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Analysis/Comment Last Updated: Nov 18, 2013 - 7:56 AM


Analysis: Germany's current account surplus - - Part 2
By Michael Hennigan, Finfacts founder and editor
Nov 15, 2013 - 8:14 AM

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We said in Part 1 that the European Commission (EC) on Wednesday announced that it would open an in-depth review of the German current account surplus - - a measure that includes the goods exports surplus, the services deficit and financial movements -- saying it will examine whether the Eurozone's biggest member should be doing more to boost domestic consumption and investment to help the Eurozone economy.

José Manuel Barroso, EC president, made clear that the review was not aimed at competitiveness of German industry or its broader economy. Officials pointed to the need for reform of the German service sector and the importance of raising infrastructure investment to stimulate demand.

“We would like to have more Germanys in Europe,” Barroso said. “Our problem could never be German competitiveness but whether Germany, the EU’s economic powerhouse, could do more to help the rebalancing of the EU economy.”

There is also concern that the German exports' engine is raising the euro's exchange rate, which creates a disadvantage for other countries.

Research shows that a rise in German demand would have a limited impact on peripheral economies.

European Commission economists calculated that a 1% rise in German domestic demand would mainly benefit domestic production and its effect on the German trade balance would amount to about 0.2% of GDP; the greatest benefits would be for the Czech Republic, followed by Slovakia, Hungary, Austria, and the Netherlands.

The trade balances of Spain, Italy and  Portugal would gain 0.02% of  GDP, and the Greek balance would be less.

The contrasting fortunes of the two biggest economies is stark. Is German success responsible for France's failures?

There are no soundbite answers. However, responsibility for most of France's woes cannot be put on Germany.

Germany's last balance of payment deficit (the trade balance and the balance of payments with other countries e.g dividends, investment) was in 2000; France has had a balance of payments deficit every year since 2005.

The German foreign merchandise trade balance showed a surplus of €189.8bn in 2012, which is the second largest surplus since the introduction of foreign trade statistics in 1950, according to Destatis, the federal statistics office.

France’s trade deficit shrank by €7bn in 2012, to €67bn, from its record high of €74bn in 2011.

Employment and wages

Eurostat, the EU's statistics office, say that in 2012, average hourly labour costs in the whole economy (excluding agriculture and public administration) were estimated to be €23.4 in the EU27 and €28.0 in the euro area (EA17). However, this average masks significant differences between EU member states, with hourly labour costs ranging from €3.7 in Bulgaria, €4.4 in Romania, €5.8 in Lithuania and €6.0 in Latvia, to €39.0 in Sweden, €38.1 in Denmark, €37.2 in Belgium, €34.6 in Luxembourg, €34.2 in France and €30.4 in Germany.

The first chart here [pdf] shows that when non-pay costs are excluded the margin among the leaders narrows.

On Germany's borders, the hourly cost in Poland is €7.40 and €10.60 in the Czech Republic -  - these rates suggest why pay in low skill service jobs tend to be low.

Germany is among the European countries with public social spending above 30% of GDP, compared with 33% in France and 20% in the US.

German and US real average hourly wages in the period 1985- 2010 using US and German data, rose a real 30% compared with 6% in the US.

In the early years of the last decade, in response to economic problems in the aftermath of high reunification spending, wages fell relative to other countries in the monetary union.

Matthew Dalton of The Wall Street Journal has a chart here in a blog post.

According to the Institute for Employment Research, the research unit of the federal employment agency, 25% of all German workers earn less than €9.54 per hour.

The OECD Survey of Germany 2012 says past labour market reforms, arguably the most significant among OECD countries during their time, significantly changed labour market institutions in Germany with positive effects on the reaction of unemployment during the crisis. However, the organisation said that there continues to be a divide between workers with short-term contracts and little job security, and workers in highly protected permanent jobs. In addition, the OECD said, German women work some of the shortest hours in the world because of a tax system that penalises working couples, and because of a lack of child care.

The OECD also said that German banks are more leveraged than their peers in Europe, and vulnerable to shocks. The report highlighted the publicly-owned Landesbanken which it said “still lack a viable business model.”

The reforms introduced by the government of Gerhard Schröder a decade ago also introduced “mini jobs” in which people could earn, untaxed, up to €400 a month.

One out of five jobs is a now a “mini-job.” For nearly 5m, this is their main job, requiring steep publicly-funded top-ups.

The OECD says labour taxation is particularly high. The total tax wedge for a single individual without children and average income amounts to 39% of gross wage earnings compared to 24% in the average OECD country. The wedge is lower for families, but still exceeds the OECD average. This primarily reflects social security contributions, which are more than double the OECD average in terms of gross wage earnings. High non-wage labour costs are a major disincentive for employment, also because they set in at relatively low income levels.

Christian Noyer, Banque de France governor, said last May that GDP in Germany "contracted almost twice as much as in France in 2009." But Germany's greater labour-market flexibility allowed for a much faster rebound." France lost 500,000 jobs in that period, while German unemployment "remained stable," in part because businesses could cut working hours when growth slowed.

The global trend of rising temporary and part-time jobs has been reversed in Germany, reflecting the strong jobs market in 2012 and a widening skills shortage.

The number of German workers employed on a temporary or part-time basis fell by about 146,00 people in 2012 to a total of 7.89m, according to Destatis, the federal statistics office, last August.

Meanwhile, the number of permanent jobs rose by about 504,000 to 24.2m, Destatis data showed.

The statistics office said the fall in temporary and part-time work last year marked the first time that this section of the German jobs market shrunk while overall job creation surged.

Destatis added that the proportion of what it terms 'atypical workers' in total employment between 2011 and 2012 went from 22.4% to 21.8% respectively.

The two biggest political parties which are discussing terms for a so-called grand coalition, are reported to have agreed on the introduction of a minimum wage at an hourly rate of €8.50.

Research published last January showed that it would affect 19% of all people in dependent employment in Germany. In absolute numbers, it would mean a pay rise for 6.1m workers - - it would affect fewer people in Western Germany (16.4%) than in the former communist-ruled Eat Germany (32.1%).

The results show that a minimum wage would be of greater importance for women. In 2011, 24.1% received an hourly payment lower than the proposed minimum, compared to 14.5% of dependently employed men.

The research shows 25.3% of part-time workers and 63.1% of the marginally employed would be affected by the proposed legislation. Only 12.6% of full-time employees would be affected.

Exports engine

Germany has a huge advantage in the number of medium size (50-249 employees) and large firms at an estimated 64,000 compared with France's 25,000 and Italy's 22,000.

The French Treasury has said that 30% of French exporters fail to hold onto their market for more than a year. German SMEs, which are larger and more innovative, are also bigger exporters, with exports accounting for a larger share of their total revenue, and they also export more regularly.

The renowned Mittelstand medium size companies have about 1,300 'Hidden Champions,' which lead in niche areas across the world.

In 2010, Germany spent 2.8% of GDP on R&D, the US was at 2.9%, the UK at 1.8%, France 2.2% and Italy 1.3%.

Technology usually triggers science not the reverse. Caution should also apply to business R&D as Nokia outspent Apple at a ratio of 4:1.

Finfacts: Germany's more than 1,300 'Hidden Champions'

In many global business sectors, there are just a few dominant players: Industrial chemicals: BASF and Bayer of Germany compete against themselves and their main global rivals are Dow Chemical and DuPont of the US; Smartphones are dominated by Samsung and Apple; Flat screen TVs by Korean and Japanese companies; SAP of Germany, Europe’s only significant software firm competes against Oracle of the US; Volkswagen, Toyota and GM dominate the car market; Siemens of Germany’s main competitor in the supply of conventional power plants, sophisticated healthcare equipment, is General Electric of the US; Big pharmaceutical firms in Europe are concentrated in the UK, France, Germany, Switzerland, Denmark and Sweden, Elan which was founded by an American in Ireland in 1969, has in recent years become almost a shell operation with 150 employees worldwide.

PSA Peugeot Citroën of France has been dependent on the Western European market for 75% of its sales; the bigger Volkswagen Group sells 40% of its output there and a third of 9.3m units in Asia Pacific - - mainly China.

With the demise of Nokia, Europe has lost its consumer electronics champion. What else can it afford to lose? What is interesting about VW’s total average 2012 head count of 550,000 with 237,000 employed in Germany, an additional 173,000 were employed across Europe. Siemens has 116,000 employees in Germany, 75,000 in rest of EU27, 55,000 in US, 29,000 in China and 18,000 in India.

Outside the United States, the global premium car market is dominated by 3 German companies: Audi, BMW, Daimler and Toyota’s Lexus [I’m not including the real pricey market including VW’s Porsche - - Ferdinand Porsche was the founder of VW - - and the Italian sports car manufacturer Lamborghini that has been part of the Volkswagen Group since 1998. Today, some 950 employees work at its headquarters in Sant’Agata Bolognese. In 2012, Lamborghini delivered more than 2,000 vehicles).

Slovakia, the Eurozone country of 5.4m, is home to 3 big plants run by VW, South Korea’s Kia and PSA Peugeot Citroën.

While overall EU exports to South Korea have risen sharply since a free trade deal took effect in July 2011, a jump in SK car exports to Europe has particularly hit PSA Peugeot Citroën models’ markets.

Excluding cars, of the top 250 global consumer product companies by sales revenues (food, drink, consumer electronics, personal care products, watches, clothes), France has 15; Germany 10; UK has 8 (including Unilever, the Dutch-UK group).

Italy has 6 companies on the list and Switzerland 5. However, Nestlé of Switzerland, the world’s biggest food company, is at No. 4 with sales of $95bn in 2011 while Italy’s top company is at 86 with sales of $10bn — it is Ferrero, the maker of Ferrero Rocher chocolates - - an excellent product combined with innovative packaging.

Conclusion

It's unlikely that the European Commission  will satisfy both Germany and its critics but it's nevertheless likely to be a useful project that will show the critics that the issues cannot be condensed into soundbites while for Germany highlighting areas of reform it needs to attend to, in particular in the services sector.

Germany
is already facing an ageing crisis.

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