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
exchange rate, which creates a disadvantage for other countries.
Research shows that a rise in German demand would have a limited impact on
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
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
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
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
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
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
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
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.
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.
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
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
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
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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