Revival of Europe's powerhouse

1 January 2005



Long regarded as Europe’s economic powerhouse, Germany is now a country undergoing fundamental change. Brian Collett reports on the economic outlook for the single largest national market in Europe


Booming exports appear to give the lie to the stories of economic problems in Germany. Yet Germany today is a nation of contrasts – and change.

Exports are certainly hitting a high. Goods sold to Japan in 2004 were more than 10% up on the previous year, while China’s fast-growing economy is providing opportunities for German companies.

Liberalisation in the former communist nations of eastern Europe is also having a welcome effect on German manufacturers. Companies have taken advantage of lower labour costs in those countries since the democratic revolutions of 1989 and have outsourced work to eastern Europe.

Lower production costs have meant more competitively priced goods for export, a trend which has been growing since eight of those countries joined the EU in May 2004.

Some manufacturers have capitalised even further on the eastern European openings by setting up companies in Poland and the Czech Republic since the end of communist rule. These are mainly larger enterprises and they contribute hugely to the export boom. However, smaller companies, always the backbone of the German economic miracle, are seeing change too.

Jonathan Hoffman, the Royal Bank of Scotland’s chief European economist observes: “Fewer children want to take over businesses built up by their parents, partly because of the economic risks.” More young people are seeking salaried jobs, and small businesses are closing down or being swallowed up by larger rivals.

Traditional reluctance

The comparative decline of the small business sector is being helped on its way by the traditional reluctance of the more modest entrepreneurs to borrow for expansion and a corresponding disinclination by banks to lend to them.

A second dent is being made in the small business sector by a recent upsurge in the number of insolvencies. The reason for these may be the scarcity of business loans and a depression in consumer spending.

One activity that is always a welcome earner for any economy is tourism, which is only now returning to normal after the World Trade Centre atrocity.

Foreign visitors, particularly Americans, refused to fly to Europe after September 11 2001, and tourism numbers and revenues dwindled in popular spots such as Heidelberg, Wiesbaden and the Rhine valley. Economists now report a revival in tourism and the attendant hospitality industry and are looking forward to a bumper 2006, when the FIFA World Cup will be hosted by Germany.

For the present, China is good news for the German tourism industry, with more people from economically expanding China now holidaying in Germany.

Curiously, the economic development of Germany is to some extent the result of reforms introduced by the Allied powers after the Second World War. To prevent repressive regimes like the Nazis from governing Germany again, the Allies built a political structure whose principles included the formation of trade unions and workers’ places on company boards. “It was, however, not the best system for achieving economic change,” says Hoffman. “But now Germany is doing the things that Margaret Thatcher did in Britain.”

Welfare shake up

The government has shaken up the unemployment welfare system in an effort to stem the rise in the jobless figure, which government advisers say could reach five million this year.

Earnings-related benefits, which are considered fairly generous and have applied for many years, are being paid for only 12 months from January 1.

After that a flat rate will be paid, and a means test will be carried out first. The government hopes this will spur the long-term unemployed to find work and reduce the burden on state funds.

Other moves are being made to keep down wage inflation. Workers at Volkswagen have agreed to a wage freeze until 2007. They have been worried that their jobs were in danger because the labour costs of people in the new EU countries are attractively low and the work could go to them. Having signed the pay agreement they were given long-term job guarantees.

Similar pressures have produced agreements at Siemens, Daimler-Chrysler and Bosch under which hours are increased without additional pay.

Half the problem, of course, has been reunification, which has meant high unemployment in the former East Germany and a degree of knock-on economic stagnation throughout the country.

The government’s incentive to boost the consumer market has been to cut taxes. This year the top rate has gone down from 53% to 42% and the basic rate has fallen from 16% to 15%. This reduction is the latest in a series of tax reforms that Gerhard Schroeder’s government introduced when it took office in 1998 and inherited a basic tax rate of 25.5%. The cuts are seen as beneficial to small businesses.

Germans, as it happens, have the saving habit. Lower taxes could mean they can continue to save as they did and still have more money in their pockets.

Pensions policy, however, could work the other way. Although the state retirement pension is basically quite generous, it was not increased in 2003 or 2004 and is unlikely to go up for a while. The aim is to encourage employees to join occupational pension schemes or buy personal pensions.

Healthcare too has undergone an important change. For the first time Germans had to pay E10 for every visit to the doctor in 2004. The result was 20-30% fewer appointments, reducing further the demand on public funds. At the same time health insurance funds are doing particularly well – so well that some are reducing their contribution rates.

By all the rules, the government’s measures should kick-start consumer spending and inject a little into high street trading.

Disposable income

One banker who watches trading around the world views the German disposable income with relish. John Beaney, HSBC’s head of international invoice finance, says: “There are 80million people in Germany and they are the most prosperous in Europe. This is a very big market for the UK.”

Beaney warns, however, that German consumers look for quality and value for money. UK businesses are good at sourcing from Asia, so they are able to keep down the costs when exporting to Germany.

They also have to watch for the preciseness of the Germans. “They do expect you to fulfil your promises,” says Beaney. He advises exporters to watch out for several more constraints that characterise the German economy and its business people. “They are very demanding,” he says. “They will expect a discount for prompt payment. This tougher climate does deter some people from doing business there.”

UK exporters must equally be environmentally minded. Unnecessary packaging, about which British consumers are constantly complaining, is outlawed. Companies need to take advice on what constitutes too much paper and plastic in the wrapping. “There is generally a very strong environmental awareness, and recycling and conservation are taken seriously. Remember the German Green party is the strongest of its kind in Europe.”

Against a background of vigorous export performance, a consumer market in need of a boost, government action to increase disposable income and a spending public that looks shrewdly for value, the forecasts vary considerably.

The government had predicted the economy would grow by 1.7% in 2005. Yet its advisers – a panel of experts known as the Five Wise Men – scaled down that forecast to 1.4%.

Meanwhile, Germany’s six leading economics institutes were a little more optimistic, estimating 2005 growth at 1.5%. At the moment, however, Germany is a country undergoing change.


Tables

Numbers of laundry businesses in relation to number of inhabitants
Estimated total European textile rental turnover per product/per area (Emillion)
Tables

Numbers of laundry businesses in relation to number of inhabitants
Estimated total European textile rental turnover per product/per area (Emillion)
Numbers of laundry businesses in relation to number of inhabitants
Estimated total European textile rental turnover per product/per area (Emillion)
Numbers of laundry businesses in relation to number of inhabitants
Estimated total European textile rental turnover per product/per area (Emillion)
Numbers of laundry businesses in relation to number of inhabitants
Estimated total European textile rental turnover per product/per area (Emillion)

Germany Germany


Privacy Policy
We have updated our privacy policy. In the latest update it explains what cookies are and how we use them on our site. To learn more about cookies and their benefits, please view our privacy policy. Please be aware that parts of this site will not function correctly if you disable cookies. By continuing to use this site, you consent to our use of cookies in accordance with our privacy policy unless you have disabled them.