Economy and Social Matters in Germany – Background

For a long time, Germany’s exports were its strength. In the current crisis, this strength has turned into a weakness. Other countries’ problems have become German problems. But there are grounds for hope …

The world is in crisis. And with it, so is the German economy. Germany, the world’s export champion, has been hit particularly hard by the decline in global economic strength because our growth was export-based. As a result, gross domestic product (GDP) fell in 2008. A surprise came in the second quarter of 2009 when the Federal Statistical Office announced an increase in gross domestic product of 0.3% on the previous quarter.

A strength that is also a weakness

For experts, the connections are clearly evident. The reason for the impact of the crisis is quite simply the fact that Germany is such a successful exporter. More and more German products go abroad each year. In 2007 alone, the value of exported goods was 179 billion euro more than the value of imported goods, and in 2008, the export surplus amounted to as much as 164 billion euro. In comparison, this surplus was equivalent to the combined annual economic output of Hungary, Estonia, Latvia and Bulgaria.

With the literal collapse of world trade, the importance of exports to the German economy became an encumbrance, if not a burden. Many experts now fear that the impact on the Germany economy will not be just temporary. The huge level of consumption of other countries, not least the USA, was responsible for Germany’s success, explains Kai Carstensen, an expert on the state of the economy at the Ifo Institute in Munich in an article in Die Zeit. They financed their imports through debts, which is unsustainable. That means that they have to save in the years ahead with the adverse side-effect that their worries are now becoming German worries.

Good crisis management

There are various reasons for Germany to look to the future hopefully in spite of all this. One is the Federal Government’s management of the crisis. The Boston Consulting Group (BCG) regards the German economic stimulus measures as being very effective. In quantitative terms, the two economic stimulus packages adopted by the Federal Government fall far short of those of China, the front-runner. However, in the view of the BCG, the German measures, such as its car-scrapping incentive, are particularly well-suited to stimulating short-term internal demand.

That may now be demonstrated on the basis of hard figures, too. While the German economy declined in the first quarter by a record amount of 3.8 per cent on the previous quarter, which, if annualised, would mean a decline in GDP of 6.9 per cent, the second quarter surprises even researchers on the state of the economy. They had been expecting a decline of 0.2 per cent, not growth of 0.3 per cent.

Other grounds for optimism are what made Germany’s economy outstanding in the first place. German undertakings are innovative and operate beyond national and European borders; they profit from a very good infrastructure and highly-qualified and motivated staff. These are thanks to an education system which, while not being exemplary in comparison with other countries, is nonetheless very good. Excellence in research and development, too, are to some extent responsible for the fact that the economy appears to be recovering.

Social market economy – on its way out?

As to motivated employees, the fact that working in the Federal Republic of Germany is worthwhile and people can rely on a community based on the principle of solidarity when they are ill or retired is perhaps Germany’s real recipe for success. This situation is quite clearly in the balance, however. In the wake of the crisis, the social market economy as such has slid into crisis. The great promise of our post-war economic system was that hard work is worthwhile and everyone should have equal opportunities. “This promise is no longer being kept for many employees”, criticises Michael Sommer, President of the German Confederation of Trade Unions, in the Berliner Zeitung.

According to Sommer, there is clear evidence of this. Real wages have hardly increased since the mid-nineties, one in five employees today works in the low-wage sector and for the majority of lone parents, the long-term unemployed and migrants, the promise of going up the social ladder remains precisely that: just a promise. This has an impact on the population, as a European Commission study demonstrates. 20 per cent of employees are now afraid of losing their jobs, for example, and 36 per cent even fear for their children’s future.

The challenge: to boost internal demand

The alternative to having a foreign trade surplus is domestic demand. Boosting it would help to secure jobs and prosperity. The only problem is that there is no simple way to increase it. If the cost of living is high or, as at present, fear of the future is virulent, Germans do not spend money, but do what they are world champions at doing - save! In contrast, the challenge facing politics in the crisis is simple: to create more confidence, for example in the social market economy.