Conventional wisdom says otherwise, but Berlin has little to celebrate at the moment. Rising oil prices, sagging business optimism, forecasts of recession and expensive corrective measures in the eurozone are weighing down the economy. A wave of losses at German companies like Air Berlin and the Schlecker drugstore chain is also fuelling concern about further inherent problems, while cost-cutting measures at Lufthansa are another sign that German productivity is falling in the face of tough international competition. Germany’s labour unions could not have chosen a worse time to demand a 6.5% wage increase.
One measure of the mood in Berlin is the debate about “Deutschland Exportland”. Exports are traditionally Germany’s trump card, contributing on average €1.5 trillion to gross domestic product (GDP) every year. Germany currently ranks third on the list of the world’s largest exporters after China and the U.S. following a strong 9% increase in exports in fiscal 2011. While many see this as an indication of the ruggedness of the sector in challenging times, Berlin views the country’s openness to trade as an excessive dependence on exports that may not be able to sustain growth in the long-run.
There are certainly problems on the supply side; inflation is at an all-time high of 2.1%, due largely to an 8% increase in oil prices, while consumers face food price rises of 2.3%. As a result, official and private growth forecasts have been trimmed by 0.4% for fiscal 2012. The concerns are two-fold. First, the strikes led by IG Metall, Germany’s largest trade union, are threatening to upset the delicate cost-productivity balance of industrial companies. IG Metall is demanding a 6.5% increase in wages, reduced contract working and joint decision-making powers. Negotiations may eventually peg the wage rise down to 3%, but every percentage point could still cost industry €760m a year and threaten competitiveness.
Second, trouble at companies like Schlecker, which filed for insolvency in January, is putting pressure on Germany’s fiscal positon. Berlin has a long “to-do” list, but fiscal resources are tight following the expensive bail-outs in the eurozone. Wolfgang Schäuble, Germany’s finance minister, recently announced that new borrowing would be slashed to €45bn from €73bn between 2013 and 2016. Berlin’s wider strategy is to raise revenue through increased industrial production and job creation to meet demand from Brazil, Russia, India and China, the so-called BRIC economies. German investors appear to concur; the DIHK chamber of commerce recently reported that private investors are planning to invest €70bn this year. That in early 2012 unemployment fell to 6.1% from 6.6% a year before also shows that Germany’s economic trend is positive.
All of which leaves Berlin looking like Janus, the mythical Roman god with two faces. It is looking outwards to the EU to secure the right conditions for growth and stability, and inwards to maximise industrial production at minimum social costs. The mood is also mixed, with optimism tempered by looming fears that a new economic crisis reflecting cost-efficiency problems could damage the “Made in Germany” brand.
Cordelia Friesendorf is Professor of Economics and Finance at the International School of Management, Hamburg.