Germany Becoming Europe's Sick Man

As the Ottoman Empire crumbled, Turkey was called "The Sick Man of Europe." In the UK, during the awful 1970s, it was popular to call Britain the same thing. Now, it is beginning to look like Germany is having trouble with its economic health. And the worst part is, there seem to be few options for the government.

A consortium of half a dozen German think-tanks just cut its unimpressive forecast of 1.5% GDP growth for this year to just 0.7%. The German economy is still the biggest in Europe, and it ranks behind only the US and Japan. So what happens in Germany matters, and this low-growth, almost no-growth, forecast bodes ill for Europe and will have negative effects globally. Moreover, the 0.7% presumes the effects of a (too) strong euro and high oil prices ease this year; they might not.

As a general rule, the engines of growth are the big economies that bring the smaller ones in their economic orbit along for the ride. So when global aggregate GDP grows at 5.1% as it did in 2004, or 4.3% as is forecast for 2005, the bigger economies are growing above that rate much of the time, or are slowing after exceeding the average growth rate. But if Germany can only muster 1% GDP growth during such global boom times, what will happen if the global economy stagnates? It can't be good.

Worse, there isn't much the government can do without radical changes to the structure of the economy. Fiscal policy is expansionary, and the Maastricht Treaty's 3% of GDP limit on debt has been shattered three years running and is on course for a fourth. That means that tax cuts or heightened public spending aren't options. Monetary policy now comes from the European Central Bank, and it has little interest in making interests rates any lower; they're already at 2% and have been there almost 2 years.

So, the government is going to have to face the real issue -- labor market inflexibility and the persistent East-West divide. In Germany, labor has the advantage over capital, just the opposite of the US. In any market economy, the balance between the two is hard to keep. Now, German labor is among the most expensive in the world at $33 an hour. Greater power to hire and fire for management is needed, as unpalatable as that will be to the electorate.

And therein lies the greatest difficulty. Germany will require structural change to return to its proper place as the high performance engine of European growth. That change will cost any government an election or two. And it will take a genuine crisis like Britain's "Winter of Discontent" to put voters in a sacrificing frame of mind. This is likely to get worse before it gets better.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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