The Hindu Business Line : German economy: A turnaround in sight

With signs of recovery, the German economy could be the main beneficiary of Chancellor Schroeder's reform process that incidentally has triggered much controversy and emotional debates.

EUROPEAN economic and business forecasters are in a quandary over the differing perceptions of the "turn of the economic tide'' in Germany, the world's third and Europe's largest economy.

The German Chancellor, Mr Gerhard Schroeder's coalition government is showing signs of strain as it tries to increase investment and tackle unemployment that is now over five million.

While some observers put unemployment in double-digit, analysts say the "German sick patient'' is showing signs of recovery. Goldman Sachs said this week that Germany's poor economic and investment performance in the Eurozone is "about to end" and that the era of "dismal" economic performance may soon be history.

Mr Schroeder's desperate appeal on Monday to German businessmen to "invest more in Germany'' and to "stop exporting jobs'' is ironic as economic growth is not likely to exceed 2 per cent this year.

The budget deficit is about 3 per cent of Gross Domestic Product (GDP) though, according to the norms of the European Union and the European Central Bank, it is not to exceed 2 per cent.

Investment is low and many medium and large companies are looking at greener pastures in North America and the Asean (Association of South-East Asian Nations).

Mr Schroeder told German newspaper Bild on Monday that "endless talk'' about "job shift'' has to stop.

Businessmen are apprehensive about prospects of a recovery. In the last five years, investment has fallen by an average of 2 per cent every year, costing the growth rate 0.25 per cent. In recent months, the growth rate has slipped below 0.5 per cent.

There is a sort of economic tranquillity that is quietly emerging on the horizon, after the erratic boom and bust in the construction, manufacturing and engineering sectors.

The current debate is how this can be translated into a "permanent and long lasting period of economic recovery''.

With the European Central Bank interest rate at 2 per cent basic, the German and Eurozone companies have enjoyed benefits of cheap credit.

But this advantage ended with pressures of globalisation, introduction of a single euro currency and the sudden ending by the German state government of the traditional low-financing arrangements. Simultaneously, Germany's traditional and dynamic competitive edge in the global marketplace has eroded.

The companies have reported poor profits, a factor that has resulted in less money being invested in research and development.

Amid this depressing scene, Mr Schroeder's centre-left coalition has energetically pursued reforms by lowering taxes for consumers and even manufacturers. With signs of recovery — which is yet to materialise — the economy could be the main beneficiary of the Chancellor's reform process that incidentally has triggered much controversy and emotional debates in Germany.

The heart of the matter is that German companies have been able to restore wage growth and boost profits following the recent taming of the traditionally powerful trade unions.

The government has initiated an enlightened move of lessening the burden of welfare payments to the average worker. All this has boosted productivity and given the economy a competitive edge in the global market.

Today, despite the handicap of the "overvalued euro," German exports are up. This has triggered a wave of optimism on the prospects of recovery, at least in the immediate future. Goldman Sachs has predicted that the first positive economic and investment growth will happen in 2005.

Mr Schroeder's administration took the initiative this week to boost investment flows. The administration is also expected to propose policies to encourage investment. This could include still lower taxes for small businesses, which currently control nearly two-thirds of the economy.

The economy has suffered several years of low or no growth and rising unemployment.

Elections are not due until 2006, and according to the latest opinion polls, Mr Schroeder's prospects of coming to power for the third term are bleak given that the centre-right coalition has 43 per cent support compared to the 31 per cent for the ruling coalition.

A year is a long time in politics. Much in Germany's national politics will depend on the desperately awaited economic turnaround.

A growing number of small and large companies are cutting costs, especially the high and notorious German labour and welfare costs. A skilled worker costs a German company around $40 an hour, the highest in the world. No wonder then that companies prefer to "export jobs''.

The silver lining is that companies are engaged in a strategy to plough back profits. Hence some German stocks are looking "undervalued'' to some European analysts, as many German companies have successfully consolidated and increased profitability.

If the present trend continues, a 10-15 per cent appreciation of some stocks could be a reality by end of this year, provided all goes well on the economic and investment fronts.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Raising the retail stake

Infrastructure or SEZ investment?

German economy: A turnaround in sight

Fund-Bank Spring Meetings — Thus must Finance Minister speak

In fits and starts

A bowl at the exit gate

Let discretion be your tutor with this `special' vehicle

Amending the Factories Act

Promoting better relations