Will Germany Transform Itself? Does It Want to?

A little known fact is that Germany, not China (or the U.S.) is the world's largest merchandise exporter. [May 21, 2008: Who is the World's Largest Merchandise Exporter? Not China. Or the US] Thankfully the US still has its agriculture (a massive export). You can't outsource US land, although I'm sure some capitalist is thinking of a way. Amazingly, even when we throw foodstuffs back in, as a percentage of GDP the US (which I assumed was perhaps #4 in the world at worst) is behind not only the big 3, but the UK and France. Of course part of that is the size of the domestic economy i.e. while we have 3 times the size versus the Germany economy, our absolute export figures are about equal.

Remarkably, country after country is supposedly going to 'transform' their economies, all because you, the US consumer, is no longer keeping up her side of the bargain (spending like a madman without regard for any future implications). Somehow China will successfully transform from an exporting nation to an internal consumption nation, while Germany does the same... and the U.S. does the complete opposite. And all this will be done on the fly as green shoots sprout the world over (mostly of the government kind)

It all sounds very reasonable to me.

• Germany, in the grip of a massive export slump, firmly believes it has no alternative to export-led growth. But there is an alternative -- the country just doesn't have the stomach for the changes it would require. Germany's gross domestic product, the value of all its goods and services, has fallen by nearly 7% in the past four quarters, driven largely by foreigners buying fewer German goods.

• One lesson of this crisis: Even worse than having a credit bubble burst, like in the U.S., is depending on customers whose credit bubble is bursting. When exports make up 47% of your GDP, and exports drop 17% year over year -- as Germany's did in the first quarter -- the effect is to wipe out years of previous economic growth in a stroke.

There are three ways that Germany, the world's fourth-largest economy, could respond.

• One is to sit tight and wait until global trade recovers. That's what Chancellor Angela Merkel's government and much of corporate Germany plan to do. In their view, this recession is an almighty cyclical hiccup, but Germany's economy is fundamentally sound. (based on the wisdom of the collective of the stock market, this is the right thing to do since good times are soon here again)

• Defenders of the status quo say Germany's export dependence reflects its comparative advantage: Germany is good at engineering, and other countries -- especially fast-developing ones such as China -- need a lot of new machinery.

• But there are drawbacks to being the world's toolmaker. Global investment spending can be highly volatile, as this recession shows. It's doubtful whether German exports will grow as fast after this crisis as they did in the bubble years before it, because the U.S. and parts of Europe will save more and consume less for a while.

• And employment in Germany's main export sectors -- machinery, cars and chemicals -- is in long-term decline as companies cut costs and steadily shift production to cheaper countries to stay competitive. (on the plus side, at the pace this is happening worldwide, no major country outside of China will be able to wage a war since all the machinery production will be in China or other countries such as Vietnam)

• A second option is to increase domestic consumption, (see China) and labor unions say it's high time. Export competitiveness has come at the expense of consumer spending, they argue, because German companies have browbeaten workers into forgoing pay raises for years.

• German households' disposable incomes barely rose during the country's growth spurt from 2005 to 2008, when GDP rose by nearly 7%. (almost a carbon copy of the US except in our case its been over a decade already)

• Unlike Americans, German consumers don't like to shop with credit cards to make up for stagnant incomes. (ok, in this case not a carbon copy. We really need to train the Germans that is ok to spend what you don't have. When it collapses you just get the central bank to print and all is solved. Hello? Economics 101 - Greenspan style!) The difficulty is what to do about it.

• To revive wage growth, German unions want the government to set a national minimum wage, and make union-negotiated pay rates compulsory across whole sectors. (nope, you cannot do that because then all your companies would move offshore as their cost structure is uncompetitive on a global scale. Just have to find a way to pay wages of a 2nd world country with a 1st world country cost of living)

• The third option would be to foster entrepreneurship in new sectors, to supplement Germany's traditional strengths in cars and engineering. Many knowledge-based and service industries that power growth elsewhere, such as computers and software, pharmaceuticals and biotech, have largely passed Germany by. (yawn - the same "solution" we have in the US. Might I nominate smart phones as a new sector for secular growth that will employ tens of millions? If not... then create bubbles on 4-7 year cycles. Again you really need to retrain your central bank to work in the US model)

• But genuinely diversifying Germany's economy would require an overhaul of the country's universities, banking and capital markets, bureaucracy, taxes and welfare state, labor market and immigration laws, say economists. That's unlikely to happen soon. The nation is tired of reforms, after years of controversial changes to cut budget deficits and long-term unemployment.

• Politics and a public longing for stability and security mean Germany is likely to choose a second-best economic future. (much better is almost no stability and security for the masses in return for much higher corporate profits for a select few at the top! Which will then trickle down to the rest. Or something like that.)

Now I'm still trying to figure out how those socialists (the French) actually export more than the US as a percentage of GDP when they have a staid, unimaginative economy that is inflexible and rewards employees over profits for the top few.

Hmm, will have to call in on one of these Fox News shows to get an answer.

Comments

[Pax Americana:]

Another factor is Demographics, Germany population is "primed to decline "from about 80 million to about 68 million in 15 years time.
Germany still has some assets to fall back on, a special relatonship with Russia, [Political and Energy] not forgetting its dominant position in Mittel Europe, aligned with a unparelled Tertiary Education system,
centered on its high Technology and Scientific core values.
Lasty Teutonic, Medium to long term capital investment ,via Stategic sectors in the Economy, and not Anglo Saxon ,"shortermism", prevalent in USA,UK

Jul 01 11:13 AM

[Teutonic Kn...:]

Pax -

Re: "...Lasty Teutonic...Medium to long term capital investment..."

Well said, right on my lap.

TK

Jul 01 12:03 PM

[igggy:]

Or they can just have a new car stimulus every year. Actually, now they may not have a choice there since no one in Germany will be buying new cars next year without a 'stimulus'.

Jul 01 01:15 PM

[Graham and ...:]

"Germany is the world's largest merchandise exporter."
Das war, ist, und wird immer sein-That's been, is, and will always be.
No, just kidding. Nothing is forever.

Jul 01 01:50 PM

[jaimefpozo:]

Interesting and good article.
It seems that by culture our thinking is too dedicated to compare. Yes, we have some common ground to do this, like we are in a global economy or humans are all the same but, when we develop economic architectures we can't do it. Take for example regions, the US is an agricultural or commodity nation like Brasil Argentina or so. Germany, Japan, France are Industrial nations. Now, look at the influence of world peoples perceptions. These and much more has a great influence on Exports and there are much, much more differences to look before we can compare.

Jul 02 01:14 PM