Amidst the festivities last weekend over the fall of the Berlin Wall (on what Germans call 9/11, in 1989), there were a few sour notes. Grumbles against heartless capitalism, globalization, and non-German governments, particularly the Obama Administration, were audible from the Left Party, trades unions, and grumbly Berliners.
The complaints came over the unraveling of the complex joint venture whereby Magna of Canada (NYSE:MGA), a Russian automaker, and the German State would take over Adam Opel AG, the German car-maker. Last week, the board of Opel's owner, General Motors, flush with $50 bn in US subsidies, vetoed the arrangement.
The awkward bundling had been promoted by the right-wing coalition government to save German jobs at Opel. Adding to German populist outrage at GM is embarrassment that Chancellor Angela Merkel had been about to fly out of Dulles Airport when her assistant got the news by cellphone from CEO Fritz Henderson in Detroit. She'd just been honored by being allowed to address a joint session of Congress and lauded by Washington when GM said 'nein'.
At Checkpoint Charlie, one dissatisfied Berliner said; “that fink Obama showed that he cannot be trusted.” Actually he probably was not consulted.
Berlin has a 16% unemployment rate, which is why locals worry about Opel. Unemployment is higher in the former eastern sector of both Germany and its capital. While Opel had most of its plants in the former West Germany, there is a quite modern plant built after unification in Eisenach. Unfortunately it is not performing at top level because of changes in the car produced. In fact Opel is extremely ill-organized and ripe for layoffs.
In Germany, one job in 7 is linked to car-making. And the next by-election will be fought in Nord-Rhine-Westphalia site of a major creaky and inefficient Opel plant. That explains the Merkel zeal for a deal.
While the GM veto was a surprise, there were many reasons to dislike the Opel patch-up. The German Treasury Secretary warned that it amounted to requiring that every German buy two cars, the one he wanted, and an Opel his taxes would finance. The CDU-CSU governing coalition barely agreed on the financial terms. There were worries that Volkswagen (OTCPK:VLKAY) and BMW (OTCPK:BAMXY) would also want subsidies to level the playing field.
But even if Berlin ultimately backed the joint venture, there were other issues. If Opel was going to invest in Russian autos, the timing is not propitious, and the risk to its intellectual property great. Viewed from Detroit, these factors were enough to derail the German JV. Moreover, Opel is the GM spy in Europe where the technology for smart fuel-efficient cars can be learned.
Meanwhile the Berlin initiative violates EU rules. Opel would save German jobs at the expense of those elsewhere in Europe where more modern assembly plants and less coddled workers produce cars more cheaply: Belgium, Spain, and Britain. Britain, like the US, is a cheaper site because of currency effects, but Belgium and Spain are simply more efficient and better organized. Of course this is partly because of Opel's later international expansion, but if it had been allowed to modernize in its homeland it would have done so.
The deal was criticized by EU Competition Commissioner, watchdog Neelie Kroes, for distorting the EU internal market. If Germany is trying to be a good European it should not have crafted a program to only save German jobs. This is unfair to its EU partners she wrote to Berlin loudly and clearly.
Now the coalition faces a real quandary. Will it provide finance to Opel despite the fact that the JV has been vetoed and some of the jobs will be saved outside Germany? The governent rep on the Opel board, Manfred Wennemer, who resigned, told Die Welt am Sonntag that there should be no subsidization. But Professor Hartmut Mayer of Oxford thinks there will be a less public deal with job protection and some money.
Joblessness in Germany has been kept down by a series of measures put in place by corporations and the unions (which sit on the boards of German companies along with people like Mr. Wennemer representing the state) thanks to government encouragement and subsidies. The idea is not to keep retirees happy (as the UAW does) but to keep the workforce happy. Everyone keeps his or her job but they work fewer hours, sharing the pain, though it's partly assuaged by state aid.
A problem with this employment policy is that companies really going out of business drop their entire staff. Catalog seller Quelle just did. Only firms which could survive have to do expensive job-sharing.
And job-sharing is poor business. A simple idea like letting workers nearing retirement age leave the assembly line early (key to controlling manning levels in the US car business) has been blocked by German unions.
Other efficiencies are blocked too. Every single workshop continues to do its thing even if there are good grounds for rationalizing the production system. That causes a gummed up corporate personnel pipeline. Nobody will move from his post even to a different part of the company. You stay put and work at 75 or 85% of your old wages for 85% of your old hours and the government makes up the rest.
For Opel, planning new green mini-cars and closures for lines which don't make money, this kind of freeze would be fatal. I think that is ultimately why GM vetoed the Opel arrangement. The industrial logic means that Opel would be better off with GM even if some of its workers are laid off.
It is bad for the economy too. No worker is ready to seek a new job even if, as there eventually will be, new jobs are on offer. Nobody is seeking training for a new career. Nobody is thinking about starting a new company in a new business. While all that American moving around can be frustrating in the present climate, longer-term it frees up animal spirits and advances the economy. But it is not the German way.
Schumpeter's creative destruction was first written about in German but it is not popular in Germany.