A New Germany Rises

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And so the corporate outlook is beginning to brighten. A worldwide survey of 513 business executives by consultant Ernst & Young recently ranked Germany the third most attractive country in which to invest, behind China and the U.S. Deutsche Bank and Dresdner Bank reported healthy profits in the first three months of 2004, after heavy losses for the same period last year, a sign that German banks can succeed by cutting excess retail staff and pruning bad debt. Media companies like Axel Springer, publisher of Bild and Die Welt, are bouncing back from a crippling advertising drought. Companies are winning important labor concessions. Siemens just sealed deals with workers in two of its mobile-phone factories to increase the workweek from 35 to 40 hours — with no increase in pay. And DaimlerChrysler won $600 million in wage concessions from its workers after threatening to move 6,000 Mercedes-Benz factory jobs from a Stuttgart suburb to lower-cost factories in northern Germany and South Africa. Such battles are bitterly divisive, but they may be necessary if Germany is to become competitive again. Longer hours without more pay would boost growth. Yet longer hours with more pay, as some unions will require, would encourage spending, which Germany desperately needs. The recovery can't really blossom until robust exports are matched by a boost in domestic consumption — but Germany's jobless rate, which dropped fractionally in June to 10.5%, has people too spooked to spend.

Germany's biggest problem is Zukunftsangst (fear of the future). Uncertainty has led to declining membership in political parties, an increase in stress-related illness and consumers who cocoon at home rather than go out for a little retail therapy. It has more and more people "going to Balconia"--passing up a traditional holiday for staying home to water the geraniums. And as companies move production farther east, to the new E.U. member states and Asia, to avoid strict employment laws and high labor costs, German industry is gradually being hollowed out. In 1993, for example, Siemens employed 238,000 people in Germany and 153,000 in other countries; 10 years later, these figures were reversed, to 167,000 in Germany and 247,000 elsewhere. Some of Chancellor Gerhard Schroder's economic reforms are kicking in — an astounding 6.3 million people (out of a population of 83 million) have signed up to work part time in "mini-jobs," earning up to $486 a month tax free — but he hasn't solved the big problems.

Eastern Germany continues to be one of them. Since unification in 1990, the people of the former East Germany have certainly had their confidence tested. The German government's $1.46 trillion helped build railways, highways, schools and communications networks. But the money did relatively little to create permanent jobs; unemployment is above 18%, more than double the jobless rate in western Germany. Two-thirds of the funds are used to pay unemployment and retirement benefits to people who never contributed to the system. "Everything was concentrated on social policy," says Joachim Ragnitz, an economist with the Institute for Economic Research in Halle. "There was not a policy to attract foreign investors." Ragnitz warns it could take 20 to 30 years for living standards in eastern Germany to reach the level of those in western Germany.