Economic Recovery: A New Germany Rises

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The first indications of a national turnaround are starting to show up in the numbers. The German Institute for Economic Research in Berlin in July revised its GDP growth estimate from 1.4% to 1.8% for this year and from 1.8% to 2.1% for next year. The Germans got a boost as economies in the U.S. and Asia began to grow again, and also from the run-up to E.U. enlargement, as exports to new members in Eastern Europe surged. "Germany remains an export machine that keeps running and running," says Holger Schmieding, an economist at Bank of America. "Despite the strong euro, even Germany is having a modest upswing."

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.