I am making a bit of a habit now of writing the ‘News behind the News’ in reaction to articles in the mainstream media. Here comes another one!
Apart from an unsubstantiated swipe at the corporate governance of German companies, which gives employees and trade unions a much bigger say in corporate decision-making than in the Anglo-American economies, the leader writer goes on criticising the imbalance between German exports and domestic demand:
German exporters are innovators, tough on wages and flexible enough to get the job done. They have stayed competitive against all comers. (…)
But Germany prefers to save rather than spend. In the boom German consumers stayed at home. Last year consumer spending was only 56% of GDP compared with 70% in America. Puny demand was partly the result of small wage rises, but it was also because Germany’s service sector is underdeveloped. (…)
Instead of using the crisis to promote services at home, the coalition of the Social Democratic Party (SPD) and Ms Merkel’s Christian Democrats has fallen back into bad old habits and used policy to prop up exporters. Germany has 1.4m workers in job-saving schemes which are supposed to tide people over until export demand picks up. It makes sense to preserve skills, but, since export demand will not fully recover, many of these people will end up unemployed. Realising this, perhaps, the SPD this week proposed a “Silicon Valley of environmentally friendly industrial production”—another export-boosting plan.
It is right that Germany – as other export-led economies – will have to rebalance her economy as previous trade surplusses are unlikely to come back any time soon. But the major reason for sluggish domestic demand was only mentioned very briefly.
What the author praised in the first quote (being ‘tough on wages’ to retain competitiveness) comes back as ‘puny demand was partly the result of small wage rises’ later.
Well, the wage development in Germany is more than a small part of the story. Wages in Germany have only increased by 0,51 per cent on average between 2001 and 2007, which is much less than in other industrialised countires.
One also must not forget that because of recent reforms in Germany, more private money is needed to maintain your standard of living later in life. Many Germans are therefore saving for their retirement and plan even more of these savings in the future.
So if you want to push for more consumption of services in Germany you need to advocate higher wages. The article of course doesn’t do this. But given that the author is right in stating that Germans are unlikely to go into personal debt for consumption (unlike the also mentioned US) there is no other way to increase domestic spending.
The other point about the ‘Silicon Valley of environmentally friendly industrial production’ to me seems not really to be about the import-export imbalance but more about German economic policy, which rightly advocates an intelligent industrial policy rather than the winding down of industry. This is by the way also the view of the outgoing EU Industry Commissioner.
I cannot see anything wrong in trying to build on existing strengths to innovate in the area of sustainable industrial production. The article criticises this as only another export-supporting measure, which largely misses the point of the policy.
Germany definitely needs more domestic demand but won’t be able to achieve this without higher wages. And in terms of economic diversity, it should have become clear in recent months that only relying on a narrow portfolio of services is not the way to success. In Europe we need both, industry and services.