Is Germany now the sick man of Europe? Dear Bob Bischof
27th May 1999
How can I put this without sounding smug and offensive? The German economy, which most of us were brought up to admire, is failing. Britain's economy, about which the only discussion used to be the pace of its decline, is succeeding. This is not the temporary consequence of the economies being at different stages of the economic cycle. Something fundamental is wrong with Germany.
The Rhineland model, with its emphasis on long termism and consensus, has had a good innings. In the golden age of the world economy (1950-73), nowhere was more golden than Germany: it had price stability; almost zero unemployment; the hardest of hard currencies; and the world's most formidable exporting machine. Nor did German success end in the 1970s. Larry Summers, the new US treasury secretary, tells of attending the Davos world economic forum in the late 1980s and having to defend the US against accusations of economic and social failure. While the US was experimenting with Reaganomics and Britain with Thatcherism, Germany was quietly succeeding. Small wonder that in Britain we used to engage in so much soul-searching about how to try to emulate German success. If only we could have German-style single-industry unions, or technical education, it used to be said, perhaps Britain could catch up.
You will say that the big difference between Germany in the 1980s and Germany in the 1990s is the event which neatly divided the two decades: unification. I don't dismiss the magnitude of the task of absorbing an east German economy which was weaker than anybody had imagined. But the seeds of Germany's current problems were sown long before that. Germany made the mistake of building on the Rhine model when the longer-term trends were turning against it. Thus, in the late 1960s and 1970s, employers' social costs increased sharply, unemployment and other benefits became more generous, and hire-and-fire regulations more restrictive. At the very time when Britain was forced into the reforms which, after a sticky start, laid the foundations for economic rehabilitation-reducing union power, privatising companies, freeing labour markets, cutting direct tax-Germany was moving in the opposite direction.
Not everything is rosy in Britain and bad in Germany. The legacy of Germany's past success is that living standards, even after the absorption of east Germany, remain markedly higher than in Britain, and Germany has many world-beating companies. But the trends are with Britain. Like Japan, Germany has an economic model, backed by a sound education system, which was suited to the modern manufacturing era. In the weightless world of new technology, of the soft skills and service jobs that will be the wealth-creators of the 21st century, that model is inappropriate. The City of London frets about the threat from Frankfurt, but Frankfurt is not in its league.
Furthermore, Germany has contrived to lock itself into the euro on highly disadvantageous terms. German hourly labour costs are easily the highest in the euro zone. As things stand, it is hard to see anything other than a continuing "hollowing out" of the German economy. I can't understand how the German people were persuaded to accept what has turned out to be a soft euro, but one which has also reinforced Germany's competitive disadvantage in Europe. France has entered the euro at a competitive rate and is prospering.
Finally, I see no sign that the German political system, blocked by the veto power of too many vested interests, is capable of reforming the welfare state or the labour market. Five years ago the OECD identified 24 steps Germany needed to take to make its labour market more flexible. The Kohl government implemented just three, some of which have been partially reversed by the Schr? government. In Britain's case there were six recommendations, half of which are now in force.
Yours,
Dear David Smith
28th May 1999
The sinking euro and high unemployment on the continent seem to support your claim that the boot is now on the Anglo-Saxon foot. I concede, indeed, that most of the 1980s can be seen as a golden age for Britain-the country freed itself from irresponsible unions, privatised many industries and, under the pressure of an overvalued currency, weeded out uncompetitive manufacturers.
The 1990s are more of a mixed bag, and a closer look at the fundamentals suggests that Britain is less competitive than it looks. Unit labour costs have been rising in Britain, while falling in Germany in recent years. Britain is only expanding and creating jobs in the domestic service sector, free from foreign competition-24-hour retailing, pizza deliveries, call centres and so on. For every decent job lost in manufacturing, there are two part-time and often badly paid jobs created. Many are taken up by desperate people, who need two incomes to sustain their families.
Britain is like a company which is not investing in equipment, R&D or skills, and is losing market share at home and abroad-but, hurrah, it is employing more and more people. A rising head count is seldom a sign of success in companies. In the economic debate in Britain, it appears to be the only measure. Germany boasts a broader measure of success: higher living standards; a DM 25 billion trade surplus with Britain; rising productivity; falling unit labour costs; record numbers of patent applications; a thriving car industry; world beating software houses such as SAP; and a buoyant stock market for start-up companies, mostly high tech. BMW introduced flexibility into Rover, not vice versa.
Germany's social market did grow stiff in the 1970s and 1980s, but under the double blow of globalisation and German reunification, it has had to change. You do not seem to be aware how much the Germans have changed. They have learned from the Brits, they treat their shareholders with more respect and they are a lot more flexible. (Germany also has the highest number of people connected to the internet in Europe.)
What they have not done, is absorb the worst of the Anglo-Saxon system. Too many German bosses have seen what the short-term promotion of shareholder value can do to companies like Rover or Lancer Boss, the company I restructured when it was bought out of receivership in 1994. I was well prepared for the task, as I had spent the previous two years sorting out east German industrial ruins.
I recommend that you go and work in Germany, see what is really happening and observe the "old-fashioned" apprenticeship system. I know what it means to run British companies with workers who have "on the job training" instead of proper apprenticeships.
As for Germany entering the euro at an uncompetitive rate-you seem to have forgotten that it is unit labour costs that matter (costs in relation to productivity), not simple labour costs. The euro is genuinely welcomed by German business leaders; it means stability and the end of constant upward revaluations of their currency. And they cannot believe their luck with such a low rate against the dollar and sterling. Wunderbar!
Reunification does, indeed, lie behind many of Germany's short-term troubles. West Germany inherited 16.5m people, most with useless skills and education. In addition, 4.5m mainly unskilled people have settled in Germany from Russia and eastern Europe since 1989. While German industry is outsourcing most unskilled jobs into the east, the unskilled jobseekers have come west. It will take time to retrain people and get the economic balance right again. (Do not forget that despite its high level of regulation, the west German economy had lower unemployment than the US economy in each year from the mid-1950s through to the early 1990s.)
The fall of the wall has many benefits for Germany, too. The country will benefit from its central position and the cultural ties between the east Germans and the former Comecon states-they have been drinking vodka together for many years. Not surprisingly, 55 per cent of EU exports to eastern Europe come from Germany, against only 5 per cent from Britain. Eastern Europe is important as a procurement as well as a sales market; it is a kind of mini Commonwealth for Germany-a supplier of cheap components, raw materials, labour and energy, as well as a splendid 300m people market for its sophisticated products.
As the centre of gravity has moved 1,000 kilometres east, Britain has become even more peripheral in Europe. It has no realistic chance to benefit from the opening markets of the east, not only for geographical and cultural reasons, but because British companies cannot take the long view that such markets require.
Yours,
Dear Bob
29th May 1999
First, a few facts. You stress productivity as opposed to jobs. According to a recent study, between 1950 and 1980, market sector productivity-output per hour-rose by a staggering 340 per cent in Germany, compared with 150 per cent in Britain. Since 1980, British productivity has increased by 61 per cent, German productivity by 47 per cent. Something has changed, although we still have a long way to go. As for jobs, the OECD says that German employment has fallen by 5 per cent since 1990. British employment has shown a net rise, and is currently at record levels.
But what really caught my eye about your letter was the comment that "a rising head count is seldom a sign of success in companies. In the economic debate in Britain, it appears to be the only measure." This is intriguing. For years we were told that it was the Anglo-Saxons who had the brutal attitude towards employment. Now you are saying that we have an over sentimental attitude towards jobs and that it is the Rhine model which is brutally efficient. Incidentally, the claim that jobs being created in Britain are part-time, low-paid McJobs, does not fit the facts. Since 1993, 1.1m full-time jobs have been created in Britain, about 700,000 for part-timers.
This brings us to the nub of the argument. In Britain and the US, there is an implicit understanding that the route to an inclusive society is through the labour market. If you give people a job, even if it is not a great job, they become more independent and have a better chance of advancement. One job leads to another, whereas unemployment breeds further unemployment.
I am not saying such views are alien in Germany, but the emphasis on "quality" jobs, together with high social costs and a tightly regulated labour market, means that the choice has effectively been made to run the economy with a lower level of employment and a larger number of people on welfare. This is fine, if that is what the German people want, and if they are willing to pay the tax bill. I think it makes for a fundamentally less competitive economy, a less inclusive society and a rather shaky consensus.
Yours
Dear David
31st May 1999
There is no doubt that British industry has been getting more efficient over recent years; inward investment has helped this process. However, it is not good enough to get better, when your competitors are getting better faster. Cricket is not a bad parallel.
You state that productivity has increased in Britain by 61 per cent and in Germany by only 47 per cent since 1980. If Germany was twice as productive then, and has since increased its productivity by 47 per cent, then the gap with Britain has widened in absolute terms. There are little lies, big lies and statistics! Similarly, you quote the OECD saying that German employment has fallen by 5 per cent since 1990-this is not surprising, when the old East Germany had "full" employment and nearly all women worked.
Leaving this argument to one side, there is a big difference in job creation between the two countries. Germany needs 2.5 per cent growth to cut unemployment; Britain creates jobs without growth. The reason is clear: the cost of capital in Germany is traditionally low and labour is expensive, so a company would rather invest in labour saving equipment than employ people. In Britain, the cost of capital is traditionally high and unpredictable and people are cheap and simple to hire and fire.
Neither system is ideal. The Germans protect the "insider" jobs too well and make it harder to spread work around. There are also a large number of people in Germany who are exploiting the system and its generous benefits. It is the job of government to stop this.
But flexibility and mobility have a price, too. Workers who change jobs many times in a lifetime often have no loyalty or motivation. Equally, when your company has been bought and sold a dozen times, can you be expected to stay loyal and do your best? The new jobs are often bad for families. Part-time jobs and shift work mean disrupted family life, high divorce rates, unsupervised children, and so on.
As for "inclusivity," I agree that the best thing for most members of the excluded class in the US or Britain is to find them almost any kind of job. But in Germany there is not the same history of large-scale exclusion. Germany has hardly any youth unemployment (about half of Britain's). It has short-term problems with unskilled newcomers and long-term problems with over skilled middle-aged people who do not want to change.
The truth is that solutions must grow out of our different traditions. It was wrong to preach to the Brits the benefits of the German model and it is equally wrong to try to sell the Anglo-Saxon system to the Germans.
Yours,
Dear Bob
2nd June 1999
There is much on which we agree. Whatever happens, the Rhine model is not going to turn Anglo-Saxon. In the future, as now, Europe will contain an array of models, from the Scandinavian social model, through the dirigisme and protectionism of France to the "family capitalism" of Italy. The German and British models are just two big fishes in the pond. In 30 years time, whether the euro has been deemed successful or split spectacularly asunder, people will still be having this kind of debate. In an ideal Europe, the different models will turn out to be complementary, but this depends on the nature of EU integration.
I think we can also agree that a successful Germany is in Britain's interest. But what disturbs me is the lack of political dynamism in Germany, the lack of a will to tackle the country's problems. The two main parties in Germany remind me of Labour and the Tories in the 1950s and 1960s, when both were willing to preside over Britain's decline. Perhaps Helmut Kohl was distracted from the task by unification. Perhaps Gerhard Schr? was distracted by Kosovo. But it is no coincidence that the most impressive figures in the new government-Joschka Fischer and Otto Schily-both come originally from the "realo" faction of the fringe Green party.
It may be, as you suggest, that corporate Germany will quietly get on with the job of introducing the necessary flexibility into the Rhine model. But political leadership is needed too. I am not saying Germany needs a Margaret Thatcher. But it needs something.
Yours,
Dear David
3rd June 1999
Yes, there is much to agree on, but do not lose your British tradition of confrontation-consensus is a German domain, don't forget.
Political reform in Germany is very slow, but it does happen. It has to be broad-based; first the majority party has to agree with its coalition partner and then quite often with the opposition, who frequently hold the majority in the second chamber. But this deficit of "dynamism" is also a benefit. It makes Germany less volatile. This reduces the anxiety levels of its smaller neighbours. The fathers of the constitution showed great foresight in this respect. They built checks and balances into every aspect of economic and political life to ensure, above all, stability.
The pace of economic change can be frustrating, but the last thing we need in Germany is strong leadership-something rather more than just a handbag might be swung.
Yours,
