Germany's Economy Declines to Decline: A Response to Richard Fisher's Analysis
By Robert Gerald Livingston

Unluckily for Richard Fisher's dolefully admonitory assessment of Germany's economy at the American Academy in Berlin last month, the data shows that Germany has regained its customary place as Europe's economic powerhouse. Indications of this resurgence were trickling in well before November, most notably an upsurge in tax revenue in the first half of 2006.

German businessmen and investors this fall were already seeing things more rosily than Fisher: in November, the Ifo index of business confidence hit the highest level in over fifteen years and the DAX index of equities rose to well over 6,400, its highest mark in nearly five years.  Signs of a rally are multiplying, and the economy now looks likely to chalk up a healthy 2.5 percent growth for 2006 (and may go up to 2.7, as German data is usually revised upward). Unemployment, although still the major problem, has fallen below four million for the first time in four years, a policy goal that Angela Merkel's predecessor as chancellor, Gerhard Schröder (1998-2005), set but never achieved.  Profits, a topic Fisher ignores, are soaring at big firms like Deutsche Bank, Volkswagen, BMW, and Bosch.

Germany is retaining its customary ranking as the world's Exportmeister, with a $187 billion dollar trade surplus for the twelve months ending last September, which dwarfs every other country's by far (Japan is next at $78 billion). How much more successful can Germany possibly be in export markets?  Even though the Euro has appreciated 35 percent since 2002 (a key factor which Fisher neglects to mention), its trade surplus has continued to climb steadily. Inveterate American skeptics of the German economy such as Adam Posen of the Peterson Institute for International Economics keep predicting that because such a large part of German exports is in traditional manufactures (motor vehicles, machine tools, chemicals, and electrical machinery) and such a small part is in high-tech sectors (precision instruments, communications equipment, office machinery, and pharmaceuticals) that will work to Germany's disadvantage on world markets. But that is not happening yet by any means, if it ever will. Exports have driven the economy for over four decades. With trade accounting for 25 percent of world GDP (more than double the level of 1970) and that percentage still growing, Germany's traditional export orientation seems to serve its economic interests well.

What accounts for the recent resurgence?  Most importantly, German firms have restructured over the past few years faster and better than most others in Europe by laying off workers, benefiting from the unions' wage restraint, and thus cutting unit labor costs. Reforms by the Social Democratic (SPD)/Green coalition of Schröder and its successor, the Christian Democratic (CDU)/Christian Social (CSU)/ SPD Grand Coalition of  Merkel are now starting to take hold and are already an important contribution to the recovery, although they are deemed inadequate and too slow by observers such as Fisher and Posen (more below on the reforms).

Such observers fail to understand several burdens facing economic policymakers, the political framework within which they operate, and, most important, the societal values that guide them. 

Chief among the burdens are the immense costs of reunification.  About $100 billion has been transferred annually to eastern Germany for the past fifteen years. That amounts to four percent of GDP, more each year (in constant dollars) than the United States transferred to all of Western Europe during three years of the Marshall Plan. Policymakers are constitutionally enjoined to promote an equalization of living standards throughout the country; that means they must try to bring poorer East Germans' levels up to those of wealthy West Germans. Second, Germany remains the chief paymaster of the European Union, contributing about $10 billion more annually than it gets back, more than any other EU member.

Remembering the bitter left-right divisiveness and consequent instability that plagued the Weimar Republic (1919-1933), its founders designed for the Federal Republic a political framework that promotes consensus in the center and thwarts extremes on the right and left. Every single government since its establishment 57 years ago has been a centrist coalition. The framework was designed also to bolster continuity and stability - a feature that results in an approach of "small steps" for the big issues, the tactics successfully employed by Chancellor Willy Brandt to realize his Ostpolitik in the 1960s and 1970s and now by Angela Merkel for her domestic reformist course in the Grand Coalition.

Such a consensus-seeking structure and the resulting small steps approach lead to hesitation, delay, and compromise in hammering out reforms, which irritates businessmen and most professional economic analysts, who demand more reform and right away. But once a compromise is struck between the Grand Coalition's CDU, CSU, and SPD, the government enjoys such fat majorities in both the lower and upper houses of parliament, the Bundestag and Bundesrat, that it can easily turn that compromise into law.  The Grand Coalition does not face the impediment that Schröder's Red/Green government did of an upper house controlled by a strong opposition.

In the space of less than a year, Merkel's government has put through several course-setting if minor reforms and announced others, such as revision of the federal system, which could be the most significant in the Federal Republic's history. It has abolished subsidies for home construction, reduced commuter tax breaks, and raised the retirement age from 65 to 67, a big step in an aging country whose citizens have long been pension-focused.  It has been willing to tackle, although with less success so far, the big, tough problems like health care and labor market reforms that build on those initiated by the predecessor Red/Green government. This is no mean record in light of the electorate's anxieties about the reformist program on which Merkel campaigned in the summer of 2005 and popular fears which drove the CDU vote down to the lowest levels in decades and almost cost Merkel the election.  Her government's style is responsible: the spurt in tax revenues of early 2006 was used mainly to pay down government indebtedness, while a three percent increase in the value-added tax will come into effect in January 2007. The Grand Coalition looks like it will be able to push down the budget deficit to well below three percent of GDP, thus conforming for the first time in several years to the EU norm.

It is more important for American analysts of the economy to grasp the societal values that underlie economic policymaking, even more so than the political framework.  All three Grand Coalition parties, CDU, CSU and SPD are "social democratic."  That is to say advancing social justice (words seldom heard in American political parlance) ranks as a top policy goal. This is a small wonder, when two-thirds of the voters tell pollsters that they regard social conditions in Germany as "unfair."  Germans look to their government to manage the economy so that it grows robustly, to be sure, but also, for example  to "equalize living conditions" throughout the country, take care of the poor, protect the elderly, and preserve the environment. A collectivist, we are "all in this together" ethos which was pronounced during the years of the postwar "economic miracle" of the 1950s still prevails.  Pay restraint of the past few years - real wages have risen by only .3 percent since 1999 - testifies to workers' willingness to sacrifice for collective economic good.

Business values rank much lower in German political culture than they do in the United States. The American press may refer to the CDU, CSU and Angela Merkel as "conservative," yet she is most certainly no union-busting Margaret Thatcher. And the two parties, especially the CSU, are left of the SPD on many economic issues. The chief of the largest CDU state organization, Jürgen Rüttgers of North Rhine-Westphalia, warned his party recently against becoming "too capitalist." The only party among Germany's five majors that even remotely subscribes to the free market values which America's Republicans and Democrats alike tout is the Free Democrats (FDP). In a very good election year, the FDP may get twelve percent of the vote but usually comes in between six and nine percent.

Fisher concluded his remarks by quoting Calvin Coolidge, the most laissez-faire U.S. president ever, who memorably proclaimed that "the business of America is business."  His postwar German counterparts, the chancellors, Merkel included, also sought ways to help the economy thrive but they have always placed as great a weight on doing the right thing societally as well. That is the essence of Germany's social market economy.

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This essay is a response to Richard Fisher's speech to the American Academy in Berlin, titled "Is German Economic Decline Exaggerated or Inevitable?" A transcript of his speech is available by clicking here (PDF).

Robert Gerald Livingston is a senior visiting fellow at the German Historical Institute in Washington, and was the founding director of AICGS. His e-mail address is JLiving844@aol.com.

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This essay appeared in the December 21, 2006, AICGS Advisor.