German woes deep-seated, warns OECD

As unions staged token strikes against Volkswagen's attempts to reform working practices and the car giant's first-half profits were reported to be half market expectations, a report said Bonn had not yet confronted the need for structural economic change.

According to the Organisation for Economic Co-operation and Development, growth in the eastern states is not yet self-sustaining; unemployment is a German "black spot"; there are question marks over competitiveness and even the much- lauded system of corporate governance needs an overhaul.

In its annual report on the German economy, the Paris based inter-governmental think-tank warns that the recovery of the past two years "could reduce the sense of urgency required in attaching deep-rooted structural problems".

Although eastern Germany grew by almost 10 per cent in 1994, the rapid convergence in wages to more than 70 per cent of western German levels hampered self-sustaining expansion. With average labour productivity no more than half that in western Germany, 30 per cent of the workforce was effectively excluded from productive employment.

Unemployment in western Germany was also "unacceptably high", and concentrated among older workers. There was a need to tackle "labour market rigidities and hindrances to competition".

Despite restructuring in German industry in the recession, the drop in relative unit labour costs in 1994 "was not sufficient to offset the prior deterioration" in the 1990s. Germany's share of total OECD exports had increased in value terms but deteriorated in volume terms since the early 1980s.

There was concern about Germany's performance on innovation and the creation of new firms. This threatened the system of corporate governance, which gives more say to all stakeholders in enterprises than the Anglo-Saxon system, in which shareholders are given priority. Other threats to the German model were the ageing population, which would reduce funds available through pay-as-you-go pension schemes, and the increasing internationalisation of the business sector. As a result the OECD expected the stock market would gain a more important role.

Comment, above