Germany's deeper problems

The German mark may be falling because it is no longer the markets' flavour of the month, but behind this is something more important. We are in the early stages of a fundamental reassessment of the strengths of the German economy.

In the coming 18 months the economy will go through a period of cyclical weakness, with many more announcements of job cuts, such as yesterday's from Bosch. As the economy weakens, the Bundesbank will (rather too slowly) relax its monetary stance. This eventual prospect of falling rates is helping weaken the mark, so that the cyclical downturn in the economy is being matched by a cyclical downturn in the currency. The cycles will not be synchronised, but they are close enough for people such as George Soros, who are good at reading cycles, to make a decent profit.

All that is well enough known. What gives the whole matter added spice is whether the German economy is going into a period of structural decline as well. To many people in Britain the very notion that the German economy might have structural problems - aside from the obvious legacy of mismanagement in the former East Germany - would seem absurd. The politically correct view is that Germany has devoted much more attention to training and skills and as a result has much higher productivity.

That is absolutely right: every survey says so. By coincidence there was one out yesterday* that compared matched plants in Northern Ireland with those in Germany. This showed that in every area German plants had higher value added per employee, and in all but one had higher quality too. The area in which Northern Ireland did best was in metal products, where there was an established apprenticeship scheme.

But all these surveys do is say that Germany is very good at doing the things it does. The problems of the German economy are different: its costs are too high, and it is doing the wrong things.

The cost issue is widely known: German workers may have slightly lower wages than Japanese, but they also work the shortest annual hours of any country in the world. The difference between pay and working hours more than covers the 10-20 per cent gap in average productivity, with the result that it is cheaper to make most things in the UK than in Germany.

Much less attention has been directed towards the structural issue. Industry in Germany contributes significantly more to gross domestic product than in the UK - some 39 per cent of the former West Germany's GDP against 30 per cent for Britain - but one can make a good argument that if British industry is slightly too small, Germany's is relatively too big.

This is dangerous for two reasons. Too many eggs are in the export basket; and it is too easy for newly industrialised countries to get into the middle-technology manufactured goods at which Germany excels. Being the world's most successful exporter is fine provided export demand is sustained; if it falters, as is happening now, it becomes very hard to pull out of recession. Sadly for Germany, its largest export market is France, which - because the two countries run the same monetary policy - is synchronised with the German one. It is quite possible that Germany will suffer a deeper recession, peak to trough, than the UK.

But the really big long-term problem is that manufacturing technology is now an international commodity that any country can obtain. Germany has succeeded again and again in countering its very high wages costs by pushing its products up-market. People have been prepared to pay extra for quality, be it in cars, machine tools, specialty chemicals, anti-pollution equipment or whatever. In the sober 1990s, however, this trick does not seem to work any longer. German products are too good (and hence too expensive) for the demand.

If that sounds like an Anglocentric justification for shoddy quality, consider that it is also the view of the Daimler-Benz high command with regard to the new S-class range of cars. Not everyone wants double glazing in their motor if it means paying pounds 60,000 for it.

Nor has Germany been particularly good at shifting from electro-mechanical technology into electronic products - it is a net importer of television sets - or, more important, the new knowledge-intensive service industries. It is easier to make money out of writing software for a personal computer than it is to make money out of building the PC itself. International trade in services is growing at double the rate of trade in goods.

Looking ahead, Germany has to do four difficult things and do them at the same time. It has to pay for the rebuilding of eastern Germany; it has to cut the real wages of German workers; it will have to cut the numbers of those workers; and it has to find other activities that it can sell to the world.

This is a much more difficult task than the restructuring of the British economy that took place during the 1980s. It will be attacked in an ordered, logical way once the German establishment is fully aware of what the country has to do. That awareness is seeping through: the downsizing of companies like Bosch is an example of the extent to which German industrialists realise the peril they are in.

But building the new is tougher than cutting the old. If Germany were northern Italy, it would be finding new ways in which the immense stock of design could be sold to the world. If Germany were Britain, it would be trying to boost market share in growing sectors such as financial services or entertainment. If it were France it would be finding excuses to keep out foreign imports, by forcing VCRs to be imported through Poitiers, or proposing a tax on Far Eastern electronic goods.

It is not like that in Germany. If you have run what seemed to be the most successful manufacturing economy in the world it is tough to accept that you need to become less of a manufacturer, and think of something else instead.

* Training, Skills and Company Competitiveness, Northern Ireland Economic Research Centre, 46 University Road, Belfast.

Arts and Entertainment
The cast of The Big Bang Theory in a still from the show
tvBig Bang Theory filming delayed by contract dispute over actors' pay
England celebrate a wicket for Moeen Ali
sportMoeen Ali stars with five wickets as Cook's men level India series
peopleGuitarist, who played with Aerosmith, Lou Reed and Alice Cooper among others, was 71
Robyn Lawley
i100  ... he was into holy war way before it was on trend
Life and Style
lifeDon't get caught up on climaxing
Life and Style
food + drinkVegetarians enjoy food as much as anyone else, writes Susan Elkin
Arts and Entertainment
Harry Potter (Daniel Radcliffe), Hermione Granger (Emma Watson) and Ron Weasley (Rupert Grint)
newsBloomsbury unveils new covers for JK Rowling's wizarding series
scienceScientists try to explain the moon's funny shape
Usain Bolt confirms he will run in both the heats and the finals of the men's relay at the Commonwealth Games
commonwealth games
ebookA unique anthology of reporting and analysis of a crucial period of history
peopleHowards' Way actress, and former mistress of Jeffrey Archer, was 60
Life and Style
Troy Baker and Ashley Johnson voice the show’s heroes
gamingOnce stilted and melodramatic, Hollywood is giving acting in video games a makeover
Arts and Entertainment
As Loki in The Avengers (2012)
filmRead Tom Hiddleston's email to Joss Whedon on prospect of playing Loki
voices In defence of the charcoal-furred feline, by Felicity Morse
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

1st Line Support Technician / Application Support

£20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...

Team Secretary - (Client Development/Sales Team) - Wimbledon

£28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...

Accountant / Assistant Management Accountant

Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...

Senior Investment Accounting Change Manager

£600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

Day In a Page

Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices
Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

Could smartphones soon be diagnosing diseases?

Health Kit and Google Fit have been described as "the beginning of a health revolution"
Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

Can we learn to love Ryanair again?

Four recent travellers give their verdicts on the carrier's improved customer service
Billionaire founder of Spanx launches range of jeans that offers

Spanx launches range of jeans

The jeans come in two styles, multiple cuts and three washes and will go on sale in the UK in October
10 best over-ear headphones

Aural pleasure: 10 best over-ear headphones

Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel
Commonwealth Games 2014: David Millar ready to serve up gold for his beloved Scotland in the end

Commonwealth Games

David Millar ready to serve up gold for his beloved Scotland in the end
UCI Mountain Bike World Cup 2014: Downhill all the way to the top for the Atherton siblings

UCI Mountain Bike World Cup

Downhill all the way to the top for the Atherton siblings
Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

A former custard factory, a Midlands bog and a Leeds cemetery

Introducing the top 50 hidden spots in Britain
Ebola epidemic: Plagued by fear

Ebola epidemic: Plagued by fear

How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

From 'Parks and Recreation' to 'Guardians of the Galaxy'

He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star