OUTLOOK: German jobs angst

WOLFGANG CLEMENT, the German Economy and Labour Minister, seemed to suggest that it was always darkest just before the dawn in announcing Germany's worst unemployment figures since 1933 yesterday. Perhaps he should take note of Mao's famous perversion of this tired old cliche: "It's always darkest just before it's totally black".

Appealing for national calm, Mr Clement then went on to explain that the figures would have looked even worse but for the 1.5 million people in public work programmes. Yet even ignoring these state supported jobs, unemployment rose nearly 600,000 in January to more than 5 million, or 12.1 per cent of the workforce. Is it really possible for things to get blacker still? With regional elections in both Schleswig Holstein and North North Rhine-Westphalia soon, Gerhard Schroder's Social Democratic Party must hope not. Mr Schroder came to power promising to halve unemployment from its then level of 4 million. He's failed as comprehensibly as the Lisbon agenda, which promised to make Europe the most competitive, knowledge driven economy in the world by 2010. We already know that this ambition cannot be met.

As it happens, there is nothing wrong with German manufacturing and technology, which is some of the best in the world and street's ahead of Britain's. Nor is there much to worry about in her export performance, which despite the strong euro remains relatively strong. The fault lies rather with domestic demand, which as separate figures indicating a further fall in retail sales in December show, still struggles to show any growth at all. The Germans simply won't spend enough.

There are none the less one or two glimmers of light at the end of the tunnel. Structural reform at a legislative and government level continues at the usual glacial pace, but slow, incremental change is better than no change at all, and in the meantime the private sector seems to be taking matters into its own hands. Pay reductions have been forced through at a number of large German companies, making their labour costs more competitive.

All this counts for nothing if domestic demand remains flat. One key question is whether Germany's unreformed banking system, parts of it weighed down by a veritable mountain of unrecognised bad debt, is capable of creating the readily available domestic credit necessary to persuade Germans to start spending again. Or will it have to get blacker still before Germany plucks up the political will seriously to