2009-06-24
Last week, I met and I listened to a large number of German businessmen, politicians, academics and more practical-oriented economists. I had expected a rather depressing round trip, but it wasn´t.
The mood in Germany is not pitch-black - if you look at it in a slightly broader perspective. This can be observed despite the fact that many German experts expect a GDP fall around 6% during the current year.
Many firms report a structurally good starting position before the current crisis. About three quarters of German companies is estimated to manage the situation under the prevailing adverse conditions. Poor mood is primarily present in companies linked to the automotive industry and the larger part of the engineering industry.
The subcontractor Robert Bosch GmbH reported the other day on a sales decline about 25-30% in May compared with the same month last year. The automotive industry's capacity utilization is estimated to be approximately 50%. The service sector, however, is estimated to be in a better situation, at least on average.
Of course, even the more optimistic - or less pessimistic - experts are concerned about a number of negative trends. In the short term the concern is unemployment. They are worried that too many short-term jobs may be relieved by open unemployment. I myself heard Chancellor Merkel talk about a 6-percent GDP decline this year. So does the Kiel Institute in their June forecast. I am a bit less pessimistic, and currently working with a 5.5-percent German GDP reduction in the current year.
It is somewhat unclear, to what extent German companies - especially smaller and medium-sized - are affected by a so-called credit squeeze ("credit crunch"). As expected, the German credit institutions perceive that they do not act more restrictively in new credit cases than in previous recessions, but especially smaller companies quite often put complaints against their banks. Experts state that more and more companies want to search out the old house bank model. It may be interesting to investigate whether such trends also begin to be noticed in other countries.
At the same time, many German experts are not late to refer to the fact that around three quarters of the so-called toxic (poison) securities held by government and central banks (which on the other hand in many business areas have a greater market share than the big banks). Fears of a future systemic crisis in the German banking sector appear rather limited.
Somewhat later, however, many German experts estimate the growing budget deficit as an uncomfortable threat - a threat which is now observed in the broad front in the political sphere and the German population. David Ricardo classical equivalence - concern that the current stimulus sooner or later will lead to austerity - seems again to have its practical application. In contrast, the Buchanan theories - in view of frequent short-term elections – will be less relevant in the current "super election year" with a total of 17 German elections, including elections to the Bundestag on September 27th. Although, all parties in the government promise to lower income taxes after the next election - but without special concretization.
In the background of Ricardo theories it seems not difficult to understand that many Germans - probably the majority - agree with, among other things, Chancellor Merkel and the relatively new Economy minister and recent star of Germany's political horizon, Karl-Theodor zu Guttenberg, that a too expansionary fiscal policy is inappropriate in a sooner or later coming fiscal burden (which the Germans really are tired of following after the fiscal stance at the beginning of this decade). The recently, after two years of negotiations, adapted ambitious constitutional anchorage for future cap on the public new borrowing - 0.35% of GDP pa from 2016 and 0% for the states from 2020 - is undoubtedly an important cornerstone for Germany's long-term growth potential. It is stressed to be favorable from the Government´s opinion that the German stimulus package also has long-term growth components.
Encouragingly for Germany - and indirectly also for the rest of Europe - is that in Berlin finally started to act more strongly on the education and research front. This view is shared even by more and more research-intensive companies, which I myself was confirmed through interviews with leaders in the research-intensive industry. The Lisbon Agenda is no longer an empty slogan in Sweden's southern neighbor country.
In the long-term Germany needs, above all, security of energy supply, an education system with enhanced focus on the emergence of professional workers, a new and simplified tax structure, further improvement of the pension system and - not least - the voters' confidence in their elected politicians.
Overall, I conclude that Germany can come out of the current recession pretty well. Germany's diversified business structure may - just like in Sweden - be seen as a global advantage as well as product quality, innovation and the relatively limited direct importance of the financial sector to GDP development.
Germany is not perceived to achieve further progress on the research front - despite the improved situation. For this reason, the fiscal policy focuses not only on short-term growth stimulation, which is right.
No country should in these days forget their long-term challenges. It may in this context be reminded that only a few EU countries - perhaps 4 to 5 out of 27 - will meet their commitments on a budget up to a maximum of 3 percent of GDP this year. This fact is clearly worrying.