Global success can be relocated

Add that jobless figure of 5.22 million and the result is a picture of a German economy helplessly dependent on growth outside its own borders.

That Schrder’s Social Democratic Party (SPD) lacks serious political impediment to a third electoral victory next year suggests that Germans have learned the Japanese trick of shrugging off descent from glory to mediocrity. As in Japan, no amount of reformist rhetoric can disguise the fact that, for the leaders and for the led, muddling through wins every time over politically frightening hard choices, resulting in a sense of paralysis.

As Hans-Loaf Henkel, former head of the Federation of German Industry (BDI), put it recently: "We have a constitution and a political decision-making system that is not conducive to reforms - a system that doesn’t enable us to move."

The eurozone’s key economy has received such a critical drubbing of late that confusion over some of its vital signs is seized on almost with relief. Some analysts are ready to interpret mixed indicators as signs of an economy on the upward turn.

The negative details are familiar enough. Growth and employment rates are poor, the machinery of job creation - attacked by the OECD last week - is clogged, especially in the service sector. The income divide is growing, taxes are high and returns on investment are meagre. Labour reforms appear stalled, and the eurozone’s fiscal policy, already embarrassingly breached, belongs to that special class of uselessness, a guideline that can neither be adhered to nor ignored.

ECB interest rates that are too low for France are too high for Germany, but even if Berlin were further to breach the rules it helped to write by increasing its deficit by cutting taxes, there is no guarantee that householders, worried about job prospects and pensions, would spend rather than save the extra cash.

The first line of relief for German pride comes not from contradictory data but from close parsing of seemingly gloomy data.

The dip in output at the end of last year can be ascribed to reduced public spending, while manufacturing and consumer spending can be shown to be on an upward trend. Those alarming jobless figures were caused by changes in statistical methodology and under-represent real job creation. Weak consumer spending and business investment can be seen as a symptom of healthy squeezing of German business that will probably lead to higher profits and new investment and jobs.

More unequivocally positive indicators even show Europe’s slowest-growing economy as a good investment, the success of its company’s overseas (see panel) being based on aggressive cost-cutting and increased competitiveness. Moreover, productivity growth actually holds its own with that of the US.

And Germany’s real trade-weighted exchange rate (based on labour costs relative to the rest of the world’s) has risen by only 4 per cent, despite the Euro’s surge against the dollar.

Germany’s star companies, impatient with the sluggish domestic market, have succeeded in increasing the country’s share of world exports over the past five years, the only G7 country to have done so. This is a remarkable achievement for a country with none of the price advantages of China.

Corporate profits have consequently risen faster than in the US, the Frankfurt stock exchange seeing profits increase by more than 55 per cent in 2004, up from 36 per cent in 2003, with price per earning ratios that remain tempting.

A more general reason why some closely-watched German confidence indicators, like that published by Nuremberg market researchers GfK, are on the rise, is that despite its hesitancy (some say cowardice), the SPD government, aided by the spur of cheap labour in the EU’s new accession countries, has begun administering a death of a thousand cuts to outdated aspects of German business culture, with labour relations to the fore.

Schrder has often backed down from confrontation in this area, and the powerful unions are not rolling over, but it is significant that, faced with the recent threat to corporate profits caused by oil price rises, unions have been accepting pay cuts as an alternative to outsourcing and redundancy.

This new flexibility bodes well for the completion of hesitantly begun reforms, the most notorious being loosening requirements on the meisterbrief (craftsman qualifications) that restricts labour mobility. Changes to this ancient German law have so far been blocked by the Christian Democrat-dominated upper house, but resistance is fading.

The end is also in sight for the system that gives workers’ representatives a powerful say in corporate governance, a compulsory requirement for mitbestimmung (co-determination) that has outlived its usefulness. Worker representation was once responsible for Germany’s strike-free factories, but these days it leads to ponderous decision-making and unhealthy alliances between weak chief executives and labour leadership, an example being the underperforming DaimlerChrysler chief executive Jurgen Schrempp. Most importantly, it provides another incentive for corporate flight eastwards.

With far more at stake than his own re-election, Schrder’s urgent task in the coming months is to bring some of German business’s global success home to Germany.

OUTSOURCING A KEY FACTOR

THE German economy may be doing badly but the most successful German firms have responded by making themselves ultra-competitive and concentrating on overseas market. The most successful of them have immunised themselves against the low-confidence, high-cost domestic economy by relocating many of their operations abroad.

German exports account for 44 per cent of EU exports to China, and trade with China amounts to €36 billion (24.75bn), a rise of 31 per cent from last year. This amount is forecast to double by 2010.

It may offend the country’s stakeholding traditions but daring to be "un-German" has greatly improved shareholder value, and may have positive long-term effects on the dynamics of the domestic economy.

Some outsourcing success stories:

Deutsche Bank: Annual net profit rose by 87 per cent last year to €2.5bn. It also announced moving a further 1.200 jobs to countries with lower labour costs.

Schering: Fertility drugs specialists reached record profits of €503 million in 2004

Henkel: Consumer goods giant saw turnover jump 12.3 per cent to €10.6bn. It is preparing to sack 3,000 of its 50,000 global workforce, mostly in Germany.