Global Economics

German Economic Boom Creates Jobs Machine


Astonished experts in the fields of government and academia ask what's causing Germany?s powerful economic upswing

Experts in the government and academia are astonished over the strength of Germany's economic recovery. Unemployment is declining more rapidly and the government coffers are filling more quickly than during any other economic recovery in postwar German history. What's causing the powerful economic upswing?

The town of Friedrichsdorf in the Taunus Mountains north of Frankfurt is experiencing a boom of China-like proportions -- at least on a 50,000-square-foot industrial site on Max Planck Strasse. Here, pharmaceutical company Axicorp is producing low-cost drugs and registering impressive growth rates.

Holger Gehlhar, Axicorp's founder and owner, expects sales to jump from last year's figure of €euro;50 million ($68 million) to €euro;80 million this year, and he also plans to boost the workforce by 50 percent -- translating into 70 new jobs. "This year was the best in the five years since we have been in business," says Gehlhar.

Friedrichsdorf isn't the only place where the local economy is booming. In the southern Bavarian town of Kempten, Dachser, a logistics firm, plans to hire 1,000 new employees, including 400 in Germany alone. According to Bernhard Simon, the company's CEO, Dachser increased its staff by the same levels last year. By the end of this year, the family owned company will employ 8,600 in its domestic operations, and increase of more than 10 percent over 2005. "Our business is doing so well because our customers' businesses are doing well," says Simon.

Dachser is in the business of transporting the products of automotive suppliers, machine tool makers and electronics companies on trucks, ships and trains. As a logistics company, it deals with almost all sectors of the economy.

"BACK ON THEIR FEET AGAIN"

Similar stories of vibrant success can be heard all over Germany, which is experiencing the kind of surge in economic energy it hasn't seen in a long time. "German companies are simply squarely back on their feet again," says Simon.

His words could apply to just about any place in Germany. The recovery has developed a strength that exceeds even the most daring expectations. From one end of the country to another, companies large and small are beefing up their workforces.

The hiring wave has made a clear dent in labor market statistics. From March 2006 to March 2007, the number of people seeking employment declined by close to 900,000, the strongest drop in postwar German history. And it's expected to continue.

In their spring report, released last Thursday, Germany's five leading economic research institutes predicted that this year will bring 450,000 new jobs. Each day, 1,200 people find new jobs. And the German job machine is expected to continue running at similarly high levels in 2008.

The economic researchers also predict that the economy will grow by 2.4 percent annually both this year and in 2008.

The German government plans to use these estimates in its own forecast, possibly taking a slightly more conservative approach with a 1.7 percent forecast of economic growth, for 2007. In doing so Berlin will finally be sounding an optimistic note.

German growth is now approaching the level of economic growth in the United States. The US economy has experienced between three and 4 percent annual growth in recent years, but coupled with strong population growth; whereas population growth in Germany has stagnated. When the two countries are compared using the more meaningful statistic of per capita growth, Germany and the United States are growing at about the same rate.

DECLINING JOBLESSNESS

And if predictions are true, American conditions are also beginning to take hold in the German labor market. Government experts estimate that the number of jobless will fall to close to the 3-million mark next year.

The labor market isn't the only area where improvement is on the horizon. Germans interested in perusing the state of Minister of Finance Peer Steinbrück's federal budget can find themselves witnessing something akin to a miracle recovery. Tax revenues are growing from month to month, and growth rates compared to the previous year are in the double digits. The national deficit -- that is, the amount of money federal, state and local governments, together with social security programs, owe -- is shrinking. According to the economic research institutes, the federal budget will be balanced by next year. To put that figure into perspective, only two years ago Germany was bumping up against the 3-percent limit for new debt stipulated under the European Union pact that ensures the stability of its common currency, the euro.

The new German dynamism under Chancellor Angela Merkel is attracting attention abroad, too. The London-based Financial Times, notoriously critical of Germany, writes admiringly of a "new economic miracle" -- and even suggests that less dynamic economies, such as France or Italy, might be well-advised to look to Germany as a model.

WHAT'S DRIVING THE RECOVERY?

But what's driving this recovery? Why are the labor market and tax revenues responding so rapidly and forcefully this time? Experts are also examining the hypothesis that an additional percentage point of growth now generates more taxes and more new jobs than it would have in the past. And if this is the case, they want to know why.

Economic experts agree that when it comes to tax revenues, it is still too early to answer this question unequivocally. The accepted rule of thumb 10 years ago was that an additional percentage point of growth translates into the same increase -- 1 percent -- in government tax revenues.

"This relationship actually became weaker in past years," says Michael Thöne, director of the University of Cologne's Center for Public Economics. For years, the rule of thumb was that 1 percent growth led to revenue increases of only 0.6 percent, a discrepancy partly attributed to tax cuts put in place at the beginning of the decade. But recently, researchers began noticing a shift in the trend.

"Taxes on profits, in particular, are increasing to a greater extent than we would have expected," says Heinz Gebhardt, a tax expert with the RWI Essen economic research institute. The reason is that in past years, when growth and profits were fluctuating, companies were only required to remit smaller estimated tax payments to the tax authorities. But profits have jumped in the last two years, and retrospective taxation is now being applied.

MORE JOBS, GREATER CONSUMERISMAt the same time, the tax authorities are requiring higher estimated payments. "This sort of two or three-year lag is normal during a recovery, but not to this extent," says Gebhardt.

Income tax revenues have also increased, and for a very simple reason: Hundreds of thousands of the previously jobless have found new jobs and are paying taxes again. Another beneficial effect for the federal and state tax authorities is that sales tax (VAT) revenues are increasing because people with new jobs tend to consume more readily than those receiving unemployment benefits.

The effect has been even stronger on the labor market. The number of jobs being created in the current upswing far exceeds the new job growth experienced during earlier recoveries. Experts at the Economics Ministry have analyzed the problem and come up with some numbers to describe it. Between 1992 and 2000, at least 1.5 percent annual growth was necessary to create new jobs. However, this employment threshold has declined considerably to a current level of 1 percent. The result is that the job buildup begins earlier and is stronger during times of increased growth now than it was in the past. The trigger for this new mobility in the German employment market, once decried as decrepit, was a series of reforms, that were criticized individually but brought improvements as a whole.

Temporary employment companies experienced the

first wave of new employment. These businesses only began to flourish when the German government lifted almost all restrictions on the industry, thereby circumventing the barriers to employment caused by job protection.

Meanwhile, companies are once again hiring full-time employees. A large number of so-called "alliances for jobs," under which employees waive certain rights to employers in return for job guarantees. These programs take place at the company, rather than federal level, and they have eliminated barriers to hiring blue-collar workers. As a result, working hours were extended in many places, bonuses were eliminated and salaries were even reduced. Although all of this was painful for employees, the end result is that companies are now creating more jobs than are being cut or outsourced overseas.

PART 2: SCHRÖDER'S REFORMS PAY DIVIDENDS

The widely criticized labor market reforms approved by former chancellor Gerhard Schröder's government -- a coalition between his Social Democrats and the Green Party -- known as Hartz I to IV, are also having their intended effect. The unemployed are under greater pressure to accept new jobs. In addition, the recovery has given local unemployment offices more options to offer new jobs to the chronic unemployed, who in turn have fewer options to reject job offers without incurring penalties. Slackers must now expect reductions in unemployment benefits. The government employment agencies are also noticeably more motivated than in the past.

Ineffective job creation programs have also been slashed, and early retirement incentive programs have suffered a similar fate. The programs had tempted companies to send older employees into early retirement at taxpayers' expense. "Politicians didn't do everything wrong in recent years," says Wolfgang Franz, a labor market expert and a member of the German Council of Economic Experts.

But politicians can't take credit for the lion's share of the recovery. Instead, it's the parties to collective bargaining agreements -- that is, employers and unions -- who deserve most of the credit. For years they signed conservative collective bargaining agreements. As a result, unit labor costs either declined or, at the very least, didn't increase as much as in other countries. Referring, as they do, to the relationship between wages and productivity, unit labor costs are a meaningful barometer of an economy's competitiveness.

Their key message is this: A country has two options for increasing its competitiveness. Either it curbs wage increases or it raises productivity. Germany is currently doing both.

"It would be reckless for the unions to jeopardize this welcome development with excessive wage demands," warns Franz. However, his colleagues at Germany's top economic research institutes still have faith in the collective reason of the bargaining agents and they assume that the agreements to be reached this year will be ones that are economically sustainable.

SPURRING EXPORTS

Franz believes that the current plan to introduce a minimum wage in Germany is just as counterproductive as agreements that set pay at too high a level. "This would jeopardize, once again, the flexibility that was gained through such painstaking efforts," says Franz. There is much at stake. Germany is currently experiencing a virtually unprecedented recovery, which, however, is due in part to foreign demand.

It was, after all, wage restraint and an attractive range of products that led to a rise in German exports in the first place. Add to that a dose of luck, as giant economic spheres develop in Asia and Eastern Europe. The countries in these regions are hungry for the kinds of products Germany is especially adept at producing: machine tools, complete factories and automobiles. Finally, the widely anticipated rise in consumption is now coming into play.

Skeptics who see the development as nothing more than a temporary economic upturn are now in the minority, and their arguments are steadily shrinking. Even the most unbudging of skeptics are switching sides. Axel Weber, the president of the German Central Bank, also sees no end to the boom, noting that the upswing shows no "sign of fatigue."

THE PERILS OF A RISING EURO

Nevertheless, there are risks that even the optimists won't deny. The further rise of the euro could jeopardize German exports, despite the fact that most goods are exported to countries within the euro zone. Moreover, the downturn in the United States could also damage the German economy.

However, experts see the risks with astonishing composure. They believe that Germany, because of its efforts to enact reforms, is better able to deal with such adverse influences than in the past, and they see the favorable response to the recent increase in the value-added tax as a positive sign. In the past, this would have been enough to stall the economy.

Even an ironclad certainty seems no longer applicable. In the past 30 years, unemployment was always higher at the end of an economic cycle than at the beginning, while base unemployment continued to increase.

Like other experts, Hilmar Schneider of the Bonn Institute for the Study of Labor is optimistic. "We are well on our way to breaking this trend," says Schneider.

Translated from the German by Christopher Sultan


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