For years, the German economy has been held up as a model of prudent good sense. It retained and re-invested in its formidable manufacturing base when other countries were almost careless with their own manufacturing roots (Britain being the most obvious example). German consumers generally carry little debt, and the German economy has not been exposed to the crash-and-burn house price carnage that’s devastated large parts of the US and, to a lesser extent, the UK. It has also successfully managed to claw back its competitiveness, keeping wages competitive and organising some production abroad.
Yet Germany’s economy is riddled with problems. Last year, consultants Booz & Company claimed nearly 20 percent of CEOs from the German-speaking regions were forced to step down – a record high. More ominously, the International Monetary Fund (IMF) recently warned that Germany’s banking system has still not dealt with the credit crunch. The IMF anticipates, for example, that German banks could hold more than $500bn of collateralised debt obligations that will have to be refinanced by crystallising these losses. That’s a huge financial burden by any standards. And the EU expects German output to shrivel by 5.4 percent this year while the German government puts this contraction closer to six percent. Meanwhile, inside and outside Germany, the hand wringing about just what to do increases. Should this titanic export-led European economy seek a new business model? Or is continuing fiscal stimulus the answer (or one of the answers).
The mess it’s in
But how did Germany end up in such a mess in the first place? Part of the answer, says Nobel-winning economist Paul Krugman, is that Germany has depended for its economic health on exports to many of the bubble regions of Europe. In a recent interview with the Observer, Krugman said Germany was sideswiped by the loss of those exports – the UK and the US are critical export markets for the Germany economy – worse than the bubble regions themselves. “It’s Germany on a global scale that is the concern. We worry about the drag on world demand from the global savings coming out of East Asia and the Middle East, but within Europe there’s a European savings glut, which is coming out of Germany. And it’s much bigger relative to the size of the economy.” Although that savings glut means relatively few German consumers have gorged themselves on credit as they have done in the US and UK, the excessive saving in stock market related assets has also been hit by the economic downturn.
A key indicator of just how bad things have got is with German CEO salaries. Last year, salaries at companies on Germany’s DAX blue chip stock index plummeted by 25 percent for the 24 of the 30 companies listed; these company names include Siemens, BASF and Allianz. Extraordinary gestures now abound: the chief executive at Germany’s Postbank, partially owned by the government, announced recently he would be working this year for a token salary of just €1. And the CEO of German media giant Bertelsmann has promised to give up half his year’s salary for 2009. Economist Krugman meanwhile thinks that the downturn could last at least two more years.
German consumers ready to spend?
Yet when the economy re-kindles itself, the Economist predicts Germany’s export economy model will play a rather more modest role in future. “When recovery comes,” it said in a recent report, “consumption is likely to play a bigger part than exports. By 2013, net exports will account for 3.25 percent of GDP, down from 6.3 percent in 2008 [says a forecast by eight economic institutes]. Consumer spending, meanwhile, will rise from 56.3 percent of GDP to 57.75 percent. This shift will occur amid sluggish growth and lower employment: the trend rate of growth between 2008 and 2013 will be 0.9 percent, compared with average growth of 1.5 percent in 1995-2008, say the institutes.”
Dr Dirk Nitzsche, senior lecturer in finance at the Cass Business School, told European CEO he does not however expect German consumers to necessarily spend their way out of a recession. It has always been the case that there is potential for consumption to stimulate economic growth in Germany. In contrast to the US and UK, consumers in Germany are much less willing to consume financed by borrowing he says. “Hence they are much less indebted. Whether they are willing to ‘spend us out of the recession’ I doubt very much. I would expect at least in the short run that Germans are saving more to be prepared for the harder or uncertain times ahead. To change this attitude is not easy, if not impossible. The reason why Germans are less willing to spend on credit is due to them being more risk averse which also influenced the way the German financial system has been set up.”
Export champion has limited choices
But if Germans are not willing to go out and spend, then how else can the economy revive? Germany is limited in its choices on several fronts. It has few natural resources; its service economy is relatively small (and likely to stay that way); it makes most of its money from machinery, cars and chemicals, industries heavily reliant on energy demand. And because this heavily industrialised country relies hugely on energy for the production of steel, aluminum and chemicals that it makes, it’s difficult to avoid absorbing rising energy costs, not helped by surging demand (and competition) from China and India. Its dominance in the global car market is undermined by huge over-supply pressure. The German car industry simply can’t sustain production at current levels, though it is certainly an industry that it excels in.
So are there any CEO industry winners? Cass Business School’s Dr Nitzsche predicts German CEOs from the renewable energy sector (including the engineering side of it) are most likely to notice and enjoy an economic fillip before it spreads to the wider economy. “Companies too that are affiliated with the health sector and pharmaceuticals. And then there is the utilities sector, which is traditionally less affected by recessions.” Meanwhile, the OECD predicts that unemployment is set to rise sharply, though this should be twinned to gradual recovery from a gradual increase in world trade.
What is clear is that Germany’s export-led business model has suffered a sharp shock in the last year. High unemployment will be part of the price paid for this. And while the belief in a speedy recovery has all but disappeared, Germany remains in a tight spot. The big unanswered question remains this: just how long will Germany take to import some fresh thinking for its economy?
German Ceos exposed
There’s a reason German CEOs are particularly imperiled. Oddly, it’s generally not related to performance. Booz & Company say the reason is the tight control and ensuing power struggles between supervisory boards and members of the executive board. The CEO and chairman are usually two positions held by different people in Germany, as well as, in recent years, the UK (in the US the two boards are often headed by the same person). In other words, the CEO is also chairman of the supervisory board and therefore supervises himself.