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Fri, Mar 01, 2002 - Page 19 News List

Social, global pressures putting a squeeze on German economy

Once Europe's industrial locomotive, the country's economy has gone from boom to bust in just 10 years -- and there seems to be no solution in sight


Ten years ago, in the euphoric economic boom after German re-unification, nothing seemed capable of stopping this country.

Now nothing seems capable of restarting it. Like the US, Germany is struggling to climb out of a recession. But unlike the US, Germany has become a perpetual laggard with problems that started long before the current slowdown and seem likely to continue long after.

Once Europe's industrial locomotive -- home to Mercedes and Porsche, Siemens and Bosch -- Germany has had either the slowest growth or second slowest growth in Europe for the past six years.

"It doesn't matter whether we are in a boom or a recession, we are always the last in economic growth," said Hans-Werner Sinn, director of the Munich-based IFO Institute for Economic Research. "I do not think the trend will change soon."

Wednesday, the German government confirmed that the economy shrank for the past two quarters -- the informal definition of a recession in the US and the worst performance of any European country. Many economists say that German growth will revive later this year, but there is widespread doubt about the pace.

Germany's central bank, the Bundesbank, said that it believes the country's long-term "potential" growth rate has slowed to less than 2 percent a year. That is far slower than the US, as well as the rest of the European Union.

Germany's long-term pattern resembles a much milder version of the stagnation plaguing Japan -- anemia at home, unhealthy dependence on exports, a paralyzing culture of consensus decision-making and an inability to carry out much-needed economic reforms.

That is bad news for almost everyone. Germany's economy is the world's third largest, after the US and Japan, and it accounts for one-third of the euro zone's economic output. When Germany slumps, it drags the rest of Europe with it. And when the US falls into a recession, Germany's weakness makes it impossible for Europe to step in as the engine of world recovery.

The conventional wisdom is that Germany's problems merely stem from the global downturn. Exports make up a third of the economy, so Germany is sensitive to slumps elsewhere.

The real problems, however, are at home. Even last year, a terrible year for global demand, German exports were slightly higher than the year before.

Carmakers like BMW, Mercedes and Volkswagen all booked big increases in foreign sales, particularly in the US. Puma, the sport shoe manufacturer, said its sales in the US rose 28 percent.

By contrast, the mood at home is anxious, pessimistic and risk-wary.

"Everyone is looking for security, security, security," said Manfred Wittenstein, owner of a Wittenstein Gmbh, which makes servo motors for automated machinery.

Germany's much-criticized job-protection rules remain rigid, discouraging companies from hiring full-time employees. Many stores close at 2pm on Saturdays, and most do not open at all on Sundays. Ordinary discounts are illegal, because they might confuse consumers.

Evidence of domestic insecurity is everywhere. Adjusted for inflation, retail sales have been stagnant in Germany for six years. Consumers were so rattled that store owners say last Christmas was the worst in 10 years. Car sales within Germany dropped 5 percent last year and were stagnant in 2000, when the economy was relatively strong.

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