Over the last decade, Germany has been the slowest growing economy in the EU, and Europe has been the slowest growing continent in the world. From 1995 to this year, Germany will have grown by only 14.6 percent, while the old EU on average will have grown by 24 percent, the US by 39.9 percent, and the world economy by 45.6 percent. Why has Germany performed so badly?
One theory, endorsed by the head of Germany's ruling Social Democratic Party, Franz Muntefering, is that Germany is already where the others still want to be. Slow German growth, he maintains, is a sign of natural convergence.
But this theory is not convincing. Germany has recently been overtaken in terms of per capita income by several EU countries, including Ireland, the UK, the Netherlands and France, and is still growing more slowly than all of them.
ILLUSTRATION: MOUNTAIN PEOPLE
Another, more plausible theory is that over the past 15 years there have been various external challenges or shocks that have hit the country simultaneously. Rigid as it was, with an extensive welfare system and an over-regulated labor market, Germany was unable to react to these shocks and ran into trouble. This theory recalls that of the British historian Arnold Toynbee, according to which empires collapse because they are unable to react to external challenges.
The first shock was intensified globalization, which brought a lot of new low-wage competition. Although globalization is a gradual process, it gained momentum when China decided to play the game. China is 10 times the size of Japan, and Japan was not easy to deal with, either. German precision instruments and optical equipment, for example, lost their competitive edge when Japan entered the game.
The second shock was EU integration, including the northern and southern enlargements. The dismantling of the EU's internal borders boosted each country's market size and brought about the predicted economies of scale. But this helped Europe's small countries more than the big ones, and it implied more competition for Germany, Europe's biggest economy.
Think of Nokia, the mobile phone maker. Due to the economies of scale that the common market made possible, Nokia was able to exploit its inventions fully, while Germany's Siemens recently decided to give up on the mobile phone market.
The third shock was the euro, which has induced a rapid convergence of long-term interest rates, which in some countries had been five to seven percentage points above the German level. Freed from exchange-rate risk, international investors no longer demanded a risk premium from these countries and were willing to provide funds to all of them under the same favorable conditions that previously had been reserved for Germany.
This is good for Europe, because it helps improve the allocation of capital and stimulates growth by transporting German savings to the remote and previously disadvantaged regions of the euro zone. But it is of doubtful benefit to German workers who also would have liked to cooperate with that capital.
The fourth shock was eastern EU enlargement, which has brought extraordinary chances for trade and investment in the east, but has also brought massive low-wage competition. On average, wage costs in the 10 countries that joined the EU last year are only 14 percent of the West German level. Low-wage competition has led to substantial outsourcing and off-shoring activities that have kept German firms competitive by reducing their demand for domestic labor. As neither Germany's unions nor its welfare state would accept falling wages, the result was higher unemployment and slower growth.
The fifth shock was German unification, which is a failure in economic terms. GDP per working-age person in East Germany had been 61 percent of the West German level in 1996, but it is now only 59 percent. The slow growth of the eastern part of the country has pulled down the Germany-wide average, while the enormous demand for public funds in the east has increased public debt. The weak fiscal position has in turn undermined investors' confidence, with obvious implications for economic growth.
All five shocks constitute historical developments that are good for the world as a whole, but problematic for Germany. In order for the country to meet the challenges and to continue to grow, it would have to make its labor markets flexible. Only if wages adjust downward to accommodate the new international environment can German workers become competitive again, so that the country returns to a higher employment level, exploiting its human capital up to the capacity constraint.
The new government that voters will most likely elect in September will be confronted with the difficult task of confronting Germans with reality and pushing through the necessary reforms. Only then will we know whether Germany can meet the Toynbeean challenge it is facing.
Hans-Werner Sinn is director of the Ifo Institute for Economic Research in Munich.
Copyright: Project Syndicate
Recently, China launched another diplomatic offensive against Taiwan, improperly linking its “one China principle” with UN General Assembly Resolution 2758 to constrain Taiwan’s diplomatic space. After Taiwan’s presidential election on Jan. 13, China persuaded Nauru to sever diplomatic ties with Taiwan. Nauru cited Resolution 2758 in its declaration of the diplomatic break. Subsequently, during the WHO Executive Board meeting that month, Beijing rallied countries including Venezuela, Zimbabwe, Belarus, Egypt, Nicaragua, Sri Lanka, Laos, Russia, Syria and Pakistan to reiterate the “one China principle” in their statements, and assert that “Resolution 2758 has settled the status of Taiwan” to hinder Taiwan’s
Can US dialogue and cooperation with the communist dictatorship in Beijing help avert a Taiwan Strait crisis? Or is US President Joe Biden playing into Chinese President Xi Jinping’s (習近平) hands? With America preoccupied with the wars in Europe and the Middle East, Biden is seeking better relations with Xi’s regime. The goal is to responsibly manage US-China competition and prevent unintended conflict, thereby hoping to create greater space for the two countries to work together in areas where their interests align. The existing wars have already stretched US military resources thin, and the last thing Biden wants is yet another war.
As Maldivian President Mohamed Muizzu’s party won by a landslide in Sunday’s parliamentary election, it is a good time to take another look at recent developments in the Maldivian foreign policy. While Muizzu has been promoting his “Maldives First” policy, the agenda seems to have lost sight of a number of factors. Contemporary Maldivian policy serves as a stark illustration of how a blend of missteps in public posturing, populist agendas and inattentive leadership can lead to diplomatic setbacks and damage a country’s long-term foreign policy priorities. Over the past few months, Maldivian foreign policy has entangled itself in playing
A group of Chinese Nationalist Party (KMT) lawmakers led by the party’s legislative caucus whip Fu Kun-chi (?) are to visit Beijing for four days this week, but some have questioned the timing and purpose of the visit, which demonstrates the KMT caucus’ increasing arrogance. Fu on Wednesday last week confirmed that following an invitation by Beijing, he would lead a group of lawmakers to China from Thursday to Sunday to discuss tourism and agricultural exports, but he refused to say whether they would meet with Chinese officials. That the visit is taking place during the legislative session and in the aftermath