Economy in Turmoil
In January of last year, German Finance Minister Hans Eichel predicted the German economy would gain strength by the middle of 2002 at the latest. That optimistic prediction did not materialize.
A look inside the inner workings of the German economy shows that major structural reforms are needed to revitalize it. The country that was previously known as the economic engine of Europe is now commonly referred to as the “sick man of Europe.”
Will Germany muster the strength to recover from its economic paralysis? The answer undoubtedly foretells much about Germany’s, as well as Europe’s, future.
Last November, the German government’s independent council of economic advisers, the so-called five wise men, informed German Chancellor Gerhard Schröder that “Germany would register little or no growth for [the year 2002] and predicted an almost negligible increase for 2003. Germany, they said, was heading for recession in the first half of ” (Deutsche Welle, Dec. 25, 2002).
German stocks did poorly in 2002, losing nearly 40 percent of their value in 12 months. The dax, an index of Germany’s 30 biggest blue chip stocks (a term that generally refers to any stock of high quality), has never before been in decline for so many consecutive years. While numerous fiscal forecasts have consistently called for a market turnaround, the results continue to be disappointing.
Statistics already show about 4 million jobless in Germany—almost 10 percent of the work force. That number is predicted to rise to 4.5 million this year. High unemployment has persisted in Germany since the unification of the ex-Soviet bloc Eastern Germany with the West. Germany’s present level of unemployment is at a post-World War ii high.
Corporate bankruptcy has significantly contributed to the high unemployment rate in Germany. In 2002, over 37,000 companies filed bankruptcy. This year 42,000 companies are expected to file for bankruptcy. These insolvencies have hurt banks and credit companies, many of which are also struggling to stay profitable. As corporate bankruptcies have increased, the number of personal bankruptcies has also reached a record high.
Germany’s 2002 budget deficit surpassed the 3 percent allowed by the EU’s Stability and Growth Pact (ironically, engineered in large part by Germany), leading Brussels to issue Germany a formal warning last November. This excessive deficit procedure is a humiliating blow for what was once the great economic powerhouse of Europe.
Now that Germany has been officially reprimanded for failing to keep its debt under control, it faces the possibility of fines if it does not come into compliance. The fines could be as high as 5 percent of its gross domestic product—as much as $100 billion. Though fines have not yet been issued, the pact already threatens an initial $10 billion penalty. Under the provisions of the pact, the fines would continue until the country’s financial health is restored.
Under the EU’s single-currency provisions, Germany cannot use many of the traditional economic measures to help rectify its problems, such as internally adjusting interest rates. Under the single currency, the power to determine interest rates is the responsibility of the European Central Bank (ecb). Although the ecb lowered rates by half a percent last December, Germany would have probably lowered them by much more if it still had the power to do so.
At best, however, lowering interest rates only alleviates the government cash flow problems temporarily. It does not address the heart of the problem. Germany’s long-standing business and economic practices show that causes of unemployment, insolvencies and debt are primarily structural, not cyclical.
The labor market is now at the point where contributions from workers into the social security system do not cover expenditures. The overburdened welfare system is largely the result of the high unemployment and an aging population. Germany’s generous welfare system, which discourages many from wholeheartedly seeking employment, only compounds the problem. In addition, many German youth are choosing to leave the country in search of work elsewhere.
The expensive healthcare and welfare systems, along with powerful labor unions that keep pay rates high, make Germany the most expensive country in Europe in which to operate a business. The Autumn 2002 Wilson Quarterly reported that with “a gross income of $34,400 a year, the average German takes home just $20,100. Moreover, that worker costs an employer almost $50,000, when social security and insurance provisions are factored in. It’s cheaper, complain officials from the state of Hessen, for a German bank to post executives to London and fly them back twice a week for meetings than to keep them in their native Frankfurt.”
This situation is the reason that “Even German firms no longer invest in Germany: They go to America and Eastern Europe for cheaper, more adaptable labor and lower taxes” (Management Today, Nov. 12, 2002).
For business to become the driving force behind economic growth, drastic measures are needed to make the inflexible business environment a viable option for corporations. Chancellor Schröder, however, does not appear to be the man who will make this a reality.
A significant factor that has absorbed much of Germany’s capital and makes its structural problems more noticeable is the high cost of German unification. Thirteen years ago, Chancellor Helmet Kohl sought to speed unification by exchanging West and East German deutschmarks at nearly a one-to-one ratio, despite the dissimilarities between the two economies. Initially this brought East Germans closer to the living standards of the West, but for the West it quickly made East German goods and services overpriced and its cheap labor no longer cheap.
East Germany also needed to be brought up to speed technologically. Much of its infrastructure was, and in many respects still is, archaic compared to the West; and its work force, on the whole, is far less skilled. To resolve the East-West disparity, Berlin poured more than $100 billion into modernizing East Germany. An additional $2.6 billion a year came from the EU structural fund, which helps develop lower-income regions.
Much more investment funding is still necessary to solidify and heal reunified Germany. Unfortunately for Germany, future EU structural funds are targeted for economies that need the money even more desperately—those of the countries set to join the EU next year.
To make matters worse, devastating rainstorms and floods repeatedly battered the country’s economy in 2002 and early 2003. While trailing in the polls during the run-up to the election, Chancellor Schröder generously allocated emergency funds to affected regions, soaking up desperately needed cash.
In the national elections last September, Schröder’s Social Democrats were able to hang on to the majority coalition largely because of an alliance with the Greens. But this coalition is now showing signs of increased strain. As the chancellor struggles to keep his coalition in power, he is tiptoeing around the major issues, putting forth solutions that only deal with surface issues and do not get to the crux of the problems.
This lack of political will has rendered him unable to resolve the country’s worsening problems—even if he had the solutions.
Instead, Schröder’s economic answers are counterproductive. Rather than taking the logical course of cutting spending and reducing taxes, he proposes tax increases—even on businesses, which will further discourage the business investment so necessary for economic growth. “The president of the Munich ifo Institute, Hans-Werner Sinn, said [tax increases] would be damaging to employment. ‘Businesses already have great incentives to lay people off, because they are too expensive. And this just adds to that,’ he said” (Deutsche Welle, op. cit.).
Not only do these and other proposals go against the traditional economic free market doctrine of how to promote growth, they violate one of Schröder’s own campaign pledges—his promise not to raise taxes. But collecting money and driving down debt, no matter what the cost, seems to be the name of his game.
Management Today made this observation: “Schröder talked a lot during his first term about reforming all this [labor and taxation policies], but little happened. Even less will happen in his second term. One Berlin commentator told me: Schröder’s policy for the next four years will be to ‘muddle through’ in any way he can to keep his coalition in power” (op. cit.).
Implications for EU
Barring implementation of a whole range of economic reforms, Germany’s economic situation will result in further problems for the EU. “The Eurozone cannot prosper as long as its dominant economy is in decline, dragging everybody down with it” (ibid.).
Indeed, the impact of Germany’s economic woes is already being felt far beyond its borders—specifically in the areas of investment and trade. Europe’s growth forecast for 2003 is expected to be 1.8 percent, down sharply from a prediction last April of 2.9 percent.
If economic conditions in Europe, especially Germany, continue to worsen, they will have an adverse effect on plans for European enlargement. The EU is trying desperately to come to grips with managing the euro, and this is about to get a lot more complicated as the EU expands. The participants of the European Monetary Union originally had far more stable economies and were considered First World nations. All of the potential EU member nations have far less stable economies and are comparatively underdeveloped, with weaker economic infrastructures.
Consider also that the euro has gained a reputation as an inflation maker; businesses have notoriously marked up their prices during conversion. Although a minor problem for existing members of the eurozone, these and other complications may prove to be major headaches for the 10 new EU candidates. The broad economic disparity that must be dealt with in integrating these economies is certain to increase the complexity of the entire single-currency system.
Opportunity for Change
Europe’s single-currency system is in large part held together by the EU Growth and Stability Pact, which Romano Prodi, head of the European Commission, has denounced because of its inflexibility. For some years now, the governments of the larger EU national economies have been dissatisfied with the way the Stability Pact “prevents them from pumping life back into their economies through fiscal stimulus, especially when prospects for future growth are so bleak” (International Herald Tribune, Nov. 14, 2002).
It was Germany that pressured the EU into accepting the Stability and Growth Pact, which has now become the albatross around its own neck. However, for Germany it also provides the opportunity to justify desperately needed changes. Germany now finds itself forced into the position of being able to make reforms that were previously unthinkable.
Ironically, these problems will ultimately work to Germany’s advantage. In fact, given German pulling-power within the EU, and considering the fact that none of the nations awaiting accession to EU membership have a hope of performing within its requirements, it is entirely possible Germany may lobby hard for the suspension or modification of the pact. At the very least, it will have to be redrafted to establish more meaningful and flexible criteria for member nation economies to follow, otherwise it will prove the sham that Prodi had identified it as.
Reform is desperately needed in Germany if the “sick man of Europe” is to recover. However, the magnitude of the necessary structural changes will require a strong personality. History shows that the German people as a whole respond to strong leadership in a time of crisis and are able to accomplish much, because of their dynamic, industrious traits, given a strong leader.
The Bible clearly shows that there is a strong man coming who will provide this leadership (Dan. 8:23-24).
What will it take for this strongman to come to power? Conditions most likely will be similar to what they were in the 1930s when economic instability and social disruption brought Adolf Hitler to power.
Daniel 11:21 tells us that this potent leader will be a clever and astute man who will deceitfully obtain his position through flatteries.
A December 26, 2002, article in the Financial Times (London) drew an insightful conclusion: “What is clear is that a succession of shocks has not been enough to turn round these two huge economies [Japan’s and Germany’s]. History tells us that when a big enough shock comes along, these countries can change astonishingly fast.”
As economic conditions in Germany continue to worsen, and weak political leaders fail to make real progress, watch for the German people to demand a strong, dominant leader who will bring them to better times. Watch also for Europe to back a German strongman as he works to get the whole of the European economy moving again! Watch too for Germany to hike its defense budget, cranking the engines of industry into reviving the German war machine.
Despite what we currently see—a union led by a country with a stagnant economy—prophecy guarantees a strong economic recovery in Europe. The European Union, as the Trumpet consistently points out, is in the process of developing into an empire depicted as a great political and economic power with which world leaders consort, and “the merchants of the earth” do business (Rev. 18:1-3). This great economic power will have the ability to decide who is able to buy and sell, or who is able to conduct business (Rev. 13:16-17). It will have unprecedented power (v. 4).
The German economy will be the powerhouse of this European superpower that will dominate the globe for a brief time. Its dominance, however, will soon after be replaced by a Supreme Power, when Jesus Christ returns to Earth to implement lasting global economic, political and governmental reform (Dan. 2:34-35).