Perspectives for the German economy in 2004

The German economy is the largest in Europe. Since the recession of 2001, the German government has been claiming an economic upswing is imminent. But are these predictions realistic? Christoph Mürdter analyses the real direction of the German economy.

Germany, the problem child

Germany is by far the largest economy in Europe. In 2003, German Gross Domestic Product (GDP) amounted to 2,130 Billion Euros, which is about 25% of the overall GDP of the EU.

The strength of the German economy is more apparent when you measure it using the size of the big German companies as a benchmark. In 2003, 29 major German companies were listed amongst the 100 largest in Europe, and these 29 companies alone accounted for 35% of the business volume of the European top 100 (see Frankfurter Allgemeine Zeitung Supplement "Die 100 größten Unternehmen")

In 2001 the German economy slid into a new recession, which continued and deepened until 2003. If you look at the cycles from 1948 to 2003 you can draw the following conclusions: In general, the average GDP growth rates decreased with each successive cycle. While the average annual growth of the GDP was more than four per cent at the end of the 1960s, it was down to less than three per cent in the 1970s and 1980s. In the most recent cycle the German GDP growth rate has been only 1.5 percent.

It is widely held that in capitalist economies there is an eternal succession of "ups and downs" and a simple cycle of booms and slums. However, what we actually find is a constant decline in the economic situation, a constant lengthening of recessions and crises and a continual growth in unemployment.

The German economy was hit by the world crisis at the same time as other large OECD countries. It was heading for a crisis long before the terrorist attacks of 9/11.

German GDP (on the basis of 1995 price levels):

Changes on previous year figures (according to “Statistisches Bundesamt”)

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

-1.1%

+2.3%

+1.7%

+0.8%

+1.4%

+2.0%

+2.0%

+2.9%

+0.8%

+0.2%

-0.1%

Is Germany a poor country?

Germany is a rich country. It has financial assets worth more than € 3,800 billion. Yet just 0.5 per cent of the population has a quarter of the disposable wealth, and the 100 richest people together have 250 billion Euros (more than the entire annual federal budget). On the other hand, poverty is increasing in Germany. Annual income from businesses and capital assets has risen by 21% before taxes since 1994, whereas employees' income has risen by only 1% since 1991, which means that it has virtually stagnated. The GDP (€ 2,130 billion in 2003) has increased by € 560 billion in the last ten years.

Will there be an upswing in 2004?

Since 2001, the German government has been predicting an imminent economic upswing. It’s the same again this year! In concert with the economic research institutes and other bourgeois “experts” they continue to be optimistic. But they have had to adjust their forecasts downwards in the light of events.

“But in 2004 it will be different”, they say. The legally appointed Council of Advisors has set more conditions and based its perspectives for 2004 upon a number of "indispensable assumptions" – a kind of insurance policy to avoid being exposed once again. The cornerstones of their perspectives include an average oil price of $29 per barrel, the overall growth of world trade by 7.5% and a stable exchange rate between the US Dollar and the Euro with a ratio of 1.15 to 1. Their prognosis is also based on an average annual wage increase of no more than 2.2%. These assumptions are supposed to pressurise the unions into a moderate position in the coming round of wage negotiations. Should the wage increases exceed that level and economic growth turn out to be below forecast - whatever the reason might be - then they already know who to blame. If the political leaders don't stick to a rigid cost-cutting policy of sound budgets, they will also be blamed for possible economic complications.

The Schröder government and bourgeois “experts” claim that the economic upswing was the result of their “reforms” (in effect counter-reforms) and that the effect of these “reforms” was now being felt. The economists predicted a GDP growth of between 1.6 and 2 per cent for 2004. "The hopes for 2004 are now focused on the continuation of the upswing in the world economy and on the positive, fuelling effects of foreign trade on the domestic economy." (Sachverständigenrat: Staatsfinanzen konsolidieren - Steuersystem reformieren, Wiesbaden 2003) What are these hopes based on?

The takeover by the “Red-Green” government in 1998 occurred in a period of economic growth that lasted until 2000, a period in which the number of unemployed declined and tax revenues continued to increase.

Deluded by this growth it was easier to cut state expenditure and manage with less indebtedness than in an economic slump. But capitalism has its own laws that cannot be cancelled by any neo-liberal or Keynesian economic policy. All the nice juggling with statistics that was done by the German government after the elections was based on a period of “fine weather”. But there was one thing they hadn't reckoned with - the reality of capitalism. Economic cycles are fundamental component parts of capitalist economies. Politicians in office tend to forget this fact when they claim that an upswing was a result of their “good” economic policies and on the other hand that a slump was caused by global economics, rising oil prices or terrorism.

What can be said about the potential development of the German economy in the coming months? The German economy shows three main features.

1. Weak domestic demand

i.e. low capital investment, private consumption on a low level, public sector demand lagging behind. Investment in industry and the construction sector has reclined in 2001, 2002, and 2003. In 2004, there is no indication of an upturn in these sectors, which would be crucial for an overall upswing. In particular, there is hardly any demand for new industrial buildings. The renewed decline of public investment (-2.8% in 2003) represents an enormous burden for any potential growth in the construction industry.

Development of investment (changes in comparison with the previous year in %)

 

1999

2000

2001

2002

2003

industrial sector

7.2

10.1

-4.9

-9.1

-4.0

construction sector

1.4

-2.6

-4.8

-5.8

-3.4

At the same time, consumer spending shrank in 2002 (- 0.6%) and 2003 (- 0.1%); it is quite possible that it will shrink or stagnate again in 2004 as a result of rising unemployment and higher fees and taxes. In this situation - and against the background of high and ever-rising public indebtedness - the policies of the German government in effect (by increasing workers´ contributions to the pension and health insurance funds and cutting welfare and unemployment benefits) slash domestic demand and worsen the crisis decisively.

Will "Agenda 2010" have any positive effects on domestic demand?

"Agenda 2010" (a programme of counter reforms and attacks on workers, the unemployed, the sick, and old age pensioners) was announced by Schröder in March, 2003, and has caused widespread union and social opposition as expressed by half a million people participating in the three regional trade union demonstrations (Berlin, Cologne, Stuttgart) on April 3, 2004. The government still claims that carrying out "Agenda 2010" will usher in an upswing. However the result of "Agenda 2010" will be a deterioration in private consumption. It is not expected to stimulate growth. The increase in the rate of saving speaks for itself. All the measures of "Agenda 2010" will lead to financial losses especially for those whose wages are already below the average and thus undermine consumer spending. This is true in particular of the increase in health sector charges and cuts in old age pensions. On top of this, there is an extension of the low wages sector by exerting massive pressure upon unemployed people and welfare recipients to starve them into accepting any lousy job offered. Yet what is proclaimed as the creation of new jobs only amounts to a redistribution of work as jobs on decent union rates and conditions are destroyed and many workers who are made redundant are pushed into the low wage sector. In view of this cost-cutting policy, the dismantling of the welfare state and the growing uncertainty of many households a noticeable stimulation of the national economy is not to be expected.

2. The East German economy

The gap between East and West has continued to widen ever since the former eastern GDR was taken over by the western FRG and West German capitalism in 1990. The social situation in the "new federal states" (as East Germany is now called) is desperate. The per capita income in the Eastern states amounts to no more than 70% of the average level in the West. The main reason for this lies in the fact that no independent East German industry has been developed after the old state enterprises of the former GDR industry were systematically destroyed in the early 1990s. The lack of any sound economic basis finds its expression in the high and rising unemployment figures in the East. In February 2004, the average unemployment rate was 11.1% in the West and 19.4% in the East (new federal states and East Berlin, excluding West Berlin) (in 1995, the Eastern figure was 14.9%, and in 2002 it amounted to 17.7%). When considering these figures, the fact that the population has been reduced drastically due to a continuing shift of population from the East to the West must be taken into account. The younger and more qualified sections of the working class, especially, have abandoned any hope for an improvement in the East.

The gap between East and West is increasing, although state funds of many billions of Euros have been directed towards the new states. But only a small part of these funds are used for investment or infrastructure. Most are spent to subsidise employment and welfare, i.e. to administer the whole plight in the end. "The East is drifting away, the new states are going to be a German Mezzogiorno", says economist Hans-Werner Sinn, President of the Munich Ifo-Institute. Let us not forget that the East includes about one fifth of the total German population. By European standards, such a stark social gap is unique. The existence of a large economic territory with a level of income and social standards considerably lower than in the rest of the country is bound to lead to social explosions. The improved conditions for the exploitation of the working class (lower wages, longer working hours, and less holidays) must be seen in relative terms when consumer demand is undermined and goods can't be sold.

Enlargement of the EU will lead to an intensification of the rat race. German capitalists will tend to invest increasingly in the countries of Eastern Europe and supply the German market from there, because labour costs there are considerably lower.

3. Dependence on exports

In 2003 goods and services worth € 764 billion were exported abroad - six billion Euros more than in 2002 and about twice as much as in 1989.

Over the past years, the growth of German exports has been a lot higher than the minor growth of GDP. Thus, German exports and the positive balance of trade (exports exceeded imports) have tended to support and stabilise the overall economic position. The share of exports within GDP has increased from 24.5 % in 1995 to 35.7 % in 2003, now well above the peak reached by West Germany before unification of the two German states in 1990.

The dependence on foreign trade has not only increased generally. As the structural development of exports indicates, dependence on exports to countries outside Europe has especially increased. As the German Institute for Economic Research (DIW) states: "From 1991 to 2001, foreign trade with the USA developed more dynamically than German foreign trade as a whole. In this period, the export of goods to the USA increased by 217 per cent nominally whereas German exports as a whole increased by almost 90 per cent. The most important reasons for the export boom lay in the fact that the economic growth in the USA, which lasted for years, was more intensive than other countries as well as in the growing competitiveness of German exporters, due to the fact that in this period the US devalued the Dollar by 25 per cent in real terms.

But the dependence on the US economy involves immense risks, and an upswing based on investment is not certain. The risks of a downturn are high.

Apart from the growing economic problems in the USA (net foreign indebtedness is 23 per cent of GDP, the trade deficit is growing by about $ 45 billion a month) the tendencies towards a crisis are increasing. The enormous rise in the exchange rate of the Euro since autumn, 2002, makes German exports - especially exports into the Dollar region - more expensive, thus undermining enormously the competitiveness of goods and services from Germany as the Dollar was simultaneously devalued.

"The upswing is an up without any swing, it is only wishy-washy." (DIW)

There can be no talk of a lasting upswing. In the present situation an upswing would be very flat (the DIW prognosis for 2004 and 2005 is 1.4 %, see: FAZ 7.1.2004) and would be far from a growth rate of 4 per cent (this would be a decisive level required to have some positive effect of reducing the number of unemployed considerably). Anyway, in the case of a forecast economic growth of 1.7 %, the number of unemployed will rise again as an average of 4.448 million is officially forecast for 2004. Under risky and unstable economic conditions the cyclical recovery can be expected to be very short and based on the increased exploitation of the working class.