The “secret” behind Germany’s economic recovery

According to the Bundesbank, German GDP grew by 3.6% in 2010. This comes after the steep 4.7% drop in 2009, when the recession hit Germany hard. Unemployment has gone down from the 10.5% peak of 2005 to 7%. It now stands at just under three million. Volkswagen is taking on 3,000 workers, BMW and Daimler 400 each. Lufthansa has announced plans to take on an extra 4,000 staff this year. The same picture can be seen in chemicals, electronics and other industries. When the rest of Europe is facing lay-offs and sluggish growth, what is different about Germany?

German exports have been growing fast. In the first semester of 2010 they were up 17% on the first semester of 2009. Growth in countries like China and India has played a big role in this, with German exports to these two countries growing by 80% and 40% respectively in the past three years. In November orders for German industrial goods were up 5.2% compared to the previous months, mainly due to growing demand for German capital goods from the “emerging economies”, i.e. countries like China, India, Brazil and so on.

Within the European Union also German exports of cars, machine tools, chemicals, electronic goods have been dominating the market. The weaker economies like Italy, Greece, Spain, have all been losing out, seeing their own unemployment levels surge.

The irony of all this is the following: German banks have lent money to these countries over the past decade, which has been used to provide credit that has ended up being used to buy German goods. Now that this piling up of credit has turned into the deepest financial crisis since 1929, the German capitalists are complaining that Germany has been called on to bail them out because of their national debts.

Sooner or later this is going to provoke a financial crisis in Germany itself. But for now Germany is exporting its way out of the crisis. This, of course, means also exporting unemployment and increasing the problems of the weaker European economies.

Why is Germany more competitive?

The question one has to ask is: why is Germany more competitive? The answer to that is to be found in the power of its industrial base. In countries like Britain it became fashionable in the past decades to praise the banking and services sector of the economy. London was a key financial centre, where much of the money made elsewhere was being banked and invested in all kinds of financial schemes. Germany, on the other hand, maintained a much stronger manufacturing sector.

The boom of the past 20 years or so led investors to believe they could make money from money, without going through the troublesome task of actually investing in the production of real value, i.e. goods! This brings us to a basic postulate of Marxist economic theory, and that is that value can only be created by putting human labour power to work in the production of goods that are required by humans. Pushing up the price of a house as a result of a bubble doesn’t actually increase the real value of the house. It still remains a house, in which only one family can live. Sooner or later these bubbles must burst and the nominal price must come into line with the real underlying value. This has partially been achieved, but more is to come as house prices will inevitably come down further in the coming years.

Returning to Germany, we see an economy where manufacturing is a much bigger part of overall GDP. The table below shows manufacturing as a percentage of GDP in China, France, Germany, Japan, the United Kingdom and the United States. China clearly outflanks all the other major powers, and here lies the secret to its success. Germany comes second. In the last 20 years manufacturing as a percentage of GDP in Germany has remained close to 25%. In Britain it has gone down from around 22% to around 13%.

Manufacturing as a percentage of GDP globally and across comparator countries

Source: UNCTAD Handbook of StatisticsSource: UNCTAD Handbook of Statistics

If we look at productivity – measured as gross added value per hour   in the production of commercial goods between the years 1997 and 2007 in Germany, France, Italy, Spain, Britain and Japan, we see that only in Germany is there a net growth. [Source: EU, Klems]. According to an article, Why Germany's Top Manufacturers Succeed, published by Germany Trade & Invest, the foreign trade and inward investment agency of the Federal Republic of Germany:

“...German competition winners... have bucked the expected trend. They've defied experts who believed that services, rather than manufacturing, were the way of the future for Germany. Moreover, they've contradicted the widely held assumption that outsourcing production overseas is an ideal cost-saving strategy. In no other industrialized country is manufacturing more essential than in Germany. In 2008, twenty-three percent of gross value added in Germany came from the manufacturing sector; compared to 13.3 percent in the USA and significantly less in Great Britain and France.”

Apart from the boasting on the part of a German government agency (as it conveniently ignores China), this gives a good picture of the situation. German manufacturing is stronger than that of its competitors, and the key question is growth in productivity. But how has this been achieved, and more importantly what has it meant for German workers?

The fact is that the German workers who produce all these competitive industrial goods, cars, chemical goods and electronics, have been under the cosh in terms of the real value of their wages for about a decade now. And this is thanks partially to the role of the trade unions who have wholeheartedly embraced “mitbestimmung”, co-determination or so-called workers’ participation. This is a system which is supposed to allow the workers a say in the running of factories. In reality it is a way of getting workers to accept what the bosses want, but make them feel they are part of the decision-making process.

Bosses’ offensive against the workers

How has it been applied during the recent recession? For the past three years, for example, the wages of the 750,000 German car workers have been frozen. The bosses and the trade unions – who have a representative on the board of managers – agreed to hold back wage increases and to cut hours. In 2009, when the recession hit home, over one million workers were on “short time” work, known in German as Kurzarbeit, of two or three day weeks and on 70% of their wages. At Opel wages have been frozen for the whole of 2011 and holiday pay at Christmas and in the summer has been halved.

In the period 1977 to 1997 productivity in Germany grew by an average of 3.2% a year, whereas hourly wages grew at the rate of 4.25% per year. In fact hidden behind the image of an industrial powerhouse, for a period of around 20 years, as the Financial Times explains, was the fact that, “growth in output per person [was] seven percentage points lower than the UK from reunification in 1990 until the financial crisis.”

All this was clearly unacceptable for the bosses who went on an offensive against the German workers demanding “sacrifices” which the trade union leaders agreed to. In the past ten years wage demands have been very much on the moderate side. This explains why in the past five years there has been a very big increase in productivity of labour in terms of cost to output ratio.

If we look at real wages per worker, cost of labour per unit of production and hourly productivity we get a clear picture of what has happened. Between 1997 and 2010 real wages went down by 10% and hourly productivity rose by around 8%, resulting in an overall reduction of 25% in the unitary cost of labour. [Source: EU Commission]. According to the Global Wage Report recently published by the International Labour Organisation, German workers’ wages over the past decade have shrunk more than in any other industrialised country.

Added to this has been the increasing “flexibility of labour”. The number of workers on permanent contracts has fallen in the recent period. In 2011 for the first time in its history there will be over one million temporary workers in Germany. This means German capitalists can take on workers when the economy is growing and dump them in times of recession. And the wages earned by these workers – known as the “€400 jobs”,   are much lower than those of workers on permanent contracts.

Translated into simple language, all this means that the bosses have managed to squeeze down real wages while at the same time getting more production out of each worker per hour. This is the “secret” to German industry’s increased productivity. Thus it can outcompete its rivals, but at the cost of holding down real wages for German workers. This means that its own domestic market, although big, is not big enough to absorb the immense productive capacity of German industry; hence, the need for Germany to export more.

In the recent period this process was facilitated by the 2009 recession. In fact in that year trade union militancy was at a low ebb, as workers kept their head down waiting for the storm to pass. An indicator of the mood that existed in 2009 is the fact that that year saw the lowest number of day lost through sickness since the health ministry began collecting data on sick days in 1970. As Joachim Moeller of Nuremburg's Institute for Employment Research, explained: “In times of economic crisis, the number of sick days taken tends to go down,” He added that workers in times of recession are often afraid they may lose their jobs and go to work even when they are sick.

Mood beginning to change

Now, however, things are starting to change. Marxists understand that there is no direct correlation between the economic cycle and class struggle; put more simply, recessions do not automatically provoke class struggle and booms do not automatically calm class conflict. The German workers have made many “sacrifices” in the recent period. This they did because the bosses and the trade union leaders sold them the story that such sacrifices were for the good of all and that this was the only way to get the economy moving again.

Well, the economy is moving, production is up, and exports are going at full blast. Last year German growth was its highest since 1991 and German business “confidence” is high. So when are the workers going to be rewarded for their sacrifices, not to speak of the millions of poor in Germany? The position of the poor is in fact a dire one. Seven million Germans, on top of the three million unemployed, live on some form of benefit. At the end of 2010 Merkel gave these poor a paltry 5 euros increase, bringing their monthly cheque from 359 euros to 364, “an insult” as the former leader of the Die Linke, Oskar Lafontaine described it. This “reserve army of labour” has been used to push down wages in general, threatening the workers that unless they accepted wage cuts and worse conditions they could easily join this army of unemployed.

However, this nice cosy set up – for the bosses that is – cannot last forever. There is a limit to what workers can take. And now the German workers are about to present the bill. A militant mood is beginning to develop now and this is reflected within the trade unions who are about to enter into a period of wage negotiations. In the coming months collective bargaining agreements expire in the chemical industry, at Volkswagen, for shop, hotel and insurance workers. In December the collective bargaining agreement for the regional government workers had already expired. The total number of workers whose labour contracts are up for renewal is 7.5 million.

The trade union that organises the regional government workers has already put in a demand for a 5% wage increase, when official inflation figures are hovering around the 2% mark. The unions are seeking to claw back some of what was lost in the recent period.

A German economist, Gustav Horn, considered “close to the trade unions” expects wages to grow on average by 1.8% in 2011, still below the rate of inflation, but in those industries where labour contracts are to be renewed this year he sees wages going up by 3 to 4%.

The militant mood of the workers can be seen in the steel industry where the IG Metall in October managed to win a significant concession: temporary workers are to receive the same wages as permanent workers, while the DGB trade union federation has been demanding a minimum wage for some time. At Volkswagen, where the labour contract expires at the end of this month, the trade unions have put in a demand for a 6 percent wage increase, while the union Ver.di has called for a 6.5 percent rise for telecommunications employees. The IG BCE union recently demanded a rise of at least 6% for Germany’s 550,000 chemical industry workers.

The boom in Germany is bringing with it growing exports and rising profits. Employment is growing as companies take on more workers to meet growing demand. In these conditions the confidence of the German workers is growing. Those same workers, who were forced to keep their heads down in times of recession and growing unemployment, will now feel their time has come. They will present the bill to the capitalists and demand their share. This is a recipe for class struggle in Germany. And we can confidently predict that the German working class in the coming period will join their workers across Europe and beyond in the fightback.