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Last Updated: Monday, 8 May 2006, 15:03 GMT 16:03 UK
German revival in the spotlight
By Jonty Bloom
BBC Economics Correspondent in Hamburg, Germany

Worker at German steel firm Thyssenkrupp
Germany's economy appears to be showing signs of heating up

When experts study the finer details of the European Commission's Spring Economics forecasts for its members, they will pay particular attention to Germany's fortunes.

The report examines issues such as the effect of high oil prices on the 25-member EU and economic confidence in the eurozone.

Germany is in focus, amid recent signs that its may be on the road to recovery, despite being in the doldrums for years.

The country always used to be described as the powerhouse of the European economy and, for all its recent problems, to a very large extent it still is.

It is the largest economy in Europe - despite unemployment of more than 10% and annual growth rarely rising above 1% for years - and has made a massive success of exporting.

With a huge and increasing trade surplus, Germany's economy is being driven by its exports - and Hamburg, the largest port in Germany and the second largest in Europe, is feeling the benefits.

Situated on the outskirts of Hamburg, Ixion machine tools is a typical family-owned, middle-sized maker of precision drilling machines.

Their machines are used to make car engines, plane parts and medical instruments, and things seem to be going well, with the firm winning new orders from Indian and Chinese manufacturing industry.

Tough changes

That success has brought workers a profit-sharing scheme. But as Ixion boss Christoph Klumpp says, it has also led to painful reforms.

You can imagine what they [other workers] think about it - once you have got used to working 35 hours, you don't want to work 40
Alex Cox, Ixiom machinist

Workers have not had a pay rise above the rate of inflation for years - which means that their wages are actually falling in real terms.

They have also had to adapt to flexible working practices, taking time off when orders are short.

However, the real shock for Ixion's workforce was the change in the number of hours worked.

They have gone up from 35 hours a week to 40 - a sharp and painful reversal of hard-won benefits that is happening all across Germany.

It's a sign that the much-needed reforms of the German economy have been going on quietly and remorselessly for some time now.

Of course, the changes are not popular with the workers.

"You can imagine what they think about it. Once you have got used to working 35 hours, you don't want to work 40," Alan Cox, an English machinist who has worked at Ixion for 30 years, said.

Competition boost

But while things have been getting tougher for workers, the changes have helped German industry to compete internationally and export like never before.

Containers moved by crane at container dock
Thousands of containers are shifted in Hamburg each day

Germany has been breaking even its own impressive records - in February, it had a trade surplus of 13bn euros - and many of its exports are going through Hamburg's docks.

On a tour of the harbour, it is easy to see what that means.

Vast container-carrying ships are loaded and unloaded by huge cranes using the latest in computerised technology at one of the five separate container terminals in the city.

Thousands of containers are moved in less than 24 hours and such speed is essential; in the last year alone, they have handled 15% more containers.

But is this all enough to pull Germany out of the doldrums?

Well, unemployment in Hamburg is 11% around the average level in Germany.

'Not enough'

But Gunar Uldall, Hamburg's minister for economic and labour affairs, says unemployment is not falling, despite the city's economy growing at 2% a year - higher than the German average.

Mr Uldall says such growth is "too little" to offset a sustainable fall in the unemployment rate.

"We say that growth must be more than 2%," he says. "We have reached the break-even point, but this is not enough.".

But the trouble is that neither Hamburg nor Germany is likely to get economic growth of more than 2% this year or next.

Economic growth will peak this year at 1.8% - the fastest economic growth in Germany for years and possibly the best in Europe this year.

But probably that will not be enough to make serious inroads into the massive numbers of unemployed across Germany. That won't happen without even more reforms and even more pain.

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