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Friday, 28 January, 2000, 12:43 GMT
Germany's economic resurgence

Full steam ahead for Germany's economy

Until recently, Germany was the sick man of the European economy.

But after years of high unemployment and measly growth rates, the country is making a comeback. And as Europe's largest economy gets into gear, so will the rest of the 11-country eurozone.

The German government now expects gross domestic product to grow by about 2.5%, up from the weak 1.4% achieved during the past 12 months.

Many economists believe that this is too cautious, and expect rates of 3% and higher, about in line for growth forecasts for the whole euro region.

This recovery, though, pales somewhat when compared with the blistering growth rate achieved in the United States, which is forecast to come in at least at 4%, and could be even higher, considering the 5.7% GDP growth recorded in the third quarter of 1999.

Nonetheless, Wim Duisenberg, president of the European Central Bank and official the guardian of the euro, confidently predicts that economic growth in the eurozone will soon outstrip the United States.

Growth fundamentals

Germany's resurgence is based on two factors, both closely related to monetary union: low inflation and a weak euro.

Germany's Finance Minister Hans Eichel: The economy will grow that much
It may not be obvious at first glance, but for the German economy the single currency has been a success.

Strict objectives for public finances have cut fiscal deficits and driven down inflation, now hovering below 1%.

Low inflation translates into low interest rates. These contributed to the euro's weakness against the US dollar and the UK pound, which in turn helped Europe's and especially Germany's export industries, triggering boosting growth rates across the continent.

Monetary union has had other dramatic side effects that are expected to make the recovery sustainable.

  • Economic integration
    The single currency is making Europe's single market a reality. This has triggered a wave of mergers, as firms and whole industries restructure to survive on the global market place. Though painful for individual workers, it makes the economy as a whole stronger and more resilient to competition from abroad.
  • Deregulation
    Governments, in turn, are forced to tag along, deregulating once cosy monopolies like telecoms and energy, moves with direct benefits for both consumers and business.
German drawbacks

But all is not well in Germany's economy.

Unemployment is stubbornly high. The rate of jobless is set to edge into single digit figures, but what growth there was has so far failed to create new jobs.

Labour markets continue to be rigid, labour costs are the highest in the world. Were it not for the high productivity of the country's workforce, Germany would be priced out of the world markets a long time ago.

East Germany's decrepit industry has held back economic growth
This has not stopped the country's largest and arguably most powerful union, IG Metall, to demand a pay rise worth 5.5% - well above inflation (although one should bear in mind that the union tends to settle for amounts less than half its initial demand).

A weak euro may boost exporters, but as the oil price is rising, inflation could creep in through the back door, forcing the ECB to raise interest rates. This could choke the economic recovery before its benefits are fully felt.

Like businesses everywhere, German companies like to complain about red tape. Regulations are plentiful and have scared away many foreign investors.

And last not least Germany's government has rediscovered the (dubious) benefits of state intervention, when it recently sponsored a bail-out of troubled construction company Holzmann AG.

The move restored Chancellor Gerhard Schroeders political fortunes, but did little to inspire the confidence of the world's financial markets.

Balance sheet

Germany's economic woes have deep roots. After the end of the post-unification boom and euphoria, output slumped.

The huge sums of government money pumped into East Germany caused a rampant budget deficit, increased the tax burden and created only artificial, short-lived growth.

Furthermore, the East German economy recovered much slower than many had predicted or hoped for.

And across the unifed country, too much red tape and high labour costs hobbled the country's economy even further.

The final blow came with the financial crisis in Asia and Russia, which led to the collapse of vital markets for the country's export industry.

But things are changing. Exports are picking up, boosted by the weak euro. A tough austerity programme imposed by the single currency and introduced by Chancellor Schroeder could balance the budget.

As the economy starts growing again, Chancellor Gerhard Schroeder is all smiles
Overall, Germany's economy is set for at least one year of sunny weather.

Deutsche Bank, for example, predicts that the country's GDP will grow by 2% in the first quarter, 4.6% and 4.8% in the second and third, and 4.3% in the last quarter of 2000.

Ultimately, Germany's economic recovery will be out of the government's or the ECB's hands.

Just as the euro's problems are not a reflection of the weakness of the single currency, but the strength of the US dollar, the eurozone economy will have to rely on continued growth in the United States.

Should the dollar weaken and US stock markets collapse, all growth predictions for Germany and Europe won't be worth the paper they've been printed on.

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