Over the past 10 years the EU economies have grown roughly at 2.8 %. Germany has been the colossal disappointment averaging 1.4 % GDP growth over the last 10 years or about equal to that of Japan which has been mired in a depression. Since 2000 the rate is an abysmal 0.3 %. There are many factors that have negatively impacted the German economy including; rigid labor and capital markets; an over reliance on bank financing, lower rates of returns on investment, the transfer of money to East Germany, high taxation and Government interference at all levels in economic and job markets.

Yet much of Europe suffers from these same ills so why is Germany so moribund compared to its socialist brethren? A 2004 Goldman Sachs study has one answer – that the low cost of capital and poor return on investment are chiefly at fault. European firms typically earn a 12 % return on capital, and US firms about 10 %. In Germany the return is 5 %. Germany’s cost of capital vs. the rest of Europe has been kept artificially low and this has increased investment but returns are low given labor and market rigidities.

Germany also has a different financial system than the US or Canada. Bank debt is far more prominent in funding companies, than financial markets. In fact German firms use about 2x more bank debt financing than other EU firms. State owned bank institutions are prominent economic players. Their issued debt is of course guaranteed by taxpayers, which reduces financing costs and interest rates. The purposes of government owned debt issuances are to create jobs - not maximize returns.

According the Goldman Sachs study, in recent years the cost of capital has increased and investment has slowed further reducing GDP growth. As Germany’s capital costs come into line with the rest of Europe, it could reduce its GDP by up to 5 % - a massive economic decline. With rigid labor markets this will result in job pain. As Germany reduces its capital subsidy it will be forced to liberate its jobs market as firms acclimatize first to the increasing cost of capital and then secondly to the increased possible rates of return and investment opportunities. This will entail economic restructuring and short term pain for long term economic reformation.

In a revealing and frank book by Gabor Steingart, ‘Germany: Decline of a Superstar’, not only are capital costs and low rates of return to blame for Germany’s economic malaise, but Steingart outlines a slew of other welfare, cultural and economic factors contribute to the deepening crisis. “It is simply not profitable or viable to have Germany workers, who cost considerably more than they produce…Our productive core is melting away...”, says Steingart in a recent interview. Indeed France and Britain now have larger economies than Germany, a fact that would have been unthinkable 25 years ago. Germany spends 20 % of its GDP on social welfare payments – double the Canadian average.

Steingart’s book argues that Germany is a country that has been very poorly run since 1945. Industry is in trouble, the welfare state is deep in debt and headed into bankruptcy, creative minds are leaving and an overbearing government bureaucracy is stifling everything from investment to work habits. According to German records the average German spends only 13 % of their lives working, far lower than British and US workers. Britons work 250 hours more per year than Germans and Americans 350 hours more. Less working hours and high punitive labor costs are forcing firms out of Germany. Employers pay 42 % of a worker’s wages in social costs, which lead either to job cuts or an increase in illegal jobs and illegal black market payments. In total a staggering 2.6 million jobs have been relocated out of Germany in the past few years, many to Eastern Europe.

Germany’s malaise is a clear signal that a socialist regime mitigates against economic growth and vibrancy. There is also the attendant political and democratic costs associated with a country in which over half the economy is directly or indirectly manipulated by government. The political paralysis is nearly as acute as the economic crisis. Interest groups with enormous leverage represent the beneficiaries of redistribution and government welfare policies. Elections are held at the provincial or federal level every 2 years making politicians prone to avoid addressing issues with tough policies that reduce poll support. Over half of Germany’s politicians are former government and bureaucracy members. This ‘elitist’ view of the morality of government power and redistribution is thus embedded quite deeply into the party and political structure of German politics. As such political and democratic reform, which must occur in parallel with economic liberalization will never occur. Germany and Europe will suffer for the creation of self perpetuating socialization.

Sources; Herb Grubel and the Fraser Institute article in National Post July 19/04, Economist Feb. 21 2004, p. 75, Goldman Sachs Paper 103, G. Steingart.