Thursday, March 2, 2006

Germany run like GM

A country run like a badly managed car company

by WSJ, March 1 2006

Imagine a whole country run like General Motors and you get an idea of Germany's economic problems.
For almost every gold-plated benefit that brought the world's biggest auto maker to its knees, an equivalent can be found in Germany's welfare system. As GM struggles with rising health-care costs, so does Germany, where employers and employees finance a system weighed down by an aging population and a high jobless rate.

GM's "job banks" pay laid-off workers not to work, while Germany gets them to retire "early." All the "job security" that unions tout in both cases doesn't amount to much in a stagnant market. Last November, GM announced 30,000 job cuts. Yesterday, the Federal Labor Agency said that more than five million people, or 12.2%, are out of work in Germany.

We see one big difference. Unlike on GM's glum assembly lines, the Germans are ebullient. Much has to do with a veritable "Merkelmania" that has gripped the country in Angela Merkel's first 100 days at the Chancery. Friends and rivals have nothing but praise for the Chancellor. Her approval ratings are at a record 85%.

Ms. Merkel has managed to impress in foreign policy, not on the domestic front. Hobbled by her coalition partner, the Social Democrats, the Christian Democratic Chancellor can't run economic policy as she now does the country's diplomatic affairs. In that field, mere words have impact.

On issues like the trans-Atlantic relationship or Iran, Ms. Merkel broke dramatically with her predecessor without checking with her coalition partners. But if ever she is asked to participate in a joint action against the mullahs' nuclear program, the Chancellor won't have as free a hand. Her honeymoon could end quickly.

Yet the greatest threat to Germany's current euphoria is the economy. While Ms. Merkel campaigned as a bold reformer, she now speaks only of "small steps." Even those she only takes with great hesitation. Ironically, that seems to aid her popularity. For years Germans endlessly debated and fought over reform; people are tired. The reluctance of the grand coalition to raise the topic helps create the impression that maybe things can stay as they are. Only in such an atmosphere a modest step such as raising the retirement age to 67 from 65 (by 2030!) can be hailed as a major reform.

The optimists invariably cite two figures to build their case that the worst is over. One is the rise in the GfK consumer climate index. Yet the bullish consumer sentiment doesn't mesh with the continuing fall in real wages and the massive job cuts at German blue chips. Volkswagen recently announced cutting 20,000 jobs, Deutsche Telekom 32,000. And the apparent willingness to spend a little more this year may in fact be due to one of the Merkel government's most deplorable policies: In 2007, VAT rates are set to rise three percentage points, and Germans are responding rationally in mulling purchases now.

The other figure is the Ifo business climate index. Usually a reliable bellwether of future economic activity, it has now reached levels not seen since the unification boom almost 15 years ago. But better business outlooks don't necessarily translate into new jobs. What's more, the answers from around 7,000 businesses are a relative assessment. After all those glum years -- and last year's fourth quarter wasn't heartening -- the prospect of a tiny bit of growth may be enough to trigger euphoria. So the projected 1.5% economic expansion this year, almost a recession by U.S. standards, is welcomed as a sign of recovery in Germany.

German businesses are profiting from cost-cutting measures, an improved global outlook and better sentiment at home. But the fundamental problems remain the same as in Gerhard Schröder's seven years at the helm. Labor laws are too rigid, though firing rules were relaxed for the first two years of employment. Taxes rates are high and complicated, the bureaucracy onerous, the schools and universities subpar and health-care and pension costs exploding.

For all the current optimism, Germany looks more like GM than Toyota or Porsche. In the next 100 days, if she is serious about fixing her country's deeper problems, Ms. Merkel will need to shift into higher gear.