German growth bolsters its stance on recession

BERLIN – Germany has
sparred with its European partners over how to respond to the financial crisis,
argued with the United States over the benefits of stimulus versus austerity
and defiantly pursued its own vision of how to keep its economy strong.

Statistics released
recently buttress Germany’s view that it had the formula right all along. The
government on Aug. 13 announced quarter-on-quarter economic growth of 2.2
percent, Germany’s best performance since reunification 20 years ago – and
equivalent to a 9 percent annual rate if growth were that robust all year.

The strong growth
figures will also bolster the conviction here that German workers and companies
in recent years made the short-term sacrifices necessary for long-term success
that Germany’s European partners did not. And it will reinforce the widespread
conviction among policymakers that they handled the financial crisis and the
painful recession that followed it far better than the United States, which,
they never hesitate to remind, brought the world into this crisis.

A vast expansion of a
program paying to keep workers employed, rather than dealing with them once
they lost their jobs, was the most direct step taken in the heat of the crisis.
But the roots of Germany’s export-driven success reach back to the painful
restructuring under the previous government of Chancellor Gerhard Schroeder.

By paring
unemployment benefits, easing rules for hiring and firing, and management and
labour’s working together to keep a lid on wages, Germany ensured that it could
again export its way to growth with competitive, nimble companies producing the
cars and machine tools the world’s economies – emerging and developed alike –
demanded.

Germans steered clear
of the debt-fueled consumption boom that many believe contributed to the
financial crisis. During the recession, Chancellor Angela Merkel resisted the
palliative of government spending that the United States and some European
partners felt was crucial to restoring growth.

The battle over how
to navigate the financial crisis helps display Germany’s emerging post-cold-war
identity as a country less tolerant of foreign demands and lecturing, one with
a tenser relationship with European partners. Although Germany has plenty of
problems to grapple with at home, it has also become less obsessed with its
historical crimes and more enthusiastic about its economic model, its culture
and its improved standing in the world.

Jenny Wiblishauser,
33, a single mother in the southern town of Memmingen, said Germany’s financial
prudence – and its willingness to ignore foreign criticism – made her proud.

“Before, the Greeks
would call us Nazis, and we would act vulnerable,” she said. “Now one says,
‘Well, I’m not driving there for vacation.”’

Some critics in
Europe say that confidence veered toward hubris in the contentious debate this
year over shoring up the Greek government and restoring confidence in the
troubled euro. In particular, the contempt in the German media directed at
Greece raised significant concerns among allies that a more assertive Germany
had emerged, said Thomas Klau, an expert on European integration at the
European Council on Foreign Relations.

“That was like a
wake-up call to the rest of Europe that something had changed in Germany,” Klau
said.

In the process, the
relationship between France and Germany has become fraught and mistrustful,
calling into question the future of the project of European integration.

As the latest numbers
show, Germany is out producing its neighbours by wider and wider margins,
raising fears of a two-speed Europe that could render the common regional
currency unstable.

France’s economy grew
at just a small fraction of Germany’s, 0.6 percent in the second quarter.
Spain’s economy grew an anemic 0.2 percent, while Greece’s shrank 1.5 percent.

If policymakers in
Berlin are right and the turning point has been reached, they will look wise.
If the fragile recovery cracks, as worrisome signs of a slowdown in the United
States and a cooling down of Chinese growth may augur, they could still bear
the brunt of the blame for doing too little to foster regional and global
growth.

Government officials
here are confident they found the right approach, including a better solution
to unemployment. They extended the “Kurzarbeit” or “short work” program to
encourage companies to furlough workers or give them fewer hours instead of
firing them, making up lost wages out of a fund filled in good times through payroll
deductions and company contributions.

At its peak in May
2009, roughly 1.5 million workers were enrolled in the program. The
Organization for Economic Cooperation and Development recently estimated that
by the third quarter of 2009, more than 200,000 jobs may have been saved as a
result.

The German economy’s
comeback is visible in smaller towns like Memmingen, in the historic region
known as Swabia. The brightly painted market square in this prosperous town is
straight out of a German fairy tale, but it is beyond the medieval
fortifications of the old town that Memmingen’s part in the nationwide rebound
of employment, which Merkel has likened to a “small miracle,” took place.

After a record year
in 2008, the family-owned firm Magnet-Schultz watched orders for its
electromagnetic products plunge. Nearly one-third of the company’s more than
1,500 workers in Germany were put on the short-work program. Only 57 were laid
off.

The firm’s chairman,
Wolfgang E. Schultz, whose grandfather founded the firm nearly 100 years ago
and whose son Albert joined as a vice president in January, said that his goal
was to maintain the company in the long term by losing as few skilled workers
as possible. He promised to try to rehire those who were let go when times
improved. Forty of those workers have been rehired already.

German exports rose
in June by 28.5 percent compared with the year before, the highest level since
the financial crisis began to pinch in October 2008. The renewed boom for
industrial companies like Magnet-Schultz has helped push the unemployment rate
down to 3.4 percent in Memmingen, less than half the national average of 7.6
percent.

“The government took
the right steps in extending the short-work program because it bridged a
difficult situation,” Schultz said in an interview.

From the start of the
financial crisis, Merkel has been the leading advocate of fiscal austerity, a
view that won out at the Group of 20 meeting in Toronto in June when the
leaders of the world’s biggest economies promised to reduce their budget
deficits.

Despite Merkel’s
triumphs on the world stage, her government is struggling to reverse its
plummeting approval ratings. Her stance reflects the will of a public that,
despite the good economic news, remains stubbornly worried about the future.

The very sacrifices
that have made German products more competitive and helped the country outpace
its weaker, less disciplined European partners – strict wage control, a
retirement age rising to 67 from 65, lower welfare payments and eased hiring and
firing – have resulted in a deep feeling of insecurity.

Wiblishauser, the
single mother in Memmingen, spent one month in 2006 on the scaled-back welfare
program known as Hartz IV. Although working as an assistant tax consultant now,
she said slipping back onto the rolls was her greatest source of dread.

“It gives you an
existential fear,” she said.

Germany’s partners
have cajoled, begged and demanded that the government in Berlin encourage more
robust consumer spending, to combat imbalances among the countries that use the
euro currency. But Wiblishauser said she found the prospect of spending to aid
other European countries distasteful.

Like many Germans,
Wiblishauser said she was having a hard time seeing the benefits the country
received from being a member of the European Union.

“I would really like
it if we were self-sufficient, like the Swiss,” she said.

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