Germany's deeper problems

The German mark may be falling because it is no longer the markets' flavour of the month, but behind this is something more important. We are in the early stages of a fundamental reassessment of the strengths of the German economy.

In the coming 18 months the economy will go through a period of cyclical weakness, with many more announcements of job cuts, such as yesterday's from Bosch. As the economy weakens, the Bundesbank will (rather too slowly) relax its monetary stance. This eventual prospect of falling rates is helping weaken the mark, so that the cyclical downturn in the economy is being matched by a cyclical downturn in the currency. The cycles will not be synchronised, but they are close enough for people such as George Soros, who are good at reading cycles, to make a decent profit.

All that is well enough known. What gives the whole matter added spice is whether the German economy is going into a period of structural decline as well. To many people in Britain the very notion that the German economy might have structural problems - aside from the obvious legacy of mismanagement in the former East Germany - would seem absurd. The politically correct view is that Germany has devoted much more attention to training and skills and as a result has much higher productivity.

That is absolutely right: every survey says so. By coincidence there was one out yesterday* that compared matched plants in Northern Ireland with those in Germany. This showed that in every area German plants had higher value added per employee, and in all but one had higher quality too. The area in which Northern Ireland did best was in metal products, where there was an established apprenticeship scheme.

But all these surveys do is say that Germany is very good at doing the things it does. The problems of the German economy are different: its costs are too high, and it is doing the wrong things.

The cost issue is widely known: German workers may have slightly lower wages than Japanese, but they also work the shortest annual hours of any country in the world. The difference between pay and working hours more than covers the 10-20 per cent gap in average productivity, with the result that it is cheaper to make most things in the UK than in Germany.

Much less attention has been directed towards the structural issue. Industry in Germany contributes significantly more to gross domestic product than in the UK - some 39 per cent of the former West Germany's GDP against 30 per cent for Britain - but one can make a good argument that if British industry is slightly too small, Germany's is relatively too big.

This is dangerous for two reasons. Too many eggs are in the export basket; and it is too easy for newly industrialised countries to get into the middle-technology manufactured goods at which Germany excels. Being the world's most successful exporter is fine provided export demand is sustained; if it falters, as is happening now, it becomes very hard to pull out of recession. Sadly for Germany, its largest export market is France, which - because the two countries run the same monetary policy - is synchronised with the German one. It is quite possible that Germany will suffer a deeper recession, peak to trough, than the UK.

But the really big long-term problem is that manufacturing technology is now an international commodity that any country can obtain. Germany has succeeded again and again in countering its very high wages costs by pushing its products up-market. People have been prepared to pay extra for quality, be it in cars, machine tools, specialty chemicals, anti-pollution equipment or whatever. In the sober 1990s, however, this trick does not seem to work any longer. German products are too good (and hence too expensive) for the demand.

If that sounds like an Anglocentric justification for shoddy quality, consider that it is also the view of the Daimler-Benz high command with regard to the new S-class range of cars. Not everyone wants double glazing in their motor if it means paying pounds 60,000 for it.

Nor has Germany been particularly good at shifting from electro-mechanical technology into electronic products - it is a net importer of television sets - or, more important, the new knowledge-intensive service industries. It is easier to make money out of writing software for a personal computer than it is to make money out of building the PC itself. International trade in services is growing at double the rate of trade in goods.

Looking ahead, Germany has to do four difficult things and do them at the same time. It has to pay for the rebuilding of eastern Germany; it has to cut the real wages of German workers; it will have to cut the numbers of those workers; and it has to find other activities that it can sell to the world.

This is a much more difficult task than the restructuring of the British economy that took place during the 1980s. It will be attacked in an ordered, logical way once the German establishment is fully aware of what the country has to do. That awareness is seeping through: the downsizing of companies like Bosch is an example of the extent to which German industrialists realise the peril they are in.

But building the new is tougher than cutting the old. If Germany were northern Italy, it would be finding new ways in which the immense stock of design could be sold to the world. If Germany were Britain, it would be trying to boost market share in growing sectors such as financial services or entertainment. If it were France it would be finding excuses to keep out foreign imports, by forcing VCRs to be imported through Poitiers, or proposing a tax on Far Eastern electronic goods.

It is not like that in Germany. If you have run what seemed to be the most successful manufacturing economy in the world it is tough to accept that you need to become less of a manufacturer, and think of something else instead.

* Training, Skills and Company Competitiveness, Northern Ireland Economic Research Centre, 46 University Road, Belfast.