The "New" Germany A Complex Mix of Factors

Aug. 31, 2010 - PRLog -- By David Caploe PhD, Chief Political Economist, EconomyWatch.com

One of the most striking developments of the Eurozone crisis has been the emergence of what might be called a “tough” Germany.

As readers of this site know, the Germans were among the most militant in opposing the “rescue” of Greece from a potential default, which –

as pointed out by former Bundesbank President Karl Otto Pöhl in our piece on him –

was in fact a bailout for the German and, especially, French banks that had loaned the Greek government money over the years.

This was followed by a period of rising tensions throughout the Eurozone, basically between Germany and everyone else in the group,

most of whom were shocked by the tough talk, though less militant action, of Chancellor Angela Merkl.

Then, Q2 economic growth figures came out in July,

& Germany blew away everyone – including itself – w 2.2% total,

highest quarterly numbersince country unified 20 years ago in 1990.

Once this happened, the “balance of power” within the Eurozone shifted in Germany’s favor,

since it SEEMS to have been “right” in taking tough line w Greece, given its own apparent success,

while nearly everyone else in the EZone is evidently floundering.

It’s therefore a complex issue, and, in order to make it understandable,

we’ll break it down into two different sections, each one of which is significant and substantive.

Today, we will talk about some of the INTERNAL dynamics that have led to the rise of this “new” Germany;

next week, we’ll talk in detail and at length about single most important EXTERNAL factor in current German economic “miracle,”

which we can at least mention now, namely, its

huge success in selling high-tech capital goods to China –

a fact that has some Germans nervous, not just because so much appears to depend on a single export market,

but also because of the signs of SOME kind of slowdown in China,

whose exact nature and dimensions, of course, remain as yet unclear.

As always, the internal aspects are a mixture of political and economic factors.

The chief political factor is that – for the first time in post-World War II history,

there is a German chancellor who is NOT from the old West Germany.

This is crucial, because the West Germans – not always willingly, especially at first, but, in the end, strongly / decisively / irreversibly –

took responsibility for, as the saying went when I was there in the early 90s,

“what our fathers did,” namely, the horrific crimes of the Third Reich.

The basic approach was to create West Germany as a “European Germany,”

whose most fundamental orientation was the strengthening of a united / democratic/ market-oriented Western Europe.

As a result, both West Germans & Europeans became used to a Germany

that would willingly sacrifice its so-called “national” interests & sovereignty for greater cause of European unity.

Attitude towards Third Reich was quite different, however, in the East Germany in which Frau Merkl was raised.

There, the basic line was that the Communists were as much victims of Nazism as the Jews / gypsies / gays / Eastern Europeans,

so no need for any significant introspection about and / or sacrifice regarding Third Reich from East Germany.

Consequently, most East Germans have never gone through the serious soul-searching as a society about Nazi period

that was major pre-occupation of West Germany throughout 50s / 60s / 70s / & 80s.

For Merkl,and most former East Germans,

there is no particular need for Germany to “sacrifice” its perceived “national” interests for European unity –

an attitude shocking to most other Europeans, who had become used to a restrained and self-denying Germany.

In this sense, many found Merkl colossally “tone deaf” to European aspect of Greek default situation,

and were critical of nakedly “national” definition she put forward of German interests in the matter.

But other Germans supported her stance, 4 variety of economic reasons.

Many West Germans resent economic sacrifices

they have made for Eastern brothers & sake of united Germany.

And they HAVE seen definite decrease in their standard of living since unification –

one neither easy nor pleasant to bear.

So when Greek situation suddenly exploded,

initial reaction of many German taxpayers, especially from former West, was along the lines of

“What ??? Now we have to pay AGAIN for the inadequacies of our supposed ‘fellows’ ???

Thanks, but no thanks – we’re tired of paying for other people” –

which was precisely attitude former East German Merkl assumed almost instinctively.

So from both a "West" & "East" German perspective,

there was a real logic behind resistance to “helping out” their Greek “brothers”,

even though, as noted, REAL beneficiaries of bailout were hardly Greek public sector workers & taxpayers –

who face massive layoffs &  grinding austerity for foreseeable future –

but, as former Bundesbank President Pöhl pointed out,

German & French BANKS who had loaned Greeks money.

Despite this, venomous contempt in German news media directed at Greece

raised significant concerns among allies that a more assertive Germany had emerged,

said Thomas Klau, expert on European integration at European Council on Foreign Relations.

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

In addition to complicated political factors,

there are powerful economic dynamics at play as well,

perhaps most important so called “short-work” or kurzarbeit policy,

whose beneficial effects we will examine shortly.

As noted, strong growth figures 4 Q2 reinforce widespread conviction among policy makers

they handled financial crisis & painful recession that followed far better than US,

which, they never hesitate to – correctly – remind, brought the world into crisis.

But roots of Germany’s export-driven success reach back to painful restructuring

under previous govt of Chancellor Gerhard Schröder.

By paring unemployment benefits, easing rules for hiring & firing,

and management & labor’s working together to keep lid on wages,

Germany ensured it could again export its way to growth w competitive companies

producing cars & machine tools world’s economies — emerging & developed alike — demanded.

As latest numbers show, Germany outproducing its neighbors by wider & wider margins,

raising fears of a two-speed Europe that could render common regional currency unstable,

a scenario we pointed to when crisis erupted in February.

If policy makers in Berlin are right & turning point has been reached, they will look wise.

But if fragile recovery cracks, as US continues to slow,

& cooling down of Chinese growth may augur, as we will examine in detail next week,

Germany could bear brunt of blame for doing too little to foster regional & global growth.

But govt officials here confident they found right approach,

including better solution to unemployment.

In this frame, vast expansion of a program paying to keep workers employed,

rather than dealing w them once they lost their jobs,

was most direct step taken in heat of crisis.

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 thru payroll deductions & company contributions.

At its peak in May 2009, roughly 1.5 million workers were enrolled in program

OECD recently estimated by Q3 2009, > 200,000 jobs may have been saved ...

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