Daily Archives: September 3, 2013

If Germany’s economic model is the future of Europe, we should all be quite troubled. But that is where we seem to be going. The apparently successful re-election campaign of Angela Merkel, the Christian Democrat chancellor, promises “Germany’s future in good hands”. More, in other words, of the same. The policy response to the eurozone crisis is likely to remain a programme to induce member states to follow Germany’s path to competitiveness: cutting the cost of labour. Make no mistake; that has been the basis of the nation’s export success in the past dozen years; and exports have been its sole consistent source of growth in that period. But low wages are not the basis on which a rich nation should compete.

Since 2003 a falling unemployment rate has been the consequence of the creation of a large number of low-wage and part-time or flexitime jobs, without the benefits and protections afforded earlier postwar generations. Germany now has the highest proportion of low-wage workers relative to the national median income in western Europe. Average wages increased by more than inflation and productivity growth in the past year for the first time after more than a decade of stagnation.

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Ideally, a wealthy country should stay competitive through research and development, and capital investment. Instead, total gross fixed investment has fallen steadily in Germany, from 24 per cent to less than 18 per cent of gross domestic product, since 1991. The recent OECD Economic Survey of Germany states that German investment has been persistently well below the rate of the rest of the Group of Seven leading economies since 2001 (and not just because of the bubbles of the mid-2000s in the US and UK). Even the employment mini-miracle and export boom since 2003 were not enough to induce German businesses to increase investment – and public infrastructure investment has been even more lacking.

The other way for a rich country to stay at the top of the value-added chain, and thus compete on productivity, is to invest in human capital – that is, to educate its workforce. In Canada, France, Japan, Poland, Spain, the UK and the US, the share of young workers with advanced education is at least 10 per cent higher than in Germany – in most of them, 20 per cent higher or more. Germany, moreover, is one of only two advanced economies in which the share of those aged 25-34 with higher-education qualifications is the same as, or smaller than, in preceding generations (the US is the other). Germany has failed to invest in its public university system while the private sector has maintained but not expanded the supply of its famous apprenticeships.

The result is that Germany’s productivity growth has been low compared with its peers. Growth in gross domestic product per hour worked is 25 per cent below the OECD average, whether one goes back to mid-1990s or looks at just the past decade – and whether or not one excludes the bubble years for the US and UK. With these productivity numbers, it is no wonder German business is competing only by reducing relative wages and moving production east.

Examples of outstanding businesses from the Mittelstand sector – middle-sized, family-run companies – and their manufactured exports to China should not obscure the reality. As the Peterson Institute’s Lawrence Edwards and Robert Lawrence show in their new book Rising Tide , manufacturing’s share in total employment has fallen by the same amount in the past 40 years, about 15 per cent, in almost all the advanced economies – including Germany. The only rich economies where manufacturing employment shrank less were Italy and Japan, neither engines of growth. The terms of trade for manufacturing – that is the relative value of manufactured goods from a country compared with all of its manufactured imports – have risen by the same amount for the US as for Germany since 1990. There is no evidence for special manufacturing success in Germany.

Some might say the country is merely making the best of the situation in which richer economies find themselves in a globalised world – particularly in regard to downward wage pressure for low-skilled labour in the west. Certainly, it is not alone in its rising inequality and the reluctance of its corporations to invest. Such an assessment, however, blinds us to the gains to be had from a different kind of reform agenda that is possible for Germany and the euro area.

German under-investment is the result of deep structural problems in the economy, which are not the fault of its now more flexible labour markets. The export obsession has distracted policy makers from recapitalising its banks, deregulating its service sector and incentivising the reallocation of capital away from old industries. Furthermore, public investment in infrastructure, education and technological development could help increase profitable private investment, which would lead to growth with higher wages.

Dependence on external demand has deprived Germany’s workers of what they have earned, and should be able to save and spend. This leaves them dependent on exports for growth, in a self-reinforcing cycle. Most importantly, this means they move down the value chain in relative terms, not up. The pursuit of the same policy by its European trading partners will reinforce those pressures. Wage compression will not be a successful growth strategy for Germany’s or Europe’s future.

The writer is president of the Peterson Institute for International Economics

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Letters in response to this article:

Germany is facing up to competition / From Dr Peter Patel

Germany is far from ‘crushed’ / From Mr Willem Thorbecke

Syrian refugees stand sit in front of a closed shop in Reyhanli, Turkey, Saturday, Aug. 31, 2013. U.S. President Barack Obama said he has decided that the United States should take military action against Syria in response to a deadly chemical weapons attack, but he said he will seek congressional authorization for the use of force. (AP Photo/Gregorio Borgia)©AP

The repeated use of chemical weapons against the Syrian people has brought the civil war to a new diplomatic and political boil. Yet none of the military options being canvassed – or, in the UK, rejected – promises a decisive shift in the course of the conflict. We are not yet anywhere near the nadir of the humanitarian crisis already consuming five countries at the heart of the Middle East.

The International Rescue Committee has just completed a six-week audit of the situation in Syria and its neighbours. The litany of suffering is grim, the dynamics are all going in the wrong direction and the prospects are bleak. For geopolitical reasons, as well as basic humanity, we need a fundamental step change in the scale of effort.

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A third of Syria’s 22m population have been forced from their homes. Of these, 5m are trapped in the country. They are at risk from the violence that has claimed 100,000 lives, including those of 7,000 children, but also from deadly diseases such as typhoid fever as clean water and sanitation breaks down. Syria’s own government says more than 60 per cent of its hospitals and 80 per cent of its ambulances have been hit by the war. Food aid struggles to get through to civilians as the combatants flout basic norms of conflict.

Outside Syria, more than 2m refugees have sought shelter in Jordan, Lebanon, Iraq and Turkey. The UN expects this figure to reach 3m by the end of this year. The strain on these fragile countries is huge. Zaatari refugee camp in Jordan has, within 18 months, become in effect the third-largest city in the country, with new arrivals still coming in (including 13 babies born every day). Meanwhile, most Syrian refugees are not in the camps. They are scraping by; whole families are crammed into small apartments or squatting in abandoned buildings.

Our findings confirm that the Syrian war – part democratic revolt, part sectarian explosion, part proxy regional conflict, part global power play – is now a defining humanitarian crisis. People have compared it to the refugee crisis ignited by the Rwandan genocide of the 1990s, when 2m people fled. But in scale and complexity, it is more like the after-effects of the Soviet invasion of Afghanistan, when as many as 7m Afghans, out of a total population at the time of 16m, fled – mainly into Pakistan (which had its own problems).

The parallels go beyond numbers. As with Afghanistan, regional and global struggles make Syria a toxic brew. And, as with Afghanistan, there is real potential for the centre and east of Syria to become a regionally and even globally dangerous no-man’s-land. This is one of the terrible consequences of the fragmentation of the Syrian opposition and the failure of western governments, with allies such as Turkey, to break the diplomatic and military deadlock.

The humanitarian effort over the past two years has made a difference; 3m Syrians in the country are receiving life-saving help. Refugees outside are receiving education, housing and cash assistance. But whether as a result of the financial crisis, or post-Iraq intervention fatigue, the UN has raised only about a third of the required funds for its global appeal.

There just are not enough of the basics of life reaching people in need. Many are cut off from aid because aid organisations cannot breach violent sieges, risk arrest or murder at checkpoints, or survive aerial bombardment. And that is just the emergency response – before anyone starts thinking about rebuilding the majority of urban areas in Syria that have been destroyed.

The humanitarian priorities should be clear: reach those in Syria caught in the crossfire or its aftermath, and shore up the livelihoods of those in neighbouring countries. For those in the country, non-governmental organisations cannot stop the killing, but they can staunch the dying. That requires safe access for food and medical help, across the country and across combat lines. For doctors to fear reprisals for treating the wounded – and I have heard such concerns myself from Syrian surgeons – takes us back to the dark ages.

In neighbouring countries, there is desperate human need and growing political pressure. The host governments at the local and national levels, especially in Jordan, Lebanon and Iraq, cannot be expected to manage population flows on this scale alone. Their demands for help should be heard.

It is clear that, while international engagement is decreasingly popular in the advanced democracies, a multipolar world makes it increasingly necessary. Humanitarian intervention is about human need, not political sides – but it has political consequences. There is capacity to save more lives, but this needs resources and political will. The drums of war are reason to redouble humanitarian efforts, not forget them.

The writer, a former British foreign secretary, is president and chief executive of the International Rescue Committee

This week’s heavy schedule of data releases will likely have a big, if not determining, say in “when” and “how” the US Federal Reserve tapers its quantitative easing programme – that is, start moderating its exceptional support for markets and the economy. And while most assessments will focus on the timing, scale and scope of the policy adjustments, the “why” will be as important, if not more so in shedding light on what may lie ahead.

The context, while quite well known by now, is worth mentioning given its relevance to the outlook.

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