FT.com / Comment & analysis / Editorial comment - Germany grows

FT.com / Comment & analysis / Editorial comment - Germany grows

Germany grows
Published: January 17 2008 02:00 | Last updated: January 17 2008 02:00

Hard as it was to imagine during the 1990s, as unemployment soared and unification sucked money out of the federal coffers, Germany's budget is now balanced and the enduring virtues of its economic model are shining through. The progress has been impressive. The mistake would be to reverse or abandon important reforms.

The German state collected as much in tax as it spent in 2007. Despite doom-laden predictions of consumer woe, the rise in value-added tax at the start of 2007 has not only increased revenues, it has also produced a helpful structural shift towards indirect taxation. But more important was 2.5 per cent economic growth, which created 650,000 jobs. Corporate and income tax revenues went up; the cost of unemployment benefits went down.

The strengths of Germany's economy are once again on show. Highly productive workers in high-value industries that are helped, as well as threatened, by globalisation have produced strong export growth. Germany's famously cordial labour relations have made adjustment to low-cost competition easier than in other European countries.

Yet other reasons for today's recovery must be remembered. One is that a lengthy period of stagnation and low inflation has increased Germany's competitiveness within the eurozone. Another is the so-called Hartz I-IV labour market reforms in the last years of Gerhard Schröder's government. Two lessons about labour market reforms are sometimes forgotten: one is that they work, and the other is that the effects take time to show up.

The result is a German economy that is strong - an example to others in Europe, including the UK - but still vulnerable. It is vulnerable to a fall in external demand, whether due to the credit squeeze or a rising euro, that hits exports. Faster growth in consumer spending is needed to sustain expansion, and further labour market reform is needed to prevent unemployment surging again in a slowdown.

But the German economy's biggest vulnerabilities are complacency and coalition politics. Chancellor Angela Merkel's commitment to fiscal rigour is welcome. But the recent minimum wage specifically for the postal sector, which is already responsible for thousands of job losses, is not. Nor is the recent decision to lengthen the period that elderly jobseekers can spend on premium unemployment benefits. Germany is on the cusp of a sustained expansion that could make it one of the world's most admired economies once again. To throw that away through reluctance to reform would be a pity.
Copyright The Financial Times Limited 2008