The Future Viability of Germany's Export Driven Economy

UNCLAS FRANKFURT 000283 SENSITIVE STATE FOR EUR/CE (SCHROEDER, HODGES),EEB (NELSON, HASTINGS), EEB/IFD/OMA (WHITTINGTON),TREASURY FOR ICN (NORTON) AND OASIA SIPDIS E.O. 12958: N/A TAGS: EFIN ECON ETRD PREL GM SUBJECT: The Future Viability of Germany's Export Driven Economy ¶1. (SBU) Summary: At the recent annual "Topics of the Year" financial event on January 14 in Frankfurt, the chief economists of Deutsche Bank and the KfW Group, Thomas Mayer and Norbert Irsch, called into question the future viability of Germany's export driven-growth model. While both posited that the current recovery of the German economy will be led by exports, they also asserted that the country must, in the long term, overcome its export dependence. Both economists stated that Germany also faces additional economic challenges, including the consequences of climate change, demographic change, and the looming loss of technological leadership to emerging economies. End Summary. Germany's Model Ultimately: "a Vicious Cycle"? -------------- -------------- 2.(U)Deutsche Bank's Mayer argued that Germany's economy has taken advantage of globalization by disaggregating production processes and tailoring its export structure to demand from growth regions. While this practice created growth, it also reinforced the export-heavy structure of the German economy, making it vulnerable to external shocks. Recently, the appreciation of Euro has decreased Germany's international competitiveness. Instead of balancing this out with a shift from the manufacturing to the more labor intensive services sector-- which would ensure more balanced growth-- Germany has continued on what Mayer called a "vicious cycle" by sticking to its export model. Mayer likened the German business model to a highly volatile stock that generally does not earn an above average yield. Norbert Irsch likewise agreed that excessive export dependence has not served Germany well and overall has not created more growth and GDP per capita than the British or French models. Short and Long-Term Challenges -------------- 3.(U)In the short-term, both economists consider an export-driven recovery and an expansive fiscal policy as crucial to moving out of the crisis. Both, however, articulated fears that the government is not spending public money wisely and expressed hope that the government will prudently shape measures to promote growth efficiently. 4.(U)The long-term challenge, Irsch and Mayer agreed, will be to initiate domestic structural reforms that will transform the country's overly high export dependence. Such measures would enable Germany to achieve more balanced economic growth but would require significantly increased investment in private sector innovation, education, and renewable energy. Investment in these areas would also help to meet some of the other structural challenges in the German economy: i.e., responding to climate change, a shrinking supply of natural resources and corresponding price increases, demographic change, and the potential loss of its technological lead to emerging economies. 5.(U)In addition, Germany must, Irsch said, return to a wage policy that is oriented towards productivity. Germany diverted from such a wage policy between 2000 and 2008, which helped to contribute to Germany's export surplus, but contributed to weak domestic demand. Thomas Mayer also focused on wage policy in his address. He argued for the balancing out of wage levels from the export sector (where wages are too low) to the domestic sector (where wages are too high). In addition, he called for more differentiated wages across the board. Unemployment benefits do not compensate for a reduction in well being derived from productive employment, Mayer said. 6.(SBU)Comment: Irsch and Mayer's presentations indicate that there is an emerging discussion about the country's export-oriented model and its suitability for Germany's long-term economic future. However, thus far the discussion appears to be largely among economic experts and members of the finance and banking community. Politicians and government officials have yet to seriously engage in this debate. End Comment ALFORD