Identifier
Created
Classification
Origin
10FRANKFURT283
2010-01-28 11:56:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Frankfurt
Cable title:  

The Future Viability of Germany's Export Driven Economy

Tags:  EFIN ECON ETRD PREL GM 
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VZCZCXRO0299
PP RUEHIK
DE RUEHFT #0283 0281156
ZNR UUUUU ZZH
P 281156Z JAN 10
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC PRIORITY 3324
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNFRG/FRG COLLECTIVE
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

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