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Shrinking Germany

From the desk of Thomas Landen on Sat, 2009-05-09 19:02

The German economy is expected to shrink by 5.6 percent this year. That is the gloomy expectation of the IMF, confirmed by the five major economic research institutes in the country. Never before in its 60 years of existence has the German Federal Republic experienced a deeper and more sudden recession.

Between January and August last year, the German economy, which is the biggest in Europe, still experienced a growth of 2 percent. Then Germany took its biggest hit since the Great Depression of the 1930s. Its economy is one of the worst affected by the slump in global demand. German exports have declined by almost 20 percent. The unemployment figure is expected to rise to almost 5 million next year from 3 million today.

Many people hope that the worst may be over. Investor confidence seems to be on the rise again. Some fear, however, that this is just the beginning of an economic crash of cataclysmic dimensions. One of the doomsayers is Prof. Max Otte of Worms University. In 2006, he wrote the book “Der Crash Kommt” (The Crash Will Happen) in which he predicted the current situation. As a consequence the professor, who is an alumnus of Princeton and taught at Boston University in the late 1990s, has become something of an oracle for many Germans.

Prof. Otte caused a controversy recently when, in an interview with the Berlin tabloid newspaper Berliner Kurier, he predicted apocalyptic scenes next Fall, with scenes of poverty Western Europe has not experienced for decades, such as thousands of homeless living under bridges or in squatter camps, sustaining themselves on charity provided by home kitchens.

The remedy which Prof. Otte advocates has hit a nerve with the readers of Berliner Kurier, which sells most of its copies in the Eastern half of the German capital where far-left demagogues attempt to convince people that is was better in the old days of Herr Honecker and the  German ‘Democratic’ Republic. “The rich will have to foot the bill,” the professor says. “Those who still have a job will have to pay the costs of the economic crisis.” He also said that the German government should forbid people from travelling abroad: “German tourists spend 40 billion euros each year on foreign holidays. A travel ban has to keep this money in our own country.”

Prof. Otte added that, though such a ban is theoretically possible, he doubted whether it would be politically feasible. However, the history of the early 1930s shows that, when confronted with a deep economic depression, the otherwise sensible Germans lose their political wits. An internet survey conducted by the conservative broadsheet Die Welt among its readers showed that 21% agree that, given the current situation, the German state should make foreign trips illegal.

Next September 27th, the Germans are to elect a new Bundestag (federal parliament). The far-left Left Party – a coalition of the former East-German Communists and West-German radicals – is expected to do well. Leading figures of the German economic establishment, such as Hans-Werner Sinn, the president of the prestigious Institute for Economic Research (Ifo) in Munich, who taught at Stanford, Princeton and the London School of Economics and who is a fellow of the National Bureau of Economic Research in Cambridge, Mass, do little to counter the radicalizing trend.

Prof. Sinn blames America for Germany’s current predicament. America brought the global economic crisis upon the world and now Germany has to act as the world’s buffer, he wails. “The shock was caused by America, but Germany is the shock absorber.” He proposes more regulation. “Even Chicago-school economists must understand that markets can only function within a strong regulatory framework.”

Meanwhile, Labor Day, on May 1st, when the Communists and Nazis used to hold parades, has led to riots and “carbecues” in major cities such as Hamburg and Berlin where far-left thugs went on a rampage and battled with the police. Oskar Lafontaine of the Left Party called for a general strike and mass demonstrations. Michael Sommer, the president of DGB, the largest German union, representing more than 7 million people, said that “since the rich have caused the crisis, they should be forced to lend to the state.” Marxist revolutionary rhetoric is doing well in Germany today.

On the other hand, however, IG Metall, the trade union of the metalworkers, which was still organizing strikes for higher wages last Fall, has asked its members not to demand pay rises and bonuses which will make it even harder for their companies to survive. There is a realization among the sensible people on the left that companies such as car manufacturer Opel cannot be saved by setting cars alight.

Polls predict that the Socialist SPD will become the main loser in the September general elections, losing votes to the radical Left Party but also to center-right Liberals. If this happens, the present centrist coalition of Christian-Democrats and Socialists will be succeeded by a center-right government of Christian-Democrats and Liberals, with the far-left as the main opposition.

Another political trend which is clearly visible in Germany is the loss of confidence in supranational institutions such as the European Union. Many Germans feel that Germany has become a normal country which is allowed a certain degree of nationalism and is again entitled to look at its own interests.

A survey among readers of Die Welt, asking “What do you think about the EU” found that 74% think the EU “takes too many powers from Germany.” As in other European countries, the majority of the Germans feel that the EU interferes too much or should not interfere at all. Many Germans may perhaps think that America has caused the global crisis, but they do not have any confidence in the European Union as the vehicle for solving it. As a result, confidence in the euro as a common currency shared with countries such as Spain, Greece, Italy and France, is also wavering.

Two months ago (Feb. 15), Wolfgang Munchaü already wrote in an op-ed piece in The Financial Times that he is “no longer so sure that a break-up of the eurozone is in effect impossible.” Munchaü’s pessimism was caused by a statement on the part of French President Nicolas Sarkozy, who quite bluntly said: “It is justifiable if a factory of Renault is built in India so that Renault cars may be sold to the Indians. But it is not justifiable if a factory ... is built in the Czech Republic and its cars are sold in France.” German voters are now asking themselves why Germany should not be allowed to think in a similar fashion.