Still Lagging Behind

Germany’s leading economic research institutes ranked the German economy as Europe’s laggard in their spring report which was presented on Tuesday.

The news comes after warning strikes in the metal and electronics industry and several high-profile company failures in the past weeks, and just 48 hours after an election drubbing in Saxony-Anhalt.

Germany’s growth in gross domestic product this year will slip to 0.9 per cent, compared to 1.4 per cent for the entire euro zone, the report said.

While Germany is struggling to recover from last year’s downturn, other European countries are on a current economic upswing:

Once regarded as the ailing old man in Europe, Britain is one of Europe's leading economies.

Despite a global recession, the British economy grew by 2.5 per cent last year, and is expected to expand by a slightly slower margin this year.

France, too, can boast a stable economy. Last year, France's GDP grew by two per cent.

France's economy has been thoroughly modernized, the work week reduced to 35 hours. And France is actively, and successfully fighting high unemployment, as the government's job creation projects in the public sector have shown.

Which can not be said of the German market. According to Haig Simonian, chief German correspondent for the Financial Times, labour is the main problem of Germany’s ailing economy. "It is principally in the labour market that need for reform is urgent".

Both Simonian and Germany’s six leading economic research institutes do not expect improvement in this year's labour market: The number of unemployed in Germany is expected to grow by around 100,000 to 3.957 million, or 9.3 per cent this year and only recede slightly to 3.811 million, or 8.9 per cent, in 2003.

The result of wrong measures taken by the German government, Simonian says: "The Social Democrats tend to talk about tinkering at the edges". And further: "In fact some measures have made the market more rigid".

Spending

According to the German Bundesbank's April report, economic recovery in Germany is being held back by a lack of consumer spending.

While spending in Britain and the US has been strong even during economic downturn, Germans are still reluctant to spend money.

"In the current climate of uncertainty, consumers are reluctant to spend", Simonian says. The reasons are difficult to name, but, "Germans are known to have a higher savings ration" than their European counterparts, he says.

Just how essential consumer spending is, however, for the economy, can be seen in Britain, where spending is up.

So far, Britian has not suffered from its decision not to join the euro. With the government returning a budget surplus, investment money for infrastructure projects is flowing.

Still hope

But Germany’s economic research institutes haven’t given up hope that the country will meet its EU Stability Pact commitment of virtually balancing its budget within two years.

Based on expected economic developments, Germany still has chance of achieving a virtually balanced budget in 2004 with a deficit of 0.5 per cent, the spring report says.

However, Joachim Scheide from the World Economics Institute in Kiel said on Tuesday that the institutes assumed there would be no large strikes in the near future. If strikes do occur, this could dampen growth forecasts. At present, the researchers expect German GDP growth of 0,9 per cent this year and 2,4 per cent in 2003.

Strikes

Ironically the one industry which is leading the way in terms of economic growth in Germany is the steel industry. Ironic because the industry giant union, IG Metall, has conducted a number of so-called warning strikes over pay issues.

And with more strikes imminent this summer, union demands could affect any possible recovery.

A recent survey by the Emnid Institute showed that 57 per cent of Germans said they thought the current strike action was justified. Only 47 percent opposed it.

Balancing the scales

The economic researchers' spring report also called for further austerity measures, estimating a total savings of 8 billion euro needed to boost the economy in the coming year.

With the September elections looming on the horizon, Germany’s lagging economy is giving the German chancellor a severe headache.

Simonian says, there is a "general feeling that much more needs to be done".

But in their spring report, the researchers say Germany’s economy is not expected to get back on track until next year – after the elections.