Evans On The Economy -- The Sick Man Of Europe

Dec. 21, 2004
Germany's politics spell doom for its economy.

They used to say, "Will the last one to leave please turn off the lights?" about Detroit. Now it applies to Germany. Like Japan, that country has dug itself into a deep hole, with little chance of recovery. We all assumed that when the Berlin Wall fell, East Germany would become more like the West. In fact, the opposite has happened: the West has become more like the East. From 1996 through 2000, the average growth rate for German real GDP was 1.8%. It fell to 0.6% in 2001, and this year will be less than 0.5%. By comparison, France, which is hardly the poster child for growth economics, generated annual increases of 2.6%, 2.1% and 1.5% for those periods. The nauseating spectacle of the German Justice Department minister comparing Bush to Hitler has received most of the headlines, as indeed it should have, but from an economic viewpoint that is not really the main story. It simply points out Germany's deep fissures between capitalists and communists. For all of the unspeakable abominations committed by Hitler and the Nazis, he became chancellor because his party got more votes than any other candidate. His vicious anti-Semitic ravings would not alone have been enough to get him elected. The loss of World War I, the hyperinflation of 1923 and the Great Depression were all factors that propelled Hitler to the top. The proximate cause, however, was the riots in the streets between the right-wing and the left-wing -- orchestrated by Stalin -- that were serious enough to send otherwise level-headed voters into the National Socialist camp. No rational person expects a return of fascism in Germany, or for that matter anywhere in Western Europe. My point is that the socialist strain has always run strong in that country. Marx thought communism would start in Germany; he presumably would have laughed out loud if anyone had suggested that backward, agrarian Russia would emerge as the leader of the Communist world. In the first generation after World War II, the previously warring factions put aside their differences and agreed to work together. Guided by U.S. economic policies and U.S. economic aid, the well-publicized Economic Miracle sprouted. However, it gradually sputtered out after 1973, and flickered again only briefly in the 1980s. By the 1990s it had become almost completely extinguished. Why would anyone -- German or otherwise -- invest in Germany these days? Wages are almost 50% higher than in the U.S., but productivity is lower. High taxes and bureaucracy are strangling the economy. The government's main foreign policy is apparently to alienate the U.S. Even once-famed German quality is slipping; their products are no better than those manufactured in the U.S., Japan or for that matter Korea. In brief, the climate has never been sicker for German businesses and German entrepreneurship. As a result, the best and the brightest will leave. They will be welcomed with open arms in Western Europe, Eastern Europe and Russia, the U.S., South America and developing nations in Asia. One need only consider the spirited bidding and massive subsidies granted to attract the BMW plant to South Carolina and the DaimlerChrysler AG plant to Alabama. The time of Germany has passed and will not return. This time, the external enemies are not allied bombers or even Russian tanks. They are all internal. By failing to realize the value of capitalism, the Germans have doomed themselves to socialism, with all its attendant inefficiencies and declining standards of living. The standard of living in Germany will remain high -- for a while. But the growth rate will stagnate near 0%, and its real purchasing power will not rise. For companies seeking growth opportunities outside the U.S., the place to look is clearly outside Western Europe. Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.

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