west German 'miracle' begins to fade

Press, 8 November 1980, Page 14

west German 'miracle' begins to fade

By

JOHN PALMER

in die

—Guardian,” London

Are we witnessing the beginning of the end of the West German economic miracle? To put it in blunter terms is the Wirtschaftswunder kaput? The question is posed by the extraordinary fate which has overcome the West German mark in recent weeks and months. Indeed, its fortunes have directly mirrored the extraordinary rise in the international value of. sterling. In terms of United States dollars the West German currency has lost 7 per cent of its value since 1978 and is now at the bottom, rather than the top, of the regime of fixed exchange rates in ' the European Monetary System, (E.M.S.). Ironically, less than a year ago, the main-worry in European capitals was that the strength of the mark would disrupt the attempt to link all Common Market currencies except the pound Today the worry is that the mark is so weak that there may be no way of keeping it safely inside the E.M.S.

The .crisis of the West German mark may prove to be more a matter of temporary and unnatural conjuncture of monetary circumstances. This argument rests on the belief that some reduction in British interest rates and some reversal of the trend for United States interest rates to rise — possibly accompanied by some new efforts to reduce the West German budget deficit — will be enough to turn the tide of the mark’s fortunes.’

However, the problems of the West German economy go somewhat deeper. Recently the Ministry of Economics in Bonn conceded that, contrary to earlier official expectations, the rate of

economic growth will fall to less than one per cent next year. Meanwhile, the Federal Republic has, with the rest of the world barely noticing, swung from being a country with a regular balance of payments surplus to one with a deficit. The main reason for this is West Germany’s massive bill for imported oil. But, more ominously, there is evidence that West German industry is losing its big Competitive edge in world exnort markets. There are several reasons why the West Germans have started to lose competitiveness. -West German wage rates are among the highest in Western Europe — indeed, they are exceeded only by Belgium and Sweden. Although productivity is high in West German industry, figures produced by the Dresdner Bank show that it is not high enough to offset wage costs.

There is an even wider issue. What will be the effect on West Germany of a protracted international economic recession? Some believe that West German industry is sufficiently competitive to survive the present depression better than most of its competitors. The alternative way of looking at it is to say “the higher they climb, the harder they fall.’’ West Germany’s economic growth rate is very dependent on what is happening in the European and World economies. In a period of relatively rapid growth, the multiplier works in Germany’s favour. But, conversely, lower growth means that West German industry is even less, able to afford high wages, with the result that the trade balance remains indeficit and the mark is all the more vulnerable.

The rest of Western Europe has a very direct interest in the outlook for West Germany. As one pf the traditionally stronger economies, the rest of Europe normally looks to Bonn to act as the motor forcd' to puli the rest of Europe out of recession. This may be more difficult for the West Germans from now on. There is a second, more political point. West Germany has been held up as some-

thing of a model for its remarkable degree of social and political consensus. But to what extent has that consensus depended on a more or less permanent and rapid rate of economic growth? During the last recession, which started in 1973, native West Germans were largely sheltered from the effects of unemployment because of the large numbers of “guest workers” who were left with no alternative but to return

to their native Turkey, Spain, or Portugal. This time round, the cushion provided bv foreign migrant workers is that much thinner. Slower growth and the slide into recession in West Germany is bound to increase pressure on the employers to grab. back what they have conceded to tiie trade unions in past years. If we are about to enter a period of greater social pola-

nsation. thanks to V'*-* Germany's straitened economic circumstances, wil. Chancellor Helmut Schmidt be able to depend indefinitely on the support ot the Liberal Free Democratic Party in Government? Might economic recession and social conflict provide Herr Franz-Josef Strauss and the Christian Democrats with the chance of power which was denied them in the general election in September?