Is Germany going to brake? Well, not so fast

Is Germany secretly a BRICS country, as recently claimed? Compared to China or India, its problems are hardly similar.

Last February star editorialist Wolfgang Münchau wrote a witty piece for the FT raising the question whether Germany should behave like a BRIC. Similarly to China and India, the European country is enjoying new export records, and can rely on good companies that often enjoy the benefits of (relatively) low labor costs (laborers eventually enjoy them a little less). So it does not come by surprise if new reports about a slowdown of the actual BRICs lead to skepticism about possible problems in “wanna-be BRIC” Germany.

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This should mean that the similarities of Germany with the BRICs should be valid in good and bad times. On this extent, Daniel Altman on Foreign Policy mentioned the main concern about Germany’s economy, in an interesting Foreign Policy article with a horrible title (“No Special Sauce on This Currywurst”, sic). After the usual praise to the 2000s labor market reforms, Altman moves on to say that labor costs in former East Germany have almost caught up with the West, and this might lead to a slowdown: “Wages in the East have almost caught up to those in the West, and eventually the advantage in exports will disappear”.

This is classical deterministic economy. A slowdown due to rising labor costs is what determined the end of Italy’s “Economic Boom” of the 1950s, and even the parallel German “Wirtschaftswunder” of the same period.
Yet, is this really the case of Germany anno 2012? Possibly not.

Read more on The European:

The point is, ehm, that Germany is not a BRIC. Its companies are larger, its workers are more skilled and expensive, and the system is able to produce higher value added goods then the BRICs. The current situation is completely different from that of the large European economies of sixty years ago. Then, it was important to work on the cost of semi-handcrafted goods through reduced labor costs. Now, if we take a look at the industries that actually export to Asia and to fellow EU countries, labor costs represent a very low percentage of total manufacturing costs. For cars, labor costs account for a mere 10% of the total cost (that is also lower than the price, since VW succeeds in the daunting task of realizing a profit on car sales). Similar, if not even lower percentages, characterize the mechanical and the chemical industries.

Moreover, labor reforms in East Germany did not work towards a throughout resurgence of export-driven manufacturing plants in the former DDR. Although some companies did open new plants in the East (most notably BMW and Mercedes), the hardcore is still in Bavaria and Baden-Württemberg, accept it or not. A 2010 study calculated that the five former East states exported some 3.100€ worth of goods per inhabitant, whereas the Western counterparts exported 8.000€ per head.

Above all, Germany could rely so far on an advantageous position in terms of monetary agreements – something that the BRICs can enjoy only partially (see the efforts of China to keep the renmimbi devalued). It is indeed true that Germany enjoys advantages from the euro. Blame it on reform-avert countries in Southern Europe, yet Germany is enjoying a 6.5 unemployment rate that is well beyond the (rightful) merits of labor reforms and the smart business visions introduced in the 1990s. In May 2012 the unemployment rate of Bavaria was at 3.5%: it is too much even for Bavaria. Unemployment is being transferred from Southern Germany to Southern Europe. An additional evidence of it is that, notwithstanding such tight labor market conditions, inflation rise has been limited.

The real risk for Germany comes then from outside: a slowdown in the BRICs and in the EU would (or will) be fatal to the country’s growth rate. Since a political deadlock makes it impossible to solve the euro question, Germany might want to focus on sustaining domestic demand – and is eventually succeeding. It might also want to further concentrate on value-added goods, and in reducing manufacturing costs other than labor. More or less, this is also what China wants to do. It seems then that Germany, although not a “BRIC”, can be termed a “luxury BRIC”, resenting from different problems, but looking for similar solutions.

Stefano Casertano, The European Magazine