German companies looking abroad

The German economy has become the emblem of Europe's economic problems. Many of the problems that afflict the European economies are at their most acute in Germany. Compare today's Europe to that of 25 years ago and the economic landscape has changed enormously. Britain was the "Sick Man of Europe," while the German economy was invincible. While the UK economy is by no means invincible, it is one of the healthier ones in Europe. Countries can and do go through poor economic times, and the economic cycle has not been conquered. But when a spell of poor performance starts to stretch out into infinity, additional problems begin to arise. For one, if there's no hope for economic growth, both people and companies begin to look elsewhere. The outsourcing of manufacturing to lower-wage countries has been a phenomenon throughout the world's developed economies; even Japan is now succumbing the economic logic of moving production to China, for instance.

It gets worse if companies start to move higher value-added services abroad. It's the high value added part of the corporate chain that's essential to generating profits. Once you start losing those kinds of jobs, your economy has a much more serious problem. Job losses in the manufacturing sector can be accomodated more easily, as it's generally easier to find another job that pays about the same, even if it's in services rather than manufacturing (assuming there is economic growth). But job losses at the high value added end are much harder to replace. German companies said again that they're thinking of moving abroad:

But as reminder of the tough economic times ahead for Germany, the nation's Chamber of Industry and Commerce (DIHK) released a survey Monday showing that nearly one in four German companies was planning to shift production outside Germany in the next three years to escape high tax and labour costs.

This could result in the loss of about 50,000 jobs each year up until 2005, the chamber presenting a survey of about 10,000 companies.

"The alarming thing is that increasingly it is not just wage- intensive production sectors that are being transferred abroad, as it was in the 1990s," DIHK head Martin Wansleben said in a statement on a new survey of German companies.

"Our recent surveys show that areas like administration, research and development and even company headquarters are being examined," he said.

Threats of corporate flight are not new, and these things don't happen overnight either. Emigrating is not something that is undertaken lightly, but it is becoming ever easier. Modern technology makes the location of a whole swath of corporate functions increasingly irrelevant. And companies will act on their economic best interests sooner or later. If they can move, they will. Eventually. Germany still has time to avert a massive corporate exodus, but the clock is ticking. Schröder's reform plans, known as "Agenda 2010" are small step in the right direction, but don't go far enough. Even so, he's faced with massive opposition from the left wing of his own party and from the labor union movement. Labor unions have been organization mass protests against the plans, which they say will eviscerate the welfare state. If only.

June 1st will be an important date for Schröder. That's when the SPD holds a special congress to vote on the reform plans. Schröder has already threatened to resign three times to obtain backing for his Agenda 2010. Thus far, the SPD fora at which he's uttered this threat have backed him. The question is how many on the left wing will be willing to call his bluff. The weekend congress should give us a clearer idea. But with just a four-vote majority in the Bundestag, just a few defections could sink the plans (assuming the opposition votes against the proposals; they might do that if they think they can hurt Schröder, even though they might otherwise be in favor of the plans).