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).

Schröder's next gamble

With yet another election defeat to haunt him and the economy disintegrating around him, Chancellor Schröder is on his way to announce a major economic package in a few days' time. In his first four years in office he invented a forum called the Bündnis für Arbeit, the Job Alliance. It was a get-together of labor unions, employers and the government, and never really amounted to very much. Last week he tried to revive the Alliance, but the attempt ended in failure. The curious thing is that his reaction was to drop heavy hints that he would be introducing a reform package. It's not new to be hearing reformist rhetoric from Schröder, but this time the labor unions seem to be laden with a sense of foreboding. There's little chance Schröder will turn into a raving free-marketeer overnight, but many of the reforms that he might be considering (and which the unions have been training their guns on) would be at least pointing in the right direction. It's quite a gamble, because he risks alienating the members of parliament of his SPD party, three-quarters of whom are union members. And with a very precarious majority in the Bundestag, it would not take many defectors to bring down his plans, and possibly his government. While the opposition of CDU/CSU and FDP might in principle agree with more market-oriented reforms, they would not hesitate to vote against such proposals if they saw a chance to topple Schröder as a result.

Perhaps he's realized that he won't be able to survive without reforms to resuscitate the German economy. With his party potentially turning against him on the issue, he's taking a gamble. What are the odds that the SPD parliamentarians would risk a new election right now? They would suffer massive defeats at the polls, so they may just go along with the plans. The position of the unions has come under unprecedented attack in Germany, with both the FDP and now also the CDU taking aim at the strangehold the unions have over the German economy. The CDU does not speak with a single voice on this issue though.

It could be the last desperate gamble of a man who has little to lose anyway.

Dissent in East Germany

Yet more glimmers in Germany that a semblance of sanity might still exist there. A group of 27 Christian Democrat politicians from the states of Brandenburg and Berlin have signed a letter criticizing Schröder, which they are going to hand to the American ambassador tomorrow. The statement contains the following:

It is a matter close to heart to tell you that we are ashamed at the behavior of our goverment in the Iraq conflict in both the Security Council and within NATO. [...] The goverment led by Chancellor Schröder has in four and a half years ruined our country economically and is now damaging our long-term security interests.

They also blast the peace movement of both today and of yesterday. Referring the 1979 NATO decision to station nuclear Pershing and cruise missiles in Europe to counter the Soviet threat, they say that the same forces who were opposed to the NATO policy then and "sought proximity to the SED-regime of East Germany" are now splitting Europe apart. (The SED was the communist party, which still exists in its current PDS form.)

Of course, they should have spoken out during the election campaign. But I suppose better late than never.

Glimmer of hope in Germany

Germany's economic problems are well-documented, and the generally prevailing opinion is that it is but a hair's breadth away from a situation akin to Japan's deflationary spiral. The situation is not as bad as that yet, and today's Ifo numbers showed a bounce back upward in both expectations and the current conditions assessment. Still, it's a far cry from a recovery and unemployment is still rising relentlessly, which will keep Schröder on the defensive for quite some time yet. In Japan the Koizumi administration has been talking a lot about reform, but has been unwilling and/or unable to implement any major structural reforms. The poor economic conditions in Germany have certainly not been lost on either German politicians or the population, and the gloom has become the norm. What has been lacking thus far is a blueprint for pulling Germany out of its slump. There have been encouraging noises now and then from various corners, including the government, about the need for reform. Nothing much has happened. Small steps have been taken on the pensions front in the last years, but these steps have been tiny and tentative.

The economic malaise is now encouraging others to speak out more boldly. A sign of the times is an interview Guido Westerwelle gave in the Neue Osnabrücker Zeitung over the weekend. He is the leader of the small right-wing liberal FDP party; as always, the moniker "liberal" in the European context refers more to the classical liberalism of the 19th century rather than the so-called liberalism of US politics. Most of these European liberal parties have becoming a firm part of the socialist welfare state consensus, and have at best argued for a bit less socialism rather than provide a clear alternative. The German FDP has been moving the right direction on this front, although their election campaign was ruined by Möllemann scandal.

Westerwelle's comments were a frontal attack on the German labor unions, which are bastions of unreconstructed socialism. Their leaders are overtly political (and to the left of Schröder), and their antediluvian economics are part of Germany's structural problems. For instance, they argued that wage moderation had clearly failed to create new jobs, and therefore demanded huge wage increases in order to create more demand. They think companies exist solely to provide jobs to workers. But despite their many protestations about wanting to create jobs, unions have played a role stifling Germany's economy. Industrial relations are supposed to be consensus-based. Workers' representatives are present on the boards of companies, and unions have considerable influence on corporate policy. But what's even worse is that most wage negotiations are done on an industry-wide basis, not company by company. This means that companies will get stuck with wage settlements negotiated at a high level that takes little to no account of their actual situation. This exacerbates the problems that corporate Germany faces.

So Westerwelle took aim at the unions, demanding that they be robbed of their power. He accused them of being more interested in the protection of the power and privileges of union functionaries than in either the workers or the unemployed. And their policies were "a plague for our country," and then added that "functionaries like Mrs. Mönig-Raane and the Green Verdi-chief Bsirske are the pall-bearers of the welfare state and of the prosperity in our country." (Verdi is a public sector union.) What's so remarkable about these comments is that they would have been unthinkable a few years ago. This is an encouraging sign that there are perhaps glimmers of hope for the German economy after all. Just dealing with the unions is hardly going to be enough, but the unions' opposition to all measures of economic liberalization has made reforms a lot harder. At least the economic crisis is bringing forth some much-needed new thinking. One should not overestimate the FDP's or Westerwelle's influence though. In the last election the FDP got 7.4% of the vote, which was good by its recent standards. But with Germany's economy is the state it is in, any movement in the right direction should be welcomed.

Stupidity versus malice

Hanlon's Razor states that one should never attribute to malice what can be adequately explained by stupidity. I am invoking the Razor on behalf of Gerhard Schröder and the Czech op-ed I blogged about yesterday. I do think the comparison with the Warsaw Pact is on target in that the effects of the policies of the Franco-German Axis are trying to bring about a rift between the US and Europe. I think one should differentiate between the Germans and the French though in this regard. I don't think that Schröder actually set out to create such a rift, at least not as a conscious bit of policy making, as also pointed out by Ralf Georgens on his blog. Instead, it is Schröders horrendous economic record and his need for a diversion that set him on the path to confrontation with the US. The electoral campaign of last fall has been well-documented, and Schröder has paid the price. Germany's weight in international affairs has diminished drastically. The tax hikes and spending cuts completely gutted Schröder's support on the domestic policy front, and with his international influence waning, he became easy prey for the French. Chirac gave Schröder a way out: support the French anti-American line and appear to be relevant again. It also fit well with Schröder's earlier anti-American rhetoric during the election campaign. The real villains in this piece are definitely the French, who for decades have been playing the spoiler role in international affairs, trying to undermine American foreign policy with a obsessive, maniacal passion that is of clinical proportions.

In the malice stakes, France is way ahead of Germany on this one. The latter just gets the stupidity award. Blame for this sad state of affairs in Germany must go beyond merely Schröder though. The opposition parties of the CDU/CSU and FDP are culpable also. The CDU now claims they would have signed the letter of support for the US that caused Chirac's fit the other day, but any support for the US during the election campaign was sorely lacking. One might ascribe this to an electorate hostile to the idea of supporting the US, but that's just part of it. No major politician in Germany even tried to make the case for the US, certainly not during the election campaign. This gave the proverbial floor to the anti-American voices. There was no debate; it was all one-sided, and the leadership of the CDU/CSU and the FDP failed miserably. Sometimes political leaders have to lead and take a stand for what's right. I have no doubt that there are plenty of politicians within the CDU/CSU who are the heirs of the pro-American Atlanticist tradition of Helmut Kohl, Franz-Josef Strauß and Hans Dietrich Genscher. But by keeping quiet they lost the argument by default. And that's pretty stupid too.

Schröder can no longer count on his anti-American position to hang on his support. The polls have probably gone as low for the SPD as they ever will. It's now down to the resolute vote-SPD-no-matter-what vote. This gives an opening to the opposition to exploit Schröder's internationally weak position to bring some semblance of sanity back into German politics. Let's hope for Gemany's sake they are willing and able to take up the challenge.

The new Axis Powers

An entire web site dedicated to the new Axis Powers!

I'm back

I'm back from a nice skiing trip to the Colorado Rockies, and aside from a sore shoulder, I have survived the entire expedition without any accidents. I got back earlier today, but had to go straight to the office, so I do feel a tad tired. Full-scale blogging will resume tomorrow. During my stay in Colorado I got a lot of snow, a heat wave and icy cold weather up on the mountain. When it's 15 below (in Fahrenheit) and there's a wind blowing, it gets real cold real fast. But that was just one day, and it did not impinge too much on the skiing.

It has certainly been an eventful period. I am amazed at how recklessly the French and the Germans are frittering away the NATO alliance. That NATO would be losing relevance did not come as a big surprise, but still it's astonishing to see the cavalier attitude these two countries are taking to the alliance that has kept them free and prosperous for the last half century. The new Franco-German axis is born of desperation. The Germans are desperate because they've lost any foreign policy clout they had before the last general election, and now that Schröder has become a big loser domestically, he has to try to cling on to some semblance of international respectability. He does not appear to care where he gets his tender loving care from internationally; it's clear he won't get it from the US, so he tries to ingratiate himself with Saddam. The French are desperate too: their entire post World War II policy of trying to counteract Anglo-Saxon power and influence is in complete tatters. America is by far the most powerful nation in the world, and regardless of the merits of America's case, in French eyes there needs to be a countervailing force. Even if this means de facto support for Saddam, that's fine. It's the price one has to pay in terms of Realpolitik. So we have a new Franco-German axis born of different sources of desperation. With Schröder so weak, it's Chirac who can drive the debate within Europe, and what he's trying to do there is to transfer the traditional French paranoia of Anglo-Saxon influence to the European stage. He's setting up a simple litmus test for Good Europeans: you can't be both a Good European and sympathetic to America. The negative self-definition of French identity (i.e. defined by what it is not:American) is being foisted on Europe, or at least, the French are trying. It's not going to fly, as the letter of support by eight European heads of state showed. But it's the big chance for France to cement its vision of a European identity on the wider EU before the new entrants get all sorts of ideas of their own. And that's another reason it's not going work, because this Franco-German Axis is treading on the sensibilities of too many of the smaller countries. They won't suddenly become rabidly pro-American, but I suspect they'll see Franco-German domination within the EU as a bigger threat than anything America might do. France and Germany are painting themselves into a corner here, and getting out of it is going to become harder the more they paint. They'd be well advised to open the windows and the let the paint dry for a while before trying to redecorate again.

The big winner out of all this could be Russia. How? Tune in tomorrow. I'm going to bed now.

State elections in Germany on Sunday

Now that the election in the Netherlands is over, there is more electoral drama coming up in Germany. Two states are electing a new parliament, and it looks like Chancellor Schröder is in for a drubbing. In the state of Hesse, the incumbent CDU-led government is going to coast to an easy victory. The latest polls even suggest it might take over 50% of the vote. Hesse used to be governed by an SPD-Green coalition until four years ago, when the poor start of the first Schröder government led to the CDU taking over in Hesse. Now that result is likely to be repeated. So this time around, no change in government is expected in Hesse.

The situation is more interesting in Lower Saxony, where the SPD is now in charge. The polls indicate that a change from the SPD to a CDU-FDP coalition is likely. Making such a defeat even more poignant is the fact that Lower Saxony is Schröder's home state. As prime minister of Lower Saxony Schröder launched his bid for the federal chancellorship five years ago. The image of a reformed, young, new kind of social democrat who's in tune with business helped him get elected at a time when the CDU was looking old and out of steam. Defeat for the SPD in Lower Saxony would be personally painful for Schröder. One key indicator to watch is the FDP vote. They need 5% of the vote in order to enter parliament, and if they fail that hurdle, a SPD-Green coaltion might yet be possible.

At the federal level the polls have stabilized with a massive lead for a CDU/FDP coalition.

Killing two insects with one stone

The United States has asked Germany to provide protection for its bases from the end of January? Another piece of the puzzle falls into place, and Iraq is another step closer to liberation. The German reaction will be interesting to watch. A spokesman for the German defense ministry said that Germany had actually agreed to help to guard US bases, but it had made no commitments as to the extent of the aid. This is going to be a highly explosive issue for the coalition of Greens and Social Democrats, as Schröder won re-election by running against the US. There's a very large number of pacifist idiots in Germany who're opposed to any German aid to the US, no matter how indirect. Overflight rights? Of course not. Limiting US troop movements? Well, sure. (I wonder how they would want to put that into practice, being pacifists and all). In fact, they would oppose military action against Saddam even if all other countries in the UN came crawling on their knees to beg for German support. War is wrong, they say, violence never solves anything, so let's allow the madman to build weapons of mass destruction (you know, the kind that never solve anything). One day they might not solve anything by leaving a radioactive crater in Frankfurt, Munich or Berlin.

So the pacifists in both coalition parties are likely to be in explosive mood when the shooting in Iraq begins. Schröder will have to make a stark decision at that point, and no matter what he chooses, he has a problem. Since the election he has realized that sticking to his dogmatic unilaterist approach of no German aid whatsoever is going to cause Germany great harm internationally. He also knows that the left wing of his SPD party is going to be even more upset with him than it already is, and the see-no-evil-unless-its-American Greens with their pacifist roots are going to go into spontaneous combustion. If Schröder does accede to the US demand for protection of US bases and overflight rights, there's a good chance that his coalition will fall. If the does not, then the opposition will have a field day with piling on to Schreöder's already dismal position in the polls by pointing out that internationally he's a disaster for Germany too. Either way this is going to result to more damage to the already sinking ship of the Red-Green coalition. The Reds and the Greens are so far behind in the polls now that there's no chance that they could win another election now.

What I really wonder is this: are American forces really stretched so thin that they really, really need German aid in guarding American bases? Sure, it helps and allows American military personnel to be used more fruitfully in Iraq, but is it really necessary? Or is Bush killing two disgusting insects with one stone here? War in Iraq takes care of both Saddam and Schröder. You gotta love it.

Suing Big Chocolate

Silly lawsuits are not limited to the United States it seems. Today we learn that a German judge lost his lawsuit against Big Chocolate. He claimed chocolate bar maker Masterfoods had gotten him addicted to Mars bars which had then led to diabetes. The linked article is very British in claiming he gained 16 stone. One stone is 14 pounds, so apparently his weight gain amounted to 224 pounds. That's a lot of weight, but it's way more than two Mars and Snickers bars a day will do to you. In any case, his claim was thrown out by a court in Düsseldorf which said that no link between his diabetes and his chocolate consumption could be proved.

Another intesting facet is the amount he sued for: about 5,000 dollars. That's hardly worth going to court for in the US, is it? Had this lawsuit been filed on the other side of the Atlantic, we'd be talking about a claim for at least 5 million dollars. Depending on the sleaziness of the lawyer, perhaps much more. On the other hand, if you really had contracted a disease like diabetes due to others' willful negligence or malice, wouldn't you want to sue for much more?

Having said that, the absurd lawsuits and equally absurd verdicts that we've been seeing in the US are signs that the system is broken and needs to be reformed. But that's hardly a new insight. I need more chocolate.

Corporate migration

The death spiral of the Schröder administration continues in Germany, with the latest shot coming from German business leaders warning that the crisis that is developing is going to eclipse anything Germany has seen since the war. By inference one is tempted to compare the current crisis with the situation before the war and the conditions that led to the rise of the nazis. It's nowhere near as bad as that at the moment, but ten more years of stagnation will bring the spectre of those days a lot closer. Nonetheless, there is a crisis and there are no signs of it getting better. It's not just that the economy is depressed, but it's also the prospect that things won't get better anytime soon. The government has a wafer thin majority in the lower chamber of parliament, the Bundestag. The upper chamber, the Bundesrat is controlled by the opposition. The upcoming state elections in Lower Saxony look likely to skew the Bundesrat even further in the opposition's direction. This is the inverse situation of the last years of the Kohl government, when the SPD and Greens had a majority in the Bundesrat, which they promptly lost after their election victory in the general election on a wave of public disenchantment with the new government. But the gridlock that prevailed in the closing years of Kohl's reign is likely to be repeated now. The Bundesrat can block certain kinds of legislation, and most of the big reforms require the Bundesrat's approval. Stagnation is the prognosis.

This prospect is leading German businessmen to despair. The CEO of the chip maker Infineon has now threatened to move his company out of Germany.

Ulrich Schumacher said German taxation rates, often double those paid by competitors, were a dangerous burden on Infineon. "In a normal business year, where there is for example $2bn (£1.26bn) in profit, it means there is some $300m to $400m more [tax] than your competitor has. Think what you would have to do to compensate for that. It's a brutal disadvantage," he said.

Moving an entire company's headquarters is a big operation. We're not talking about the tax-efficient corporate inversions which have been popular lately in the US; what Schumacher is referring to is actually moving the company and the people. It'd be corporate brain-drain. More importantly, it would undercut the knowledge base that exists within the country. Once expertise like this is lost, it's expensive to rebuild it if you can do it at all.

Threatening to move a corporation is not unprecedented. Many Swedish companies had been threatening to leave the country because of the punitively high tax rates, and AstraZeneca actually did move its headquarters to London from Sweden. But this was under the cover of the merger of Astra and Zeneca, so it's not a pure departure either, and it still maintains R&D facilities in Sweden. Ericsson also moved some R&D functions out of Sweden because of taxation. The steady trickle of high value added jobs out of the country is something the government should be very concerned with. There's a world of difference between moving a widget factory to Estonia and moving the intellectual engine of your company elsewhere. Increasingly that's where the true competitive advantage lies, and losing that knocks a hole in the local economy.

I don't think Infineon is going to move its HQ out of Germany just yet. But a few more years of drift and stagnation and Schumacher will actually do it and take his company to greener pastures. German politicians better take heed.

Increasing labor mobility in Germany

One of the problems the Eurozone faces as a single currency area is the low level of labor mobility. True interregional labor mobility only came about in the US in the 20th century, once the transportation network was sufficiently developed. Europe faces a different problem, and it is cultural and linguistic. Moving from one country to another is a much bigger change than moving from one part of the US to the other. At least in the US, you'll still be able to speak the same language (yes, even in Miami, although knowing Spanish there is a very big plus), and you'll be surrounded by familiar chains of shops and restaurants. In Europe, the language will be the first big barrier, followed by the differences in culture and habits. This is much more of a problem for the middle segment of the labor market than the either the top or the bottom ends. At the top end, people will be sufficiently well-educated and intelligent (one presumes) that they can adapt to new circumstances with aplomb. The large expatriate communities of scientists and businessmen attest to this flexibility (insert obvious joke about businessmen's intelligence here. If you limit it to finance, I'll even agree.) At the bottom end, manual laborers can get by doing menial tasks without needing to know much of the language. But middle-class labor mobility is still very low, and is likely to remain so.

Widescale labor mobility is a necessary ingredient of a successful modern economy. This would not be such a problem had Europe not embarked on the project of the single currency. Fluctuation of exchange rates, even within the rigid structure of the Exchange Rate Mechanism that preceded Monetary Union, was one escape-valve for regional differences in economic performance. A country that had high inflation could devalue its way back to competitiveness, albeit at the cost of impoverishing the entire country by the devaluation. Now this transmission mechanism has been removed, and the relative exchange rates have been set in stone. The effects of differentials in economic performance will ripple through the Eurozone economy in the form of divergent inflation and unemployment rates. Can Germany deflate its way back to competitiveness? Lowering the aggregate price level is not unheard of. The cumulative inflation rate in the US from 1870 to 1920 was about zero. But that was in the era when the currency was backed by gold.

The few examples that we do have a countries with fiat money deflating over protracted periods of time are not happy ones. The specter of Japan's last ten years are easily invoked in this context. Even a weaker yen has not had much impact on Japan's problems, and the current campaign by the Japanese government to talk the yen down to 150 or 160 is not going to solve the problems either. Japan has tried all the Keynsian recipes for rekindling growth. The last ten years have seen a stupenous amount of money being wasted on "infrastructure" projects, which were supposed to kick-start domestic demand. At the end, Japan is facing a wrecked economy, government debt of 140% of GDP, a staggering budget deficit and a financial system that is on the verge of collapse. There's another Japan too, that of the exporters who've been restructuring and sharpening their operations, but their prospects have the threat of a systemic collapse hanging over them. Everything has been tried short of implementing free-market, supply-side reforms. Tax and spend has been tried and the Bank of Japan has been running interest rates at zero for years. This still means that real interest rates are positive, as inflation is negative. Succumbing to political pressure, the Bank of Japan has done a remarkable thing in the last year: it started creating money at an amazing rate. The monetary base in Japan is expanding at a rate 30% year-over-year, with a similar increase in narrow money as measured by M1. But if pushing on a string was ever an appropriate metaphor, this is its quintessential moment of glory. Broad money, as measured by M3 and M4 has barely budged; M4 is growing at just 1% year-on-year. The money multiplier which exists in a healthy economy has put a big Closed sign on its door and gone into hibernation.

So deflation is not exactly a good option. But what can Germany do? It can go for reforms to restore the competitiveness of its economy, but at the moment it seems more bent on slowing it down rather than reforming it. While Germany is not doing much about it, the some Germans are. They're leaving the country. This is nothing new at the top end of the labor market, but now we are seeing the bottom end looking abroad. Germany is now facing paradoxical situation where its own working class is seeking employment abroad, while it is still attracting immigrants itself from poorer countries. The numbers are still very small, so it's not making much of a difference right now. I do hope that Germany never actually ends up in a situation where a significant part of its population seeks work abroad, simply because that would imply a massive economic meltdown there. The situation right now is bad, but a meltdown is not. It has the potential to become one quite easily.

Trust them, they know what they're doing

On my visits to the US, I usually end up spending some time and money in various electronics stores to stock up on various electronic gadgets and toys. The price differences can be substantial so it's worth a try. There's always some good deal to be found with a whole raft of rebates on certain products. Best Buy is kind enough to print all the material you need for their rebate at the check-out; CompUSA gives you only one copy of the receipt, so you have to make another copy yourself to send in for the rebate. Shopping around for the best deal and comparing marked-down prices, rebates and juggling price-match guarantees are all a normal part of shopping in an environment where competition thrives. So while you're picking your way through the new tradition of pre-Christmas sales, spare a thought for the Germans. You see, offering rebates and discounts in Germany is illegal.

The bizarre world of Germany's Unfair Competition Law (known by its German acronym UWG) has been created in the name of protecting consumers. It's only since last summer than German retailers can offer some kinds of rebates on articles, while they can have sales only twice a year. The Frankfurter Allgemeine explains:

The UWG has some features that may strike foreigners as curious. It contains, for example, a ban on the “exaggerated luring“ of customers and certain restrictions concerning the size of the discount that can be offered. Its most controversial section forbids merchants from announcing that sales will remain in effect for only a limited period because the prospect of a looming deadline for the expiration of a special offer could put “psychological pressure“ on customers. Retailers are allowed to reduce prices for a limited period of time, but only if they do not previously announce that the reduction will be temporary.

For instance paragraph 7 of the UWG specifically outlaws extraordinary retail activity that serves the acceleration of turnover and that gives the impression of bestowing special deals on customers. The applicability of this law goes beyond rebates and discounts, as it can be and has been applied to innovative retailers who sought a competitive edge. For instance, not too long ago the owner of a kiosk in Berlin had the idea of stimulating sales by accepting once again German marks. There's still an enormous hoard (estinmated at 8 billion euro) of marks in people's possession. In any case, he quickly fell foul of the UWG and was ordered to pay a fine. The clothing chain C&A is now running a promotion this week accepting marks too. Since they had deeper pockets and afford lawyers, they actually won the case and can now legally use the acceptance of marks as a competitive advantage. The UWG is is not a law against unfair competition, it's a law against compeition in general. The law was made by people who think all competition is unfair.

In an article on this year's Christmas shopping, the FAZ explains the kinds of things the retailers are trying to do within the limits of the current law, but many are operating in a legal gray area anyway. With the economy as depressed as it is, retailers are eager to get any advantage they can in their bid for consumer euros. It looks like this is going to be the best bang-for-the-buck shopping season in Germany in ages, but not everybody is happy with this. The largest labor union, going by the incongruous name of Verdi, is riding into battle against the discounts and the sales, lobbying to prevent any further relaxation of the UWG. Quoting from the article:

Verdi has demanded an end to retailers' current discount frenzy and seeks to prevent amendments to the German law against unfair competition, which retail lobbyists favor. “We need regulations because the market alone clearly isn't capable of putting an end to this nonsense,“ said Wiethold, adding that if the year 2003 turned out as bad as 2002, several big companies would be on the brink of insolvency.

"This nonsense" is a great boon to consumers, and considered perfectly normal everywhere else. I don't understand why the union would be opposed to this. It seems Verdi is acting out of reactionary reflex against anything that could be called liberalization. As in many other countries, the labor union have long since stopped being the champions of a downtrodden working class, but have turned into political support groups for left-leaning parties. Three-quarters of SPD members of parliament are union members, so the positions that the unions take do matter directly in politics.

The UWG also applies to areas that are not directly connected to price. The services that retailers offer can also violate the law. One famous case is the Land's End guarantee, which was ruled illegal in Germany. Showing complete confidence in your own product is in the eyes of the German law also an act of unfair competition.

But think of the vision of consumers that the UWG has: apparently, people are so helpless, so stupid, so feeble-minded that they can't resist spending money when a nefarious retailer dangles a discount before them. You're not allowed to say when any rebates end, because that might put psychological pressure on shoppers. Of course it does! But that's only a bad thing if you think shoppers can't decide for themselves whether they make use of the current sale, or whether they'll wait for the next one. The UWG is a prime example of an authoritarian, elitist mindset, that simply can't conceive of "Them, the People" being sufficiently resourceful to fend for themselves.

Actually, even this is a very benign reading of the mindset of the framers of these laws. The UWG has survived more or less intact since its introduction in 1933 when the Nazis introduced the unfair competition law to protect the Master Race from manipulation by the evil Jewish shopkeepers. It's sad that such a vile anti-semitic piece of legislation has been able to survive this long, even if stripped of its original intent. Less surprising is that the law appeals to those with a collectivist instinct even now.

Observations from Germany

The end of another long week I ended in Germany, and spent some time in Schröder's home state of Lower Saxony, visiting some long-standing business relationships in the area. In the course of business meetings, the topic of poltics is seldom mentioned explicitly. The risk of doing so is high for both parties. Political disagreements seldom affect the business itself, so by not mentioning the topic you can avoid the risk of ending up in a heated argument which might sour the relationship. My experience is that the more controversial a subject is, the more carefully it is approached (or not at all). It was therefore interesting to see the naked pessimism and the despairing comments about the new government. Bad-mouthing Schröder is apparently not a very controversial thing to do anymore and the people I spoke with all spontaneously aired their displeasure. Although the business community is hardly representative of the country as a whole, this was the first time I've heard such comments in Germany. It's not really news, but Schröder really is in trouble. The latest speculation in German newspapers is that he might not even last the winter in office. The showing of the SPD in the February elections in Hesse and Lower Saxony will be important in deciding the fate of this government. The current signs don't look good for Schröder.

The rampant pessimism about Germany's economic future bodes ill in the short-term. On the other hand, it is also a realistic assessment of the situation, and that is encouraging. Japan's problems have been exacerbated by institutionalized denial of the problems. Only by dribs and drabs have the problems been even acknowledged, and there's still a lot of acknowledging to do. In Germany at least, there is greater awareness of the predicament the country is in. That's the first step to recovery, as they say, but it's going to be a painful slog, and I am not sure the CDU/CSU and FDP politicians (the alternative to the current government) really grasp the severity of the problems. Even if they do, the question then still is whether they will want to prescribe the medicine necessary, or whether they'll just tinker at the margin.

Schröder still sinking in the polls

I haven't been able to keep track of either the blogosphere or the wider news over the past week, but it does appear that news of Schröder's problems has become bigger news internationally. The latest poll results show the enormous beating he is taking. The latest two polls of the 21st of November show the SPD on 30% and 29% respectively, down about 10% from the election result. The CDU/CSU is up about 10% to 48%.

In the regional polling data, the two relevant states are Lower Saxony (Niedersachen) and Hessen, both of which hold state-wide elections on February 2nd. In Hessen the ruling CDU/FDP coalition is comfortably ahead, while in Lower Saxony the CDU is polling substantially higher than the SPD. This is Schröder's home state, which has been held by the SPD since the 1990 election when it gained 48% of the vote; polls now put it at 37%. Based on these polling results, the SPD would be kicked out of office there. This would make governing for the federal government even more difficult, as it would enhance the majority in the upper chamber of parliament (Bundesrat) of the CDU/CSU and FDP-governed states.

The new federal government is looking shaky, but at the moment I don't yet see a catalyst that would lead to its fall. The SPD will be keen to avoid a new election, but the Greens aren't doing too badly in the polls. They'll be worried that the Schröder millstone will start to drag them down too. What is required is an issue on which the Greens can escape from the coalition. When the liberation of Iraq starts, the the use of American bases in Germany could provide just the right excuse. The Greens can pander to their anti-American base, and Schröder will be caught between a rock and a hard place: either support UN-sanctioned action against Iraq, or cause further damage to Germany's international reputation. If he chooses the first course of action, he'll upset the Greens. If he opts for the second, he may hope for a revival of the anti-American boost he got just before the election, but I don't think it's going to happen. The German electorate has at the margin become more aware of the price to be paid in its international reputation, and Schröder's credibility has effectively been destroyed. It will be seen as a desperate political maneuver rather than a principled stand.

It will all depend on whether the Greens want to be in an unpopular government, or whether they prefer to keep their electoral base by moving to the opposition.

Another bad day for Gerhard

The spiral of bad news is spinning ever faster in Germany. Today the increasingly unpopular government of Gerhard Schröder got hit by more depressing reports. First of the European Commission took the German government to task for the budget deficit breaching the 3% of GDP limit this year and next. Economic stagnation this year means that the deficit to GDP ratio is going to be as high as 3.7% or 3.8%. This means the European Commission will have to impose some disciplinary action on Germany, although I remain skeptical much will come of it.

More bad news came from the "Five Wise Men," a panel that advises the German government on economic matters. They warned of rising unemployment and poor economic growth ahead, with GDP in 2002 growing by just 0.2% and not much improvement in 2003 at 1.8%. Germany will once again underperform most of the other European economies. The wise men highlighted specifically in their report that the underlying reasons for the dismal situation are structural in nature. They asked the government to start to address the growth weakness of Germany which are mainly caused by the lack of structural reforms.

To top it all off, Handelsblatt reported today that business confidence has hit an all-time low. The October survey of the German Industry and Chambers of Commerce. In the space of one month, the responses have deteriorated enormously, and the cause of that is the re-election of Schröder and his tax-raising policies. Two-thirds of those surveyed think that Germany's competitiveness will become worse, up from just 14% a month ago. Three-quarters said they fear that the new government will make their lives more difficult. Much more worrying for the German economic outlook is that only 8% of managers said they were going to increase investment in the next year, while 43% said they were going to reduce. Unemployment will get worse, as only 9% of companies say they're going to hire more people, while 54% are looking to reduce their payrolls.

Schröder's personal credibility is in tatters, and his government's is not faring much better. The speed with which he has fallen from grace is amazing, and the situation in Germany is coming close to an acute crisis. With a government that has lost popular support, while only having a wafer-thin majority in parliament, the country is essentially rudderless. The measures that have been announced are only going to make Germany's malaise worse, and the underlying structural problems of high taxes and inflexible labor markets remain unaddressed. This government can't address these issues anymore. Schröder is transfixed by the headlights of the onrushing truck. He's desperately trying to maintain his fiscal credentials in the European sphere by pretending that Germany can get its finances under control again within the limits of the Stability Pact. But this is undermining his popularity and it's hurting the economy, which in turn means he does not have the political capital to undertaking the major structural reforms that are necessary. The election victory bought by pandering to base anti-American sentiments is beginning to look ever more expensive for Germany.

Schröder's fall continues

The newly elected government of Gerhard Schröder has been declining steadily in the polls since it was elected. The Germans are not taking kindly to the huge tax increases that he is dumping on them. The German economy is in deep trouble and higher taxes are going to make matter even worse.

The latest expression of dissatisfaction in Germany with Schröder's policies comes in the form of a satirical song, which portrays Schröder as a thief and a liar. He steals from a Red Cross collecting tin and flushed the constitution down the toilet. The lyrics are pretty brutal too (I'm only translating parts of it):

What you can promise today
you can reverse tomorrow
and that's why I'm getting myself every last bill
your money, your loot, your piggy bank!

[Chorus]

I raise your taxes
Elected is elected, you can't fire me now
That's the cool thing about democracy

I'll delve deep into your pockets
each one of you is hiding some dough
and I'm gonna get it, I'll find - no matter where it is

I'll clean you out, yeah you fools
you'll be wondering but I can still surprise you
there's no tax that does not exist for me!

In the song he also muses about a bad weather tax, a ground-use-tax, a breathing levy, a tooth tax for eating... you get the idea. Inevitably, there are already calls for this song to be banned. This is the gut instinct of the Euro-sophisticates; ban speech you don't like. The First Amendment is after all such an unsophisticated concept...

(More on European attitudes to free speech at USS Clueless and The Volokh Conspiracy.)

UPDATE: There's a whole web site dedicated to the song. It's called Steuerkanzler, or Tax Chancellor. It has Real Media streams of the audio and part of the video! (The audio stream has not worked for me though).

German stagnation and the growth gap

Germany has the third largest economy in the world after the US and Japan. And its economy has been underperforming not only the US, but Europe as a whole for at least a decade. Japan's economy is already in a deflationary slump, and now Germany is in danger of following in its footsteps. On the one hand, monetary union has forced inappropriately high interest rates on Germany, while on the other hand it suffers from deep-seated the structural problems. The ECB is not going to help out on the former, while German politicians have no clue about the latter.

The German economy's underperformance is a result of an economic structure built on social consensus rather than market forces. The Weimar republic and the following Nazi era led to Germans attaching a very high premium on domestic stability. As the economic boom of reconstruction after the war produced great wealth, the predominant socialist ideology of the welfare state spread ever further. Labor unions demanded shorter work weeks without proportionate falls in pay, while the captains of industry built a cozy network of cross-shareholdings with their banks. This system worked for a while, but the ever-increasing amounts of legislation under the banner of "social protection" shackled the economy down one by one. The road to serfdom is paved with good intentions. to protect workers from getting fired, laws were passed making firing people expensive. Now the risk of hiring workers in Germany is high, because you may not be able to fire them again. The great fundamental flaw in building this system was the belief that you could legislate your way to social cohesion and prosperity. One particularly egregious example are the "Arbeitsbeschaffungsmassnahmen." This word translates into "measures to provide employment." All kinds of retraining programs fall into this category, and over the years the unemployment statistics have been massaged downward by sending people off on these projects. If the government could indeed wave its magic wand and provide employment like that, Germany would have no unemployed. Instead, the unemployment rate is around 10%.

The structural rigidity of the German economy has meant that it could not react quickly and nimbly to changing circumstances. Germany has not yet made the wholesale transition from a manufacturing to a service economy. It is not able to climb the value-added ladder, and competing in manufacturing with much cheaper labor in Poland or the Czech Republic is futile. Yet there are no politicians in Germany who really get this. Occasionally the FDP might mumble something that would be a step in the right direction, but aside from their self-inflicted implosion, they would in any case not be a major force.

Unification provided a brief boost to the German economy at the beginning of the 1990's, but that proved ephemeral. The monetary union between East and West Germany shows the dangers of joining two disparate economies. What's even worse, the worthless Eastern Marks were exchange at a one-to-one rate for Western Marks. This was a political necessity, but the long-term economic consequences are still being felt. Despite a truly gargantuan transfusion of money from West to East, the eastern part of the country is still very far behind economically. It's quickly becoming the German mezzogiorno, the name given to the destitute south of Italy, which gets huge handouts from the prosperous north.

Ever since unification, the German economy has not been doing well. Retail sales have been flat for ten years now. The only growth Germany has seen has been export-driven as it has been unable to generate self-sustaining domestic growth. While growing a little less every year may not sound like a catastrophe, the cumulative effects do add up (or rather, they multiply up). Since 1981, the German economy has grown in real terms by 54%. However, in the same period the EU economy grew by 61%, the British economy by 69% and the US economy almost doubled in size with growth of 92%. The comparison since unification 1991 is even more shocking. The Germany economy grew just 15%, beating Japanese growth by about 5% over the period. But the performance of the Anglo-Saxon economies was in a different league altogether: the US economy increased by 41% and the British economy grew by 31%. In terms of virtually every macroeconomic indicator, the US and British economies have done better than Germany.

What Germany needs is exactly what Schröder promised not to do: a strong dose of Anglo-Saxon economic medicine. The German economy needs to be unshackled, taxes need to be cut, the labor market needs to be liberalized. Without radical change, the German banking sector is heading towards a systemic crisis like the one in Japan right now.

How much pain is necessary before the changes can be made? It took Britain a winter of discontent to get serious about breaking the unions and restoring economic sanity. With the German premium on stability, the gut instinct will be to try to muddle through as long as possible, all the while making the problem worse and the eventual cure more painful. And if Germans have an economic pain tolerance like the Japanese, Europe's biggest economy will be in for a very long period of misery.

The German post-election hangover continues

The first polls after the election already showed that the ruling Red/Green coalition was losing popularity. The votes the Germans cast in their shameful embrace of vile anti-Americanism are coming back to haunt them. At least quite a few of them are having second thoughts, as a further opinion poll shows. Shown on Bericht aus Berlin, a current affairs program on the German public television ARD network, the results for Chancellor Schröder are not pretty. The new government is losing credibility very quickly as confidence in its economic competence is fading. In the main question of "Whom would you vote for on Sunday?", the shift away from the SPD is a full 3%. Just six weeks after a very close election, the opposition parties of CDU/CSU and FDP would get a comfortble majority of the seats in parliament. In the election, the CDU/CSU and SPD came in about equal. Now the gap is 7 percent between them. That's a huge swing.

The poll also shows that the government's credibility is suffering. Asked whether the 14 billion euro budget deficit will get larger, 77% said yes. Moreover, the government's claims that the full extent of the budget crisis was only knowable after the election finds no support: a full 84% is not falling for it. The Germans feel cheated and lied to by the government.

The government's plans to reduce unemployment also inspire little confidence. Only 10% of those polled think that the plans are going to reduce unemployment substantially.

So there you have it. The government has made a disastrous start to its new term in office. Were the election re-run today, the result would not even be close. But do-overs only happen in the wet dreams of Democratic operatives; Germany is stuck with the Red/Green government until it implodes under the weight of the country's economic problems. They have no plan, no concept, no clue how to solve them. The German malaise is going to continue, and it's going to be a millstone dragging down other European economies as well.

The sad thing is that even had the election result been different, any hope for a significant change of course in German economic policy would still be far off. The specter of Japan is hovering ever more prominently over Germany. Since unification, Germany has already had something of a lost decade. Growth has been threadbare, and a second decade of stagnation looms. If they don't get serious about deregulating the economy, cutting taxes, introducing more flexible labor laws, disentangle the cross-shareholdings, reform the pensions system, overhaul the socialist welfare state... what was I saying again?

Never mind. It ain't gonna happen.

Well, he's gone

Jürgen Möllemann has resigned. Having become implicated in a illegal contributions scandal, his position had become completely untenable, as came on top of his anti-semitic campaigning. In his resignation statement, he accused the FDP leadership of trying to undermine his recovery from cardiac arhythmia, saying that "Apparently my political death is more important for them than the consequences of their destrucive behavior for the FDP." In reality, Möllemann's resignation will help the FDP, who had been seriously tainted by his remarks. However, it seems Möllemann is unlikely to keep quiet once he has recovered, so there may yet be further convulsions.

FDP still in self-destruct mode

A lot of German news today, it seems. Perhaps it is fitting penance for the light blogging of the last few days. I hadn't paid too much attention to what's going on in Germany, but the fight in the FDP looks to be intensifying. The flap began well before the election, when Möllemann went off on an anti-semitic campaign theme and was not reined in by the party leadership. As part of his election campaign, he sent out an anti-semitic flyer to households in his state of Northrhine-Westphalia. Now there are accusations that the funding for this flyer has come from illegal campaign contributions to the tune of 840,000 euros. The money was donated anonymously in 145 batches of 1000 to 8000 euros at 14 different banks. The addresses of the donors can in general not be traced, but the few people who could be tracked down deny ever having made contributions to the FDP. Significantly, the FDP treasurer Rexrodt (who brought the accusations to the fore) also says that the money may be of foreign origin. That could yet be an interesting development if it proves to be true, as Möllemann is known to be on friendly terms with several unpleasant regimes in the Middle East.

Möllemann himself is currently off the stage suffering cardiac arhythmia, meaning he has not yet had a chance to defend himself properly against these accusations. Given the damage that he has caused to the FDP, these allegations could be seen as part of a payback conspiracy, an easy way to get him out. But I doubt that: this is not doing the FDP any good either, whose finances aren't great to begin with, and if true, this affair will only make the FDP look even worse for not having dealth with Möllemann in the first place.

Government losing ground in Germany

About a month after the close election victory of the Red-Green coalition in Germany, the reality of what this means is beginning to sink in, and German voters aren't too happy about what they've done to themselves. In the first monthly update of the Politbarometer, broadcast on the German ZDF network, the governing coalition has lost considerable ground.

In terms of political mood, the SPD loses 2.5% compared to the election, while the CDU/CSU gains a massive 6.5% to poll at 45%. The FDP loses 1.4% to stand at 6%. This would have given the CDU/CSU with the FDP a clear majority. But the "mood" poll is only a proxy for the immediate short-term mood, and adjustments are made for the "Sunday Question" (elections are always on Sundays), when people are asked whom they would actually vote for, not whom they like best at the moment. The Sunday Question is less volatile, but shows that here too the CDU/CSU would gain compared to the election. It would leave the two competing blocks still very close together, but it looks as though the current government would have been voted out if the election were held this weekend.

The differences between East and West Germany are also big. What is amazing is that in what used to be West Germany, the CDU/CSU would poll 48%, a result that would have been unimaginable for many years. The reality of the poor relationship with the US is also having repercussions, with the SPD losing a lot of support, although it is still in the lead.

Another shift that has taken place is the in Iraq-question. Whereas at the beginning of September 53% of those polled were against German participation of US military action (with a UN mandate), that percentage has now fallen to 43%. Just over half (51%) of those polled now favor Germany participation if the US gets a UN mandate. Only 4% favor German help regardless. On the question of the relationship with the US, 65% of Germans still apparently delude themselves that relations are good, while 33% show a sense of realism and call the relations bad now. This is compared to 76%/20% in September and 88%/9% in May. It is clear the majority of Germans still have not grasped the long-lasting damage that has been done.

One poll does not make a trend, but it does seem as though the Germans are less than delighted with the election result now that they have had time to reflect upon it, and have been bombarded with proposals for new taxes. Also a glimmer of realism is dawning on the foreign policy issues. Big disillusionment with the Red/Green government is nothing new. After Schröder's first victory four years ago, the ruling parties quickly started to sink in the polls once they started to govern. The only thing that kept the losing streak from continuing was the implosion of the Christian Democrats, who became embroiled in the endless sleaze-pit of illegal campaign donations that took place under Chancellor Kohl. For a while, the very survival of the CDU as a political force was in doubt. Anyway, poor polls and poor state election results are nothing new for the Red/Green coalition, and it looks as though we are heading for a repeat of the last four years in this regard. If the CDU can avoid self-destruction, it should be well-placed to give the government a hard time. There are more than enough problems for the government to deal with, and they're not dealing with them very well. There are some state elections coming up in Lower Saxony (Schröder's home state) and in Hessia on February 2nd. This could provide the first electoral setback for the government at the state level. Hessia is currently governmed by the CDU, which won the state after Schröder's first election victory four years ago. Lower Saxony is an SPD stronghold, but bears watching.

Givent the miniscule majority the SPD and Greens have in parliament, any controversial issues (Iraq will come up at some point, and there are others too) could lead to the calculation within either of the two parties that it might be better tactically to allow the government to fall rather than to persist in the coalition. The logic can be convoluted, but by causing the government to fall over a hot issue, the governing party causing it can sometimes gain in popularity. This has happened at times in Dutch elections, although deft maneuvering is required, as the opposite effect also takes place.

It's going to be an interesting period in German politics. I still stand by my prediction that this government won't last the full four years.

New government in Germany

While the government in Holland is falling apart, the new government coalition in Germany has agreed on its platform for the next four years. A roundup of the German press at the BBC shows that it is not meeting with great enthusiasm. I suppose the situation is not as bad as it might have been, had they implemented all the tax hikes they were talking about earlier. Still, the new government looks like it's going to be more left-wing than its predecessor which contained traces of Third Wayism. The new cabinet is very safe as it won't give Schröder any trouble from within the party, but that's also the problem. The people in charge now are, if anything, even less suited to dealing with the severe economic problems Germany is facing. Just today, finance minister Eichel said that Germany's budget deficit would exceed the 3% norm agreed in the Stability Pact. A massive fine of several billion euro could result, although the political reality of Germany's dominant position in the EU might avert it.

Symptomatic of the new government's plans is the new tax on "speculative" profits. This would affect capital gains made on the "wrong" kinds of investments, such as "plots of land not in own use." This shows the deeply-rooted hostility to free enterprise and risk taking that is at the heart of the German government; trying to punish "wrong kinds" of investment is punishing the risk-taking that is essential to economic growth, and it is going to reduce all investment at a time when Germany's economy is doing very poorly. But importantly, this could also affect shares held in mutual funds (the details are unclear at this time), which would undermine the pensions reform that was passed by the previous government (which consisted of the same parties).

It does not look good for Germany. The government is made up of people who not only don't understand the nature of a free economy, but are in fact hostile to it. Raising taxes, as they are doing now, when the economy is stalled and unemployment hovers around 10% is an act of economic folly. The sick man of Europe's condition is deteriorating slowly. How bad will things have to become before he'll take his medicine? If Japan is anything to go by, it could be a while.

Accelerating the downward spiral

When I posted my comment on exceedingly harsh taxation, the Captain emailed me back with a note mildly chastising me for calling him "lucky" to be living in a low-tax country, quoting the Jeffersonian adage that people get the governments they deserve. I certainly agree that this holds water in many parts of the world, and especially in Europe. On the other hand there are some regimes that nobody deserves, such as the harsher despotisms of the Arab world.

However, in most European countries there are elections, and people do get a say in who they want to be governed by. Like the Germans, who went to the polls last week and made their choice. And they are certainly getting the rewards they deserve: tax hikes! In the negotiations about putting together a new government, both the Greens and the SPD have wasted no time in ditching their election rhetoric and are now calling for hefty tax rises. They've already agreed on raising further the so-called "eco-tax," which is a tax levied on energy. Since energy input is a rather essential part of economic activity, this measure alone will hit the already punch-drunk German economy pretty hard. Then there are calls to abolish tax breaks for married couples, "to fund child care." Ah, wonderful lofty goals for yet more government involvement in your private affairs. The government is of course well-known for its efficient and well-run services, so expanding government interference must be a good thing. After all, there are several areas of private life in which the government has virtually no say, and that could be dangerous. You don't want people left to their own devices.

Ah, but that's not all. The prime ministers of the states of Lower Saxony and Rhineland Palatinate are now calling for the introduction of a wealth tax and for higher estate taxes. This for yet another lofty goal, to wit a new "Pact between Generations" to fund better education. And then there's the ever popular sin taxes, which health minister Ulla Schmidt wants to raise to fund health care.

Finally, should by some weird accident there be any entrepreneurial spirit left, the new government is already floating ideas for the coup de grace. They want to undo one of the few things they did get right in the last four years, which is lower taxation on capital gains for companies. This is essential in order to unwind the German equivalent of the Japanese keiretsu system, in which companies have large cross-shareholdings. Especially stultifying are the holdings of banks in their clients. Not only does this affect capital market transparency, it also degrades overall efficiency of the capital allocation process. Many companies do want to unwind their cross-shareholdings, but the punitive tax rates (I think it was 60%) made it very unattractive. In the previous tax reform, these rates were cut. Now they want to undo this as well.

If you have a job, you get taxed on your income. If you have any income left, you buy things, and end up paying 16% Value Added Tax, so more of your income goes to the state. Then if you buy gas, you get hit with a gas tax. But perhaps you are lucky enough to have some savings. Those are taxed too of course. And your investments get taxed as well. Add a new wealth tax on top of that (you mean there would be anybody wealthy after all this?), and chances are that your total net worth is not going be growing very quickly. But let's assume that by some miracle you manage to have some money left by the time you die. At that point, the money gets taxed for a fifth time to prevent you from leaving the fruits of your labor to your children.

In my post-election analysis I predicted more stagnation for the German economy. I think I was too optimistic. If all of this really goes through, the German economy is going to spiral downward once again. The big ominous example that seldom dare speak its name is Japan. For more than a decade now, Japan has been in the grips of a vicious deflationary spiral, and the country is heading for medium-term bankruptcy if no dramatic measures are taken soon. Japan tried to spend its way out of trouble. Germany is trying to tax its way out of trouble (well, Japan tried that too at various times during the last ten years). It has not worked. It will not work. And that's not even touching on the issue of demographics, which exacerbates the situation in both Japan and Germany.

Although I can't resist a small post-election gloat at the horrible misfortune that is now descending like a dark noxious cloud on Germany, the miasma that is wafting over from Holland's eastern border is not a good thing. If any major world economy, which Germany still is, ends up in so much trouble, it has ramifications throughout the world trading system. But it will also put increased pressure on the euro and the entire structure of the European Union, which is already creaking.

This could get ugly. And that's not going to be good for anybody on the European continent.

German election redux

After the drama of election night, it is back to business now that the results are known. The first casualties have already fallen: Herta Däubler-Gmelin is out as justice minister, and Jürgen Möllemann has resigned as second in command at the FDP. Good riddance to both. (Däubler-Gmelin actually lost in her own constituency in the university town of Tübingen, but she still made it back into parliament via the SPD's list. It does show that her comments were not well-received. It's a small consolation.)

Here's an overview of the winners and losers:

WINNER (and loser): The SPD and Gerhard Schröder. They've obviously won in the sense that they're still in power, and in the end that's probably all that counts. On the other hand, they've lost votes compared to four years ago which is also going to shift the balance of power in the governing coalition.

LOSER (and winner): The CDU/CSU and Edmund Stoiber. The inverse of the SPD. More votes, still out of power.

WINNER: The Green Party. This comes as something of a surprise, given that they weren't doing all that well in the polls, and some months ago they were even in danger of not making the 5% hurdle for parliamentary representation. Now they've gained votes and will have a bigger say in the governing coalition. With their deeply-rooted anti-Americanism and utopian environmentalism, this is not exactly going to steer the government in the right direction.

LOSER: The FDP. Again, the inverse of the Greens, as they were doing OK in the polls, and some months ago had a real shot at breaking above 10%. But they blew it, and Möllemann is in large part to blame with his anti-semiitic remarks. But culpability also falls on Guido Westerwelle, who should have gotten rid of him at the first incident, but failed to do so. I think the FDP has missed an historic opportunity for them to expand their voter base in this election. Economically, the FDP was the least bad of the major parties. Let's see where this defeat takes them.

The majority for the Red/Green coalition is very slender indeed. With just a few seats separating the the two blocks, and the shift in the center of gravity within the coalition to the left, this is going make governing a lot harder, as the threat of dissident MPs will hang over the government. Voting against the party whip is fairly rare in continental European politics, unlike in the US. But that's another post for another time.

PREDICTION: This government will not last the full four years of its term. With the only other possible coalition being the "Grand Coalition" of CDU/CSU and SPD, this is likely to mean early elections. (I suppose CDU/CSU and Greens is numerically though not politically possible).

Voting patterns were interesting too. There was a clear north-south divide, with the more prosperous south voting for the CDU/CSU, while the poorer east and north went to the SPD.

SO WHAT'S NEXT? More stagnation. The new government is unlikely to be more reform-minded than the old one, despite its new electoral mandate. True, they've made some small improvements to the pensions system in the last four years, but they're nowhere near enough. And this will yet again be a government that is viscerally ignorant of economic policy; generating economic growth is however the biggest challenge. With four million unemployed (a rate of about 10%) Germany desperately needs more economic growth and more jobs. Without the critically important reform of the stultifying labor market, job creation will remain a pipe-dream. This is also the tenor of the reactions from the business world. The need for deep structural reforms is urgent. They won't happen, because many of the reforms will offend the core Red/Green constituencies, and with a small majority in the Bundestag, pushing the legislation through is going to be difficult. Moreover, the CDU, CSU and FDP have a working majority in the upper house, the Bundesrat, which can block certain types of legislation. Usually I like gridlock, because it means politicians won't be able to screw things up very much, but in this case it will be bad for Germany. More lean years ahead.

UPDATE: American Kaiser has some analysis here. More at Shark.

Election Wrap-up coming up

Well, it's morning now, and Schröder still seems to have won. I'll have more on the reactions and analyses in the German press this afternoon Eastern time. The SPD and CDU/CSU ended up at 38.5% each, the Greens got 8.6% and the FDP 7.4%. The PDS only gets the two directly elected members, and does not get three necessary to have full representation as they remained under 5% nationally. The SPD remains the largest party with 251 seats, just ahead of the CDU/CSU at 247. It's a razor-thin margin, but it should be enough to govern for a while. More on this later.

Very very close

The first exit polls show a razor-thin majority for Red/Green in Germany. ARD puts it at 301 seats, ZDF at 303. Absolute majority is at 300. SPD loses some votes, CDU gains. Big surprise: Greens do better than expected. FDP is doing poorly (Möllemann-effect?). Good news: the communist PDS will likely not make it into parliament.

This is going to be very very close.

UPDATE: ARD now has CDU/FDP in with a razor-thin margin. ZDF has SPD/Green on exactly 300. In German, this is called a "Zitterpartie:" a trembling party. (as in trembling for nerves).

UPDATE 2: ARD has CDU/FDP down to exactly 300, with Red/Green on 298 and PDS on 2. Those 2 come from direct wins in constituencies. ZDF still at 300 for SPD/Greens.

UPDATE 3: ARD has CDU/FDP now on 299, Red/Green on 299 and PDS on 2. A hung parliament, with the 2 communist MPs deciding the fate of the next government. Oh boy.

UPDATE 4: Both ARD and ZDF now have CDU/FDP on 301. ZDF puts Red/Green on 299 with no seats for the PDS, while the ARD still gives them 2.

UPDATE 5: Pendulum swinging again. ARD has Red/Green on 300, CDU/FDP on 298 and PDS on 2. ZDF meanwhile puts Red/Green on 304, CDU/FDP on 297 and PDS on 2. The ZDF numbers don't add up, unless they're taking quirks of the electoral system into account which can change the number of seats (possible).

UPDATE 6: ARD has now added seats too, putting Red/Green on 302, CDU/FDP on 299, PDS on 2.

UPDATE 7: Looks like it's all over. ZDF now has Red/Green on 306, with CDU/FDP on 298. Bah. I think the FDP's poor showing is a large factor; at one point, they were well on their way to get over 10% of the vote, instead of the 7.5% now. And for that blame falls on Möllemann and his Jew-baiting, and Westerwelle for not getting rid of his when it all started months ago. Oh well. Germany will remain irrelevant in international affairs though following the vile anti-Americanism of the left's campaign. Just ignore the bastards.

Careful what you wish for

On the ZDF network's website, there's this. "Toll" in German means "great" or "cool," and today's "great" idea (#523 in a long series) refers to Jesse Helms's statement that American troops should pull out of Germany if Schröder wins the election. The caption under the picture protesting Idiotarians says "Well, get out then!"

Does not sound like bad idea to me. Why pour money into Germany? There are plenty of other countries in Europe who'd be more than happy to host American troops, the safety and security they bring --- and the dollars too.

Go Jesse!

PS: Let's get out of the UN while we're at it.

German elections roundup

Less than 48 hours before we know what the exit polls say, and perhaps we'll even have an idea of the result. The last polls before the election indicate a very close race. There are no last-minute polls it seems, so we won't be able to see the impact of the commotion of the last few days, with Möllemann's anti-semitic flyer and the Bush-Hitler comparison by Däubler-Gmelin. Too close to call right now, and it could swing either way.

The German press has been all over the Hitler comments. The editor of the newspaper in which the comments were published, said that he's "never seen anybody lie like Däubler-Gmelin," when she said she was misquoted. Handelsblatt ran an editorial with the title "Pure cold calculation," saying that these comments and Möllemann's anti-semitic comments were no accident, but a cynical calculation to get more votes. Meanwhile, the Frankfurter Allgemeine Zeitung, Germany's leading serious newspaper, has a few editorials on the subject. In "Altar of Power" they tear into the government's anti-American policies. Translated quotes:

The relations between Berlin and Washington have been more heavily damaged than at any time since the second world war. This has not happened by accident, but consciously and deliberate: the Schröder government has sacrificied the good relationship with America on the altar of power.

Then they continue on the relationship with the US as it is redefining its role in the world:

Foremost are characteristics, which especially in turbulent times (as after the fall of the Berlin Wall) are of paramount importance: reliability, trustworthiness and -- yes, friendship too. The Chancellor has squandered something that had been built up over the course of decades, and that will be hard to regain.

Although the Frankfurter Allgemeine has always been a right-of-center paper, the strength of these editiorials indicates that there might be something of a backlash against the anti-Americanism of the election campaign. But the opposition, led by Edmund Stoiber, is also to blame for the prevailing atmosphere. Instead of taking on the anti-American forces head-on, he has instead pandered to them. With nobody taking a lead, it is not surprising that public opinion has drifted so far off track. This is a far cry from the days of Helmut Kohl and Franz-Josef Strauss, who in the 80s stood steadfast at America's side during the cold war. They both had their problems too, but I suspect they would have taken a stronger line against the left's America-bashing. I still remember Kohl in a TV debate or interview, many many years ago, putting down an pacifist idiot of the left by contemptuously denigrating his "primitive anti-Americanism."

The current leadership of both the SPD and the Greens stems from the decades of anti-American protests, especially in the "peace movement" which protested against the stationing of American cruise missiles and Pershing II's in Germany. The current German government consists of quite unwholesome people, who chose the side of the Soviet Union during the cold war. The loathsome foreign minister, Joshka Fischer, was engaged in violent protests in the late 60's and early 70's. Otto Schily, the interior minister, was the lawyer who defended in court the terrorists of the Rote Armee Fraktion.

What is really galling though is that not only did these people choose to side with the Evil Empire, and were subsequently shown to be on the wrong side of history and humanity, they never even bothered to apologize for their past support of brutal totalitarian dictatiorships. And they now run the country.

German elections coming up

Sunday Germany will go to the polls to elect a new parliament. The latest opinion polls put the incumbent government coalition of SPD and Greens slightly ahead of the CDU/FDP challengers. Only the Allensbach poll puts the CDU/FDP ahead.

For more information, there's Shark Blog with a good chronicle of the Mölleman's anti-semitic mini-campaign and then there's American Kaiser, who's running a four-part series on German politics.

In part I, he writes:

Schroeder needs the votes. He has no other way to win--the voters don't like his domestic policies. If he didn't demonize the US and create an issue, Schroeder would be massacred at the polls. So the attempt to show German machismo in the face of wanton American imperialism is really just a ploy for votes.

and then in part II:

he SPD has accomplished close to nothing, creating a quagmire with which Germans are quite upset. Unemployment has skyrocketed. In a referendum on domestic issues, Schroeder would be defeated handily. But as long as he shifts attention away from the problems facing Germany today, he will remain in the race.

I certainly agree that the posturing on Iraq is a shameful ploy for votes, but the domestic political situation is more complex than Kaiser depicts. It is true that on some domestic issues, notably the economy, Schröder has lost some of the electorate's confidence, but he's catching up. ZDF is one of the public TV networks in Germany, and they have since time immemorial cooperated with Forschungsgruppe Wahlen ("Election Researchgroup") to conduct demoscopic analyses. Their latest findings (from last Friday), show that Schröder personally is still popular, and beats Stoiber 59% to 34% in a straight popularity contest. If you click on that page on the "Bildergalerie" on the right, you will be taken through a series of graphs with poll results. One shows that the public is slightly more satisfied with the government (+0.5) than the opposition (+0.4). In part this is no doubt due to the pandering to the anti-Americanism in the population.

But there is another effect too: the floods that ravaged Germany a few months ago probably saved Schröder's bacon. To pay for the rebuilding, the tax reform has been postponed, and this has allowed the SPD to catch up on the crucial issue of economic competence. The CDU/CSU still has a slight lead (33 to 30), but that's down from 34 to 24% a week ago. On the creation of jobs, the lead is now 35 to 29%, down from 37 to 26%.

There is a lot of disappoinment and resentment in Germany about the poor economic performance. But none of the political parties, aside from the occasional flutter from the FDP, has a plan to attack the causes of the economic sclerosis. It's all just tinkering at the margin. The labor unions are still locked into antediluvian economics; they argue they need huge wage rises so that domestic demand be stimulated. To propose true free market reforms is political suicide. And the capacity to put up with economic mismanagement is cultural. Some cultures rebel, others plod along. Witness Japan, which has been in a slump for over a decade now. Germany is headed down the same path. The pain will have to become much greater before true reforms stand a chance.

Referring to the labor market, Schröder once famously said that he doesn't want "American conditions" to prevail in Germany. I take that to mean that he prefers 10% unemployment to 5%. Perhaps he'd care to explain that the 2 million extra unemployed. And this is before taking the average length of unemployment into account, which is much higher in Germany than in the US.

My prediction: much as I hate to say it, the ruling Red/Green coalition is going to squeak in by a thin margin on Sunday.

German "Attorney General" says Bush is like Hitler

Herta Däubler-Gmelin, Germany's "Minister of Justice," a position roughly comparable to the Attorney General's in the US, has made waves in Germany by comparing Bush to Hitler. (German version here.). At a meeting of labor union members she said that Bush's plans for attacking Iraq are a way to distract from his domestic problems, "a favorite method since Hitler." Her in-depth analysis of US domestic politics continues: it's not about oil, because "the Americans themselves have enough oil anyway." It's Bush's domestic problems that are the true reason for wanting to wage war in Iraq; with just 70% approvral ratings, that is understandable.

Being in charge of Germany's justice system, she also threw in that Americans "have a lousy legal system," not in the least because of the death penalty. Then she added that if today's insider trading laws had been in force in the 80's, Bush would now be in prison.

Of course, once the storm over her comments started to brew, she clarified everything: "I did not compare the persons of Bush and Hitler, but their methods." Ah, that clears it up then. But wait, there's more: she also said it's an evil campaign trick to say that she compared Bush to Hitler. Well, if that's the case, she played it on herself, finds herself up a creek full of a substance which flows freely within her head, lacks a paddle, and is now trying desperately to salvage the situation. More of her hypocrisy: "I would be very sorry, if this affair would cast even a tiny shadow on the respect that I have for the American president." So she compares him to Hitler and says he's a crook who ought to be in jail. That's some respect you've got there.

The storm in Germany is brewing though. Guido Westerwelle, the leader of the Free Democrat Party has called for her resignation, and called upon Schröder to fire her if she does not go voluntarily. He also said: "Who in the presence of 30 labor unionists makes this statement and then comes up with the excuse that she had not been informed of the presence of the press, only underlines a mentality that is not acceptable in government. The excuses of Däubler-Gmelin only make matters worse."

The Secretary General of the Christian Social Union, the Bavarian offshoot of the Christian Democrats, accused the government of "campaigning with anti-Americanism." He also said he detected a planned "escalation of the debate," with first the German Go-It-Alone route on the war, then the Social Democrats' parliamentary leader comparing Bush to Caesar, and now the culmination with the Nazi comparison. Finally he said that the Social Democrats are trying to create the impression that the real enemy is Bush, and not Saddam.

I just wish more German politicians would voice that kind of view. It'd be a start, at least.