Wirtschaftswunder 2.0: German Economic Boom Creates Job Machine
Experts in the government and academia are astonished over the strength of Germany's economic recovery. Unemployment is declining more rapidly and the government coffers are filling more quickly than during any other economic recovery in postwar German history. What's causing the powerful economic upswing?
Construction of a new shopping center in Hanover: A boom unlike any seen in Germany in years
Holger Gehlhar, Axicorp's founder and owner, expects sales to jump from last year's figure of 50 million ($68 million) to 80 million this year, and he also plans to boost the workforce by 50 percent -- translating into 70 new jobs. "This year was the best in the five years since we have been in business," says Gehlhar.
Friedrichsdorf isn't the only place where the local economy is booming. In the southern Bavarian town of Kempten, Dachser, a logistics firm, plans to hire 1,000 new employees, including 400 in Germany alone. According to Bernhard Simon, the company's CEO, Dachser increased its staff by the same levels last year. By the end of this year, the family owned company will employ 8,600 in its domestic operations, and increase of more than 10 percent over 2005. "Our business is doing so well because our customers' businesses are doing well," says Simon.
"Back on their feet again"
Similar stories of vibrant success can be heard all over Germany, which is experiencing the kind of surge in economic energy it hasn't seen in a long time. "German companies are simply squarely back on their feet again," says Simon.
His words could apply to just about any place in Germany. The recovery has developed a strength that exceeds even the most daring expectations. From one end of the country to another, companies large and small are beefing up their workforces.
The hiring wave has made a clear dent in labor market statistics. From March 2006 to March 2007, the number of people seeking employment declined by close to 900,000, the strongest drop in postwar German history. And it's expected to continue.
Graphic: Germany's economic turnaround
The economic researchers also predict that the economy will grow by 2.4 percent annually both this year and in 2008.
The German government plans to use these estimates in its own forecast, possibly taking a slightly more conservative approach with a 1.7 percent forecast of economic growth, for 2007. In doing so Berlin will finally be sounding an optimistic note.
German growth is now approaching the level of economic growth in the United States. The US economy has experienced between three and 4 percent annual growth in recent years, but coupled with strong population growth; whereas population growth in Germany has stagnated. When the two countries are compared using the more meaningful statistic of per capita growth, Germany and the United States are growing at about the same rate.
And if predictions are true, American conditions are also beginning to take hold in the German labor market. Government experts estimate that the number of jobless will fall to close to the 3-million mark next year.
The labor market isn't the only area where improvement is on the horizon. Germans interested in perusing the state of Minister of Finance Peer Steinbrück's federal budget can find themselves witnessing something akin to a miracle recovery. Tax revenues are growing from month to month, and growth rates compared to the previous year are in the double digits. The national deficit -- that is, the amount of money federal, state and local governments, together with social security programs, owe -- is shrinking. According to the economic research institutes, the federal budget will be balanced by next year. To put that figure into perspective, only two years ago Germany was bumping up against the 3-percent limit for new debt stipulated under the European Union pact that ensures the stability of its common currency, the euro.
The new German dynamism under Chancellor Angela Merkel is attracting attention abroad, too. The London-based Financial Times, notoriously critical of Germany, writes admiringly of a "new economic miracle" -- and even suggests that less dynamic economies, such as France or Italy, might be well-advised to look to Germany as a model.
What's driving the recovery?
But what's driving this recovery? Why are the labor market and tax revenues responding so rapidly and forcefully this time? Experts are also examining the hypothesis that an additional percentage point of growth now generates more taxes and more new jobs than it would have in the past. And if this is the case, they want to know why.
Economic experts agree that when it comes to tax revenues, it is still too early to answer this question unequivocally. The accepted rule of thumb 10 years ago was that an additional percentage point of growth translates into the same increase -- 1 percent -- in government tax revenues.
"This relationship actually became weaker in past years," says Michael Thöne, director of the University of Cologne's Center for Public Economics. For years, the rule of thumb was that 1 percent growth led to revenue increases of only 0.6 percent, a discrepancy partly attributed to tax cuts put in place at the beginning of the decade. But recently, researchers began noticing a shift in the trend.
"Taxes on profits, in particular, are increasing to a greater extent than we would have expected," says Heinz Gebhardt, a tax expert with the RWI Essen economic research institute. The reason is that in past years, when growth and profits were fluctuating, companies were only required to remit smaller estimated tax payments to the tax authorities. But profits have jumped in the last two years, and retrospective taxation is now being applied.
More jobs, greater consumerism
At the same time, the tax authorities are requiring higher estimated payments. "This sort of two or three-year lag is normal during a recovery, but not to this extent," says Gebhardt.
Income tax revenues have also increased, and for a very simple reason: Hundreds of thousands of the previously jobless have found new jobs and are paying taxes again. Another beneficial effect for the federal and state tax authorities is that sales tax (VAT) revenues are increasing because people with new jobs tend to consume more readily than those receiving unemployment benefits.
The effect has been even stronger on the labor market. The number of jobs being created in the current upswing far exceeds the new job growth experienced during earlier recoveries. Experts at the Economics Ministry have analyzed the problem and come up with some numbers to describe it. Between 1992 and 2000, at least 1.5 percent annual growth was necessary to create new jobs. However, this employment threshold has declined considerably to a current level of 1 percent. The result is that the job buildup begins earlier and is stronger during times of increased growth now than it was in the past. The trigger for this new mobility in the German employment market, once decried as decrepit, was a series of reforms, that were criticized individually but brought improvements as a whole.
Temporary employment companies experienced the first wave of new employment. These businesses only began to flourish when the German government lifted almost all restrictions on the industry, thereby circumventing the barriers to employment caused by job protection.
Meanwhile, companies are once again hiring full-time employees. A large number of so-called "alliances for jobs," under which employees waive certain rights to employers in return for job guarantees. These programs take place at the company, rather than federal level, and they have eliminated barriers to hiring blue-collar workers. As a result, working hours were extended in many places, bonuses were eliminated and salaries were even reduced. Although all of this was painful for employees, the end result is that companies are now creating more jobs than are being cut or outsourced overseas.
- Part 1: German Economic Boom Creates Job Machine
- Part 2: Schröder's Reforms Pay Dividends
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