Outlook for 2010: German Economy on Brink of Radical Restructuring

By SPIEGEL Staff

The German economy coped astonishingly well with the global crisis in 2009. But in 2010 it will need to lay the foundations for a radical restructuring if it wants to cope with chronic overcapacity in its aging industries and fend off powerful new competitors from China and India. Does the country need a new business model? SPIEGEL provides an outlook for 2010.

A windpark near Malmö built with the help of Siemens: Germany is betting on future-oriented technologies, such as wind energy. Zoom
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A windpark near Malmö built with the help of Siemens: Germany is betting on future-oriented technologies, such as wind energy.

The ship-launching ceremony at the quayside of the German North Sea port of Emden was decidedly low-key. No one held a speech, and there was no orchestra as the container ship Frisia Cottbus slipped into the water shortly before Christmas. The mood was as somber as a funeral, which wasn't surprising because the launch marked the quiet end of a proud era -- it was the last container ship that will ever be launched by the Nordseewerke shipyard. Its 106-year history of shipbuilding is over.

The company survived the 1929 global depression, when it was temporarily closed for lack of orders, and the post-war era when the Allies initially forbade Germany to build new ships. Its output ranged from submarines during World War II to frigates for the modern German navy. It also built the cruise ship Pacific, which later became famous due to its appearances in the cult US TV series "The Love Boat."

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Photo Gallery: German Economy Faces Deep Restructuring
But now the parent company, ThyssenKrupp, sees no future for shipbuilding in Emden, and the outlook isn't much better for the other German shipyards. Six of a total of 40 firms in the sector filed for insolvency in 2009. No other industry has been worse affected by the global economic crisis.

But the death of shipbuilding in Emden may herald the beginning of a new industry. The new owner of the yard, SIAG Schaaf Industrie AG, plans to convert it to building steel underwater foundations for wind farms. If the purchase agreement is signed and sealed in January, as planned, company owner Rüdiger Schaaf will invest €40 million ($58 million) in new equipment and transform Emden into a center for wind-power engineering. Under Schaaf's plan, a total of 720 out of 1,200 shipyard workers will keep their jobs.

Painful Transformation

Schaaf has likened the industrial transformation underway in Emden to that of the Ruhr coal and steel region of western Germany. The Ruhr is still struggling to cope with the loss of its former core industries in recent decades. And it's totally uncertain whether the industrial conversion in Emden will succeed. There's no doubt, however, that the change is necessary -- and painful. In Emden. In the Ruhr region. Everywhere in Germany, in the third year of the global crisis.

Germany is on the threshold of a tremendous upheaval, and 2010 will show how it will cope with the decline of old industries and the emergence of new ones. It will be a year of renewal for Germany, but also a year of uncertainty for companies and their employees. The foundations for the future of Germany are now being laid. Now is the time when German firms will find out which products remain globally competitive, and which ones won't. It's already been made clear that there's no world market anymore for container ships, mass-produced clothing, mobile phones or consumer electronics made in Germany. Others can produce those things more cheaply, and better.

This crisis is accelerating the pace of structural change. These days, an increasing number of foreign competitors are capable of producing things that had previously been the domain of German companies. The crisis is exacerbating the process because it has made customers focus even more heavily on price, thereby subjecting businesses to merciless scrutiny in terms of their cost efficiency and quality.

So far, Germany, which has long been the world's biggest exporter, has coped surprisingly well with the global downturn. Germany today is in a far better position than many had feared a year ago, when unemployment had been forecast to reach 5 million. The start of 2009 had been accompanied by gloomy predictions of mass layoffs and even social unrest. None of that happened. German consumers even carried on spending.

Other Industrial Nations Fared Worse Than Germany

The economy shrank by around 5 percent -- more than in any year since World War II. But unemployment rose by just 230,000 from 2008. France, Spain and many other industrial nations reported alarming increases in jobless rates; in the US, the unemployment rate has doubled since the start of the crisis (see graphic).

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Image Gallery: The German Economy in Graphics

Until recently, many observers, especially Anglo-Saxon ones, had criticized the German economy as being too sluggish and unfit for the challenges of the 21st century. The welfare system, they said, was a major burden on Europe's largest economy. But Germany's "old economy" has so far performed well in this crisis, and its social safety net has helped to guarantee stability.

But the economic calm in Germany could be deceptive -- because it's financed by credit. The government has run up unprecedented debts to save the banking system and stimulate growth. New borrowing by the federal government alone will total almost €86 billion ($123 billion) in 2010. And the banks' balance sheets still contain risks of several hundred billion euros.

Germany's state finances will remain a problem for years. Finance Minister Wolfgang Schäuble will have to save €60 billion in the years 2011 through 2016 -- that's €10 billion a year -- to bring the budget back in line with the EU's deficit requirements and Germany's own self-imposed deficit limits. Chancellor Angela Merkel's new center-right government is worsening the budget problems with its plan to cut taxes by €20 billion beginning in 2011.

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