2005 November 13 Sunday
Stephen Roach Says German Economy Restructuring

Morgan Stanley chief economist Stephen Roach says Germany is restructuring for more rapid growth.

Germany, despite its bad press, is very much on the move. Yes, it still has one of the most expensive and rigid labor markets in the world. But the rigidities are not as severe as they were just a few years ago. For example, German labor unions have lost significant power in recent years -- they no longer bargain across industries but confine their negotiations to individual companies. Moreover, led by the metals sector, Germany is now moving away from the shortened 35-hour work week. And in an effort to avoid the high fixed costs of hiring and firing, Corporate Germany has hired increasingly large numbers of part-time workers and contract temps; collectively, such “flexi workers” currently make up about 39% of the total German workforce -- up sharply from the 29% share a decade ago. At the same time, German businesses are now moving aggressively to increase IT spending -- making up for the shortfall in the late 1990s; the IT share of German capex has increased from 30% to approximately 50% over the past ten years. Last but hardly least, there has been a dramatic recent increase in German corporate restructuring; M&A activity in Germany has increased from $73 billion to $138 billion over the last three years.

Read the whole thing. He lays out some other facts that suggest Germany might be doing what needs to get done to get on a faster growth track.

Share |      By Randall Parker at 2005 November 13 10:22 PM  Europe and America

John S Bolton said at November 13, 2005 11:58 PM:

The persistent low growth and high unemployment there, is a demonstration of the extreme difficulty of absorbing a large influx of low income people into a welfare society, even when they speak the same language. A welfare state with openness like that has to reverse productivity growth, if it is to accomodate that many additional. You have to use more labor and less capital, and at lower wages, to keep unemployment from rising to depression levels. Many Germans may believe that they are the best, because they are open to the worst. If one reverses productivity growth to allow employment to rise, the part of the economy which produces productivity enhancing equipment must wither, and that is the part of the economy which sparks per capita growth. They need to induce a tightening of the labor supply through emigration of those there on sufferance, or let wages and productivity enhancing investment fall sharply, and resume growth from the lower base.

Kenelm Digby said at November 14, 2005 4:26 AM:

Germany's key strength and its key resource: The German people.By this I mean the "VolksDeutsch".

Silchiuk said at November 14, 2005 4:29 AM:

Randall Parker is important to resist being gullible. This report sounding much like sales pitch with same persuasion methods not sound data. When society so easily sway by propaganda is no solid anchor. That is the way to Hitler.

daveg said at November 14, 2005 6:50 AM:

When society so easily sway by propaganda is no solid anchor. That is the way to Hitler.

Oh please. The propaganda is far more likely to come from the WSJ, which constantly tells how bad things are in germany. I can tell you that you are just not comparing apples to apples. If you go to Germany (which I have) the people are far more happy and far more satisfied with their current job prospects. The country feels far richer and well of than the US, which has poor immigrants hanging around looking for work, which the WSJ seem to see as a good thing.

Anyway, there may be propaganda, but it is far more likely to come from the WSJ and similar ilk.

seelow heights said at November 14, 2005 11:18 AM:

"When society so easily sway by propaganda is no solid anchor. That is the way to Hitler."
Propaganda would have got Hitler nowhere without the extreme economic difficulties Germany faced, the threat of thr KPD and the Soviet Union,and,(finally) the blundering machinations of Franz Von Papen.

Invisible Scientist said at November 14, 2005 1:16 PM:

If Germany gets totally Americanized, then the Germany people will also learn what it means to see 10 % of the society own
90 % of the wealth, and what it means to see 1 % of the society own nearly 50 % of the wealth... Darwinism is absolutely great for those who make it, but for the ones who cannot make it, there will be a lot of complaints, and in particular, a more violent anti-immigrant movement, which is nothing abnormal in Germany...

Marvin said at November 14, 2005 2:28 PM:

IS's statistics do not seem to add up:
The wealthiest 1 percent of households owns roughly 33.4% of the nation's net worth, the top 10% of households owns over 71%, and the bottom 40% of households owns less than 1%.

This site has a graphical representation of wealth distribution.

Wealth will be distributed unequally in any society that is not artificially (and hypocritically) subjected to forced equality. Even in such societies, there is always an elite who run things, who theoretically control nearly 100% of the wealth, and comprise far less than 1% of the population themselves. The former USSR is a good example of such hypocritical pseudo-equality.

Invisible Scienstist said at November 14, 2005 3:40 PM:


Thank you for the web site that you mentioned, but please note that the data they have is from 2001, AFTER the stock
market had gone down substantially, and BEFORE the real estate bubble that has reached historic proportions.

Let me illustrate how the real estate bubble MORE THAN COMPENSATED for the stock market decline:

Please note that at the stock market peak in March 2000, NYSE was worth approximately $10 trillion and NASDAQ was worth approximately $6 trillion, so that even if you include the American Exchange and other peripheral stock exchanges, the total value of the stock market was approximately about $16 trillion at that time in March 2000, but then after the market decline, when the Standard and Poor 500 lost 50 % of its value and NASDAQ lost almost 80 % of its value, there was some bounce, and so right now the value of the stock market is about $10 trillion, still considerably below the peak, but only down about 33 %, which is close to the 2001 value of the stock market where your figures come from.

Now let us observe that during the past 5 years, the global worldwide real estate valued appreciated by $30 trillion, to a present total value of $70 trillion. Clearly, probably only 30 % of the global real estate value is in the United States, but to be sure, this would make a clear $10 trillion addition to the net worth of mostly the top 10 % of the people in the United states. This is why the 2001 figure you are citing where the top 1 % only owned 33. % and where the top 10 % woned only 71 %, almost certainly reached the PREVIOUS state in March 2000 when my figures were reflecting the situationof MARCH 2000 at the peak of the stock market bubble.

But please wait: There is a lot more I must say here... This time I am not just talking about ephemeral things like stocks that can crash or even real estate that can decline and even burn. This time I am talking about the new cash that the US government printed by issuing treasury bills and treasury bonds to the rich to borrow $300 billion per year for 4 years between 2001 and 2004 for DEFICIT SPENDING. This means that at least another $1 trillion in cash was added to the wealth ot the upper class during the last 4 years. This is because when the government gives $100 dollar to the average citizen in the street, that person immediately spends that money and buys from the rich, transferring that government deficit to the upper class, while the upper class is STILL keeping the treasury bills the government sold them during the same year for that cash they recovered during the same tax year.

Thus your figures from that 2001 web site, get correctly extrapolated to the current situation.

But now, let me also point out that the web site you have mentioned above, ALSO says that the lower 40 % of the society owns less than 1 % of the wealth. This is the most important part you have omitted.

Please note that the inflation adjusted salaries in the United States, are actually declining at a rate close to 2 % per year. This would make the lower 70 % of the people 20 percent poorer in 10 years.

I am not saying whether this is good or bad, but what I AM saying is that we now have a mathematical way of extrapolating what will happen in the world in another 20 years. It really seems that in the absence of world wars, cataclysmic earthquakes or volcanic eruptions, the distance between the upper and lower class will continually grow in such a way that by 2025 the top 5 % will almost certainly own 95 % of the wealth, and the lower 75 % will own less than 1 %.

But even what I said in the last paragraph above is NOT something that I direcly worry about. Returning to what Randy was saying about Germany, what I worry about is the well established fact that when the new wave of hardwhips for the many Germans who will have to endure a more difficult life-style starts influencing the public opinion there, you will see more racial violence, and possibly mass deportations, and this will add more to the fuel to the war between East and West.

Marvin said at November 14, 2005 3:50 PM:

The website includes numbers from 1983, 1989, 1992, 1995, 1998, and 2001. The pdf file at the bottom is also quite fascinating.

You fail to illustrate why your "numbers" are based on anything more substantial than your own whim. Extrapolation? What was your method? What did you base it on?

If you look more closely at the website linked to, you will see that over two decades, through substantial shifts in stock prices, the percentage of wealth owned by the lower 40% was virtually unchanged.

You will also see that income, the source of future wealth, is distributed differently than wealth. You should also be aware that there is a certain amount of turnover at the upper end of the wealth spectrum, in a relatively fluid society such as the US. In Europe that is far less likely to be true.

Invisible Scientist said at November 14, 2005 6:34 PM:

The "numbers" I was talking about was simply the enormous real estate value appreciation that benefited mosly the top 10 % and not so much the lower classes. This was between 2001 and 2005, after the web statistics of that web site were based on the 2001 figures.. The real estate appreciation was in the many trillions and it was added to the upper class. Additionally, the US government deficit spending between 2001 and 2005 was about $1 trillion (CASH THIS TIME!), and once again, that extra cash (fresh money, new money) went to the top 10 %, the lower classes broke even (or broke down). So if you add those recent gains during the last 4 years to your 33.4 % figure, you can easitly get a figure that is well above 45 % of the wealth for the top 1 %.

lindenen said at November 15, 2005 1:04 AM:

Not so fast. They're also, get this, Raising taxes! Hahahahaha And Americans are considered the dumb ones.

Ned said at November 15, 2005 6:01 PM:

I don't buy Roach's analysis. What he says is true enough - the use of flexi-workers is increasing, the unions have had their wings clipped a little, IT spending is increasing - it's just not nearly enough to reverse decades of economic stagnation. The higher taxes issue is a good one and was described in the last post. Productivity per hour worked is not a factor. The Germans work hard and efficiently when they work - productivity per hour worked has traditionally been equal to or better than the USA. The problem is that the Germans don't work enough. Look at this:

"Many analysts have attributed the U.S.'s high per capita income to higher U.S. productivity -- that is, output per worker. The OECD report found, however, that relative to other industrial countries, higher U.S. incomes are "largely due to differences in total hours worked per capita," not differences in output per hour. U.S. productivity growth has accelerated since the late 1990s, which has widened the U.S. lead in per capita income, but rising hours also have been "a major factor," the report said . . .
. . . The increase in how much Americans work reflects two trends. The first is that the proportion of working-age Americans who work has risen as more women enter the work force. In other industrialized countries, that trend has been offset by higher overall unemployment, earlier retirement and declining work-force participation of young people. Last year, 71% of the working-age population in the U.S. had jobs, compared with an OECD average of 65%.

The second factor is that among Americans who have jobs, the number of hours worked per year has edged down only slightly in recent decades, whereas hours worked have fallen sharply for workers in other countries due to shortened work weeks and increased vacation and holidays."

In the period 1970-2002, hours worked per capita declined 17% in Germany and increased 20% in the USA.

There are other factors as well. The eastern provinces remain pretty much an economic
wasteland after 45 years of communism. Most German workers have it pretty good - decent jobs, reasonable pay, 35 hour work weeks, six weeks vacations plus 12 or so holidays - not so bad. They don't want to give it all up. And everybody talks about economic stagnation and chronic double digit unemployment, but nobody really wants to do what is necessary to fix the problems. The unions are much more powerful than in the USA and more or less own one of the two major parties - the Socialists (SPD). Gerhard Schroeder's anti-capitalist and anti-American remarks were targeted to this core constituency. Union members make up to half the members of the boards of many large companies. Plus there's really no strong conservative political party in Germany - the Christian Democrats are only slightly to the right of the Socialists and never change things very much. The recent elections show that most of the voters don't really want to alter conditions. There's very little entrepreneurship, at least by American standards, and small business, which is where most of the new jobs come from in the USA, isn't nearly as strong in Germany. And then, there's the German media, which are all shrilly leftist, anti-American and multiculturalist. There's no German Rush Limbaugh or Fox News Network. The German media portray anything bad that happens in the USA as an example of the failure of the American system, while disasters in Europe are the results of acts of God, global warming or some other such nonsense. A good example is the contrasting coverage in the German media of the 2005 hurricanes which struck the US versus the 2003 European heat wave (mild by American standards) which caused over 5000 (mostly preventable) deaths in France alone.

None of this should be taken as a putdown of Germany or the Germans. I like them and their wonderful country enough to visit them every year, mostly just for the joy of losing myself in their culture and speaking nothing but German for a week or two.

Invisible Scienstist said at November 15, 2005 6:33 PM:

One reason the Europeans can afford so many nice vacations and short work weeks and many other benefits, is because the United States is subsidizing them since 1982 with an annual trade deficit which has always been over $200 (which recently increased to over $400 billion during the last few years, and over $600 billion this year). To be sure, an interestingly enough, the European Union has a positive trade balance with the OPEC countries, because an important portion of the money the we the Americans spend to pay for foreign oil, is basically spent to by OPEC countries to buy European goods and services.

BOTTOM LINE: If for any reason, the United States is forced to severely cut the foreign trade deficit, Europe will be in very deep trouble, I am not talking about severe recessions, I am talking about depressions in Europe.

Randall Parker said at November 15, 2005 7:03 PM:


A few things to consider:

1) Higher European unemployment rates boost average European worker productivity. How? By keeping low IQ and low productivity workers out of the work force.

2) A larger percentage of working age adults have lower IQs and hence lower productivity potential. So the real comparison needed is productivity of equal IQ people in the US, France, Germany, etc. I think the US has a bigger lead there than is generally realised.

3) Those flex time and temporary workers are under much greater pressure to perform. A declining percentage of German workers have the protection of being able to work fewer hours. I expect this'll eventually start to show up in measures of time worked.

4) Germany and Europe have one huge problem: Their populaces are going to start shrinking while their average IQs drop due to immigration. Smaller and dumber workforces. The US has the problem of larger and dumber workforces.

Ned said at November 16, 2005 6:22 PM:

RP -

What you say is true. But I think the gorilla in the room with regard to future German (and European) competitiveness is the astoundingly bad European demographic data. Consider:

Europe faces a demographic time-bomb with plunging birth rates and an ageing population posing a real threat to economic prosperity over the next 20 years.

A European Commission's Green Paper on Demographic Change says that from now until 2030 the EU will lose 20.8 million (6.8 per cent) people of working age.

By 2030, Europe will have 18 million fewer children and young people than today while there will be two people of working age for every one aged over 65.

According to European employment and social affairs commissioner, Vladimir Spidla, the looming crisis raises issues that are much broader than older workers and pension reform.

"This development will affect almost every aspect of our lives, for example the way businesses operate and work is being organised, our urban planning, the design of flats, public transport, voting behaviour and the infrastructure of shopping possibilities in our cities," he said

"All age groups will be affected as people live longer and enjoy better health, the birth rate falls and our workforce shrinks. It is time to act now. This debate on European level is a first step."

By 2030, the report finds, the number of "older workers" (aged 55 to 64) will have risen by 24 million as the baby-boomer generation become senior citizens and the EU will have 34.7 million citizens aged over 80 (compared to 18.8 million today).

Average life expectancy has also risen five years since 1960 for women and nearly four years for men. The number of people aged 80+ will also grow 180 per cent by 2050.

At the same time, the EU's fertility rate fell to 1.48 in 2003, below the level needed to replace the population (2.1 children per woman).

As a result, the EU's population will fall from 469.5 million in 2025 to 468.7 million in 2030, with Britain and France the only two large states that will experience a rise in population over the next half-century.

In contrast, the US population will increase by more than 25 per cent between 2000 and 2025.

Pointing out that modern Europe has never experienced economic growth without rising birth rates, the report suggests that "ever larger migrant flows may be needed to meet the need for labour and safeguard Europe's prosperity" – a direct challenge to the growing tide of immigration restrictions proposed by EU member states.

How 'bout them apples? It appears that our European friends will, in the near future, be faced with the choice of allowing millions more (mostly Muslim) immigrants to enter the EU or of kicking them out and facing an economic catastrophe. This problem is not unique to Europe - Russia and Japan are also facing demographic timebombs. The US also has some problems, but not nearly of this magnitude. The European slide into irrelevence is accelerating.

Kenelm Digby said at November 17, 2005 3:46 AM:

The report you cite is utterly worthless.
It is left-wing, Marxist, immagrationist propaganda masquerading as serious work in order to fool the gullible into accepting unlimited relacement third world immigration.
The fact is that Europe has many more "workers" than there are jobs, and this situation will continue indefinitely.
Would you call the young "scum" who rioted in France recently productive workers who add to wealth or unemployed welfare parasites?

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