[PEN-L:28601] Is Germany turning Japanese?

["Devine, James" <jdevine@xxxxxxx>]

Title: Is Germany turning Japanese?

From the current BUSINESSWEEK --

Japanese-Style Woes in Germany

Chronically weak growth, minimal inflation, mediocre productivity, and a plunging stock market: Today's Germany looks much the way Japan did in the early 1990s. If Berlin doesn't take urgent action to deregulate sclerotic markets and give the economy a boost, economists warn, the nation could get sucked into a vicious Japan-style circle of near-zero growth, declining competitiveness, and falling prices.

[[deregulate? why does that help?]]

"Gone are the days when Germany was a locomotive for the rest of Western Europe," says Jörn Quitzau, an economist at Deutsche Bank in Frankfurt. "The fear now is that it could become a second economic trouble spot [like Japan], with little momentum and reliant on other countries for most of its growth."

The situation isn't as bad as it is in Japan. Unlike Japan, Germany is expected to show positive growth in 2002, and the country has still not sunk into deflation (chart [[not shown here]]). Moreover, because Germans are covered by generous social security schemes, they don't need to build up huge precautionary savings accounts, as the Japanese have done. As a result, domestic demand has held up better in Germany. And while problem loans are mounting, German banks are far stronger than their debt-laden Japanese counterparts.

[[It's about time we heard something good about social security!!]]

But Germany's prospects are deteriorating by the day, and policymakers are unwilling or unable to take action. The Bundesbank can't cut interest rates to kick-start growth--it lost the freedom to do that when the euro was launched in January, 1999. And it's difficult for the government to oil the wheels with extra public spending or tax cuts since its budget gap is very near 3% of gross domestic product, the ceiling imposed by the European Union's Stability & Growth Pact. With a general election in September, neither the government nor the opposition is willing to champion much-needed but unpopular reforms, such as labor market liberalization.

[[good!]]

Many economists predict that whoever wins the election will come under intense pressure from business, the financial markets, and Germany's European Union partners to force through major changes, especially painful restructurings. But, like Japan, Germany is governed by consensus, which makes it difficult to enact controversial reforms. "The consensus society is unlikely to provide the flexibility needed in today's rapidly changing business world," says Quitzau. Germany and its trading partners could be about to find that out the hard way.

[[Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine]]