German companies are attempting to retain their competitive advantage by cutting costs, shedding workers, outsourcing and moving output abroad, as well as negotiating longer hours for less pay. Volkswagen has axed 20,000 jobs. At Daimler, 160,000 workers have agreed to pay cuts and increased hours in return for a pledge of no redundancies before 2012. Metalworkers union IG Metall recently demanded a 5% wage rise for its 3.4 million workers but has since backed down and agreed to a more modest 3%.
For decades, unions and management have been negotiating on the basis of an entire industrial sector, with some companies reserving the right to opt out of the system. But the technology revolution has changed the balance, and the disparity between wages for high- and low-skilled workers is widening. In consequence, more companies are opting out. Behind the scenes, “many firms are wriggling out of the rigid rules of sectoral wage bargaining,” explains Katinka Barysch, chief economist at the Centre for European Reform.
Reforms must extend beyond labor flexibility in wages, hiring or firing. According to Axel Merk, manager of the Merk Hard Currency Fund in Palo Alto, California, red tape and reams of regulation desperately need cutting. Merk points to excessive power wielded by local bureaucrats. For example, he says, every business is audited every two years. “Germans get things done despite these huge distractions,” he comments. “But they need to spend more time and efforts on genuine productivity.”
Mind-boggling numbers from the World Bank and OECD reflect the criticism. German businesses must cope with 2,100 laws, 47,200 rules and 3,100 regulations. This maze of regulations costs the country somewhere between E46 billion and E80 billion a year, with 80% of that burden falling on smaller and medium-size businesses, the Bonn-based Institut für Mittelstandsforschung (Institute for Small Business Research) says.
Progress is nevertheless under way. In spring this year, a bipartisan parliamentary group, with representatives from both the CDU and SPD, set up an independent advisory body under the auspices of the Federal Chancellery. This Normenkontrollrat has an unenviable task: to examine, and perhaps rationalize, the reams of burdensome existing laws.
Recent economic signals are tentative, and the jury is still out. Reforms are under way—in labor, pensions, health care, regulation and taxes—but the process is painfully slow. Another drag on Germany’s growth, the former East Germany, has already absorbed about $1 trillion over the past 15 years. “It will remain a burden for the foreseeable future,” Barysch warns, costing 4% of GDP in unemployment subsidies.