Europe feeling U.S. economic pain
USA Today
With the U.S. economy ailing and Japan drowning in bad bank loans, who's got time to watch Germany?
Well, don't look now, but Europe's largest economy is sputtering, too. Berlin is expected to soon lower its official 2001 growth forecast to 2.2 percent or less, down from its estimate of 2.6 percent or more.
The global slowdown finally appears to be a drag on Europe and Germany, its economic powerhouse.
The European Central Bank, the only major central bank in the world not to cut interest rates this year, is hinting it may do so. Bank watchers say the cut should come as early as tomorrow and no later than April 11.
Gloom in Germany is behind much of the ECB's concern because the country accounts for roughly a third of economic activity in the 12-nation euro zone. European markets were rattled last week when two key surveys showed German business confidence is plunging. Fifty-eight percent of German business leaders now believe conditions for big companies are bad and are likely to remain so, a survey by a German think tank found. Only 24 percent of business leaders felt that way six months ago.
"We were thinking we were immune to the U.S. slowdown, but the slide in markets and negative sentiment globally have altered the outlook," said Weiden Steiner, economist at DG Bank in Frankfurt. "Some of it's psychological. Negative sentiment in the U.S. is translating faster than any real indicators would."
Germany relies more on trade than other European economies, but the United States buys only about 10 percent of German exports.
Exports aren't the only place Germany is vulnerable to the slump: American-based operations of German firms have about $250 billion in annual sales.
Bayer has provided the latest evidence of German woes. The drugmaker and chemicals giant mothballed plans to spin off its remaining stake in Agfa-Gevaert, a Belgian film and imaging company. There is "no end in sight" to the downward spiral in global stock markets, Bayer said.
German firms are again grousing about high labor costs, rigid employment laws and restrictions on marketing and other activities.
The center-left government of Chancellor Gerhard Schroeder has cut business taxes by dropping the corporate rate from 30 percent to 25. It also has eliminated capital gains taxes for German corporations that are trying to disentangle themselves from unproductive alliances by selling their stakes in one another.
But the government hasn't made it much easier on employers. Germany has repealed the previous government's cuts in mandated sick pay and once again made it tougher for small firms to unload workers. It raised employers' social security contributions for low-wage jobs and put new regulations on jobs for part-timers, temporary workers and contract employees.
At German giants such as Volkswagen and Siemens, labor has long had a powerful voice. The country's "co-determination" laws give workers a third to half of the board seats, a voice in company strategy and veto rights over certain management moves. Under a new law, workers at smaller companies will get similar clout.
German unemployment fell for two years before rising in January and February. Joblessness remains stubbornly high — 10.1 percent nationwide and 17 percent in the east.
In effect, Germany has two labor markets. In the formal market, companies are bound by wage packages negotiated nationally across entire industries. Employers can't trim their payrolls without lengthy labor negotiations and huge severance costs. But the law's many exceptions have created a vibrant market for part-timers, temporary workers and contract employees, whose wages, benefits and hours aren't set in stone.
"The problem is these jobs aren't going to the (hard-core) unemployed," said Willi Leibfritz, economist at the Ifo Institute, a Munich think tank. "They're students working part time or full-timers taking on second jobs. So the official unemployment rate remains high."
Reforms have totally bypassed the midsize family-owned firms that make up the bulk of German companies, said Maximilian Dietzsch-Doertenbach, a Frankfurt investment banker.
Those firms, most of which are limited partnerships, face big obstacles trying to raise money. By going public, they incur crushing capital gains taxes. By going to Germany's risk-averse banks, they pay stiff interest rates and are restricted in their borrowing. While U.S. companies can attract loans and investment based on future cash flow, German firms still need sizable collateral.
"We still restrict entrepreneurship," Doertenbach said. "It's ridiculous."
Germany has loosened some business restrictions:
• Retailers, once forced to close by 6:30 p.m. on weekdays and 4 p.m. on Saturdays, have been able to extend their hours and, in a few cases, open on Sundays.
• Limits of 3 percent on retail discounts have been lifted, but most premiums, rebates and two-for-one deals are still forbidden. And marketers still can't compare their products with those of competitors in ads.
Pressure for more reform "is building," said Nigel Gault, economist at Decision Economics in London. "They have to keep going with reform. They don't have any choice." But, he added, while reform may be inevitable, "It's glacial."
