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Economists Worried Germany Could Follow Japanese No-Growth Pattern - 2002-12-14


The German economy hasn't been doing well lately, and some economists wonder whether the country will follow Japan's slow or no-growth pattern. There's a good chance of that, unless Germany takes steps to emerge from its economic morass.

Germany posted a puny 0.3 percent growth in the third quarter of this year, and 0.2 percent in the previous one. The government admits its budget deficit will exceed the allowed European Union limit of three percent of the Gross Domestic Product. One out of 10 Germans is out of work and the stock market is down by two-thirds from its peak in March 2000.

In a recent commentary, the U.S. magazine Business Week raised the possibility that Germany might be turning into another Japan whose economy has been stagnating for more than a decade. It pointed to the fact that many similarities exist between the two economies: multiplying bad loans, spiking bankruptcy rates, stumbling stock markets and dismal corporate earnings.

Dr. Jackson Janes, executive director of the American Institute of Contemporary German Studies, says that Germany's high labor costs and its rigid job market have scared away foreign investment. "Germany may suffer because of the fact that they haven't been able to unleash themselves from some of the constraints like high labor wage, prices and rigidity in the job market. That scares away people who would like to invest," he says. "Germany's foreign direct investment level plummeted last year, in many ways because of the fact that foreign direct investment capital is skittish about where Germany is headed."

But he does not believe Germany will follow in Japan's footsteps. "Because of the fact that they have an environment that is called European Union wrapped around them," he says. "And that impacts terrifically on both the decisions they can make and the decisions they can't make. If you think about the fact that right now they have a European central bank, that there is a much more constriction on what they can or cannot do, beyond their domestic interest. That is going to make it far more difficult for them to act alone, as Japan has over the last five to 10 or 15 years."

Dr. Janes says as a member of the EU monetary union, Germany has to come within the 3-percent budget deficit limit, while Japan has no such obligation.

Frank-Jurgen Richter, Asia Director of the World Economic Forum, is more pessimistic. He says if the German government did not take effective measures, the third largest economy in the world could become Europe's Japan. "Certainly [there is] a chance and possibility that Germany will have similar economic problems, a kind of inability to reform itself, especially the labor markets, and the big companies now being somehow in a difficult situation to apply more flexible labor laws," he says.

Mr. Richter believes that labor market reform is the key to revitalizing the German economy. He says that one weakness of both Germany and Japan is that they lack the entrepreneurship that the United States is proud of. He says another secret of America's strong economic growth lies in its immigration policy, which has lured a talented workforce from all over the world to the U.S.. "I think both countries, Germany and Japan, have to apply a more flexible migration policy. Germany maybe looking towards Eastern Europe, trying to attract best talents from Eastern Europe, like IT [Information Technology] engineers and software engineers," he says. "Likewise, the Japanese maybe trying to attract young Chinese to come over to Japan."

Meanwhile, the German government has announced a solution of its own: a plan to impose a tax on profits from shares, real estate and investment fund holdings to reduce the budget deficit. A similar tax hike in Japan killed off a nascent recovery five years ago.

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