What has happened in the U.S. and Japan is now happening in Germany. Restructuring, belt-tightening, and cost-cutting have finally reached Germany--and with good reason. Three years after unification, the German economy is in a slump. To pay for unification, the German government pushed the deficit to 6% of gross domestic product, and today Germany has the dubious honor of having an inflation rate, at 4%, that exceeds that of France. Despite the deep manufacturing recession, the Bundesbank has been slow to cut rates. Now, the Kohl government must cut spending and rethink a social contract that extends very generous benefits to Germans.
Manufacturing, which long traded comfortably on the high reputation of German engineering and design, is facing its own G tterdammerung. German manufacturing labor costs, at $25 an hour, are now the highest in the world; Japanese luxury cars have outsold German ones in the important U.S. market; and few buyers anywhere want to pay a stiff premium for German goods. Even the vaunted Mittelstand, or midsize companies, are finding that they, too, are uncompetitive. So German manufacturers are slashing payrolls, outsourcing production to cheaper locales in Eastern Europe and the U.S., demanding more of suppliers, and designing cost-saving into their products.
As in the U.S. and Japan, the restructuring is bound to be painful as job losses mount. But government, industry, and workers must persist in trying to make Germany more competitive. The Kohl government, up for reelection in 1994, should vigorously pursue plans to cut spending. Europe and the rest of the world need a strong, competitive Germany: as a market for their goods, as a model for reinventing industry and government, and as a leader in helping eastern Europe and the former Soviet Union join the West economically.