Cranking Up Europe's Economic Engine  

08 March, 2003 

It is ironic that just as the Euro began to gain in value over the last twelve months, that the economic outlook for EU is plunging to new depths. Strangely, the sickness stems not from previously regarded laggard-likes of Portugal, Spain or those from the Eastern bloc but from Germany which has the largest GDP. It is therefore, a paradox that the main driver behind the EU integration move, should be stuttering so palpably. What happens in Germany and the EU affect the GCC generally and the UAE, not just from trade or currency view points, but also in terms of the much touted diversification of economic linkages.

As an observer, who spent a few days, last week, in Germany, I can hardly write with any great authority on this subject. But a visitor can gain a prescient perspective as he sees and perceives trends and insights, with a certain detachment for unemotional and objective analyses; that a long term resident may sometimes be too close to the matter and miss out.

It is obvious that unemployment remains a major factor in the current German economic malaise. It is getting worse, because Germany is a high cost producer albeit of exceptionally high value and high quality goods and services. The task of the unification of Germany, may in the last decade, have daunted a lesser economy but Germany achieved it with relative ease, pain, precision and discipline.

But it took a heavy toll; and created a pool of previous East German inefficient organisations that had to be restructured through redundancies of poorly qualified work-force. Germany's unemployment / economic downturn were exacerbated in the run up to EU's birth. Germany's fiscal rectitude and inflation phobia were manifest in the convergence criteria, devised to discipline other recalcitrant states but bit the hand that fed it. As regards, budget deficit and exchange rate adjustments within the permissible range, the former West Germany would have met any criteria comfortably. But a unified Germany was less prepared because of the East G's drag factor. At the same time, a major market such as the U.S., moved into doldrums, affecting German multinationals, who have always thrived through export-led growth.

The EU integration has now encouraged German and other companies to relocate their manpower-intensive activities elsewhere, in search of cheaper cost of production and lower wages. Germany may still be the centre of excellence for research & development but production facilities are moving to Hungary, Czech Republic, Romania etc. This may well have aggravated the unemployment and anaemic GDP growth in Germany. Lack-lustre leadership from the German Chancellor is attributed by some, as unhelpful; as the country respects clarity of purpose and conviction. Ambivalence appears to be the 'drift' (!) in the current government. While leadership is important, according to many, Germany is in a recession, going by the theoretical definition of two quarters of (falling) GDP in the negative territory.

The technological edge and innovation of the likes of Siemens and others, are being replicated, at a lower cost, in countries such as Korea, Taiwan and Japan. Besides, the Anglo-American domination of the world economic flows has got strengthened, as in the Internet and IT age, English language gives a huge competitive advantage.

Germany could face further pressures from the recent political fallout. Its recent stand on a war with Iraq, in co-ordination with France, has resulted in the U.S. contemplating to move the Nato military bases to other parts of Eastern / Central Europe. The U.S. administration's approach to Germany is not yet hostile but can be hostage to public opinion. The economic relations between two very large economies, should not be to Germany's detriment, just as Japan has not been helped when it was felt that cheap Japanese exports were inimical to U.S. interests. This is not to deny that Germany itself is a major market domestically. In the EU, it will continue to play a dominant role and retain a significant clout, even if not matched in terms of political and military machoism and manoeuvrability. Russia, the other sprawling economy has the potential to leap frog quickly, and will wish to play the German and the EU card deftly. Germany and the EU attract Arab capital in good measure. Once Iran gets going, these relationships will get reinforced on both sides of the Gulf.

It would therefore, be in the fitness of things, if Germany were to focus on what it does best. Its engineering prowess, its automobile dominance, its health and bio-medical capabilities are its enduring strengths; that will propel it to a leadership position within the EU. The U.K. may join the EU and the troika, with France. The German Bundesbank has always shown considerable leadership in monetary matters.

But within the extended Europe, Germany's leadership will need to go back to the drawing board to rework and rebuild Germany's strategic strengths. EU will clearly flounder, if this troika's economies were to flounder. The locomotives for growth therefore, need to steam ahead and fairly soon. The current situation does appear bleak but every cloud has a silver lining. In the case of Germany, it is the managers down the line, particularly in the Bavarian and Stuttgard industrial empire, who are alive to their responsibilities and who possess outstanding managerial talent.

Even if the world accepts the U.S. as a superpower with suspicion and reluctance, because of its military might, its status as the world's largest economy is challenged by regional blocs such as the EU, Asean, GCC and the existing emerging economic expanses in Japan, Germany, China, Russia, U.K., France, India, Brazil, Indonesia and Egypt. These sprawling economies have huge (potential) domestic market size, that make for, collectively, a diversified and well balanced global economy. That is where, in the new Millennium, growth-oriented strategies and leadership, not disaster / conflict-prone remedies, will eventually pull the global economy out of the "morass and the mosaic of myriad problems" that it finds itself in!.

(The author (sureshk@emiratesbank.ae) is a General Manager in Emirates Bank Group. The views expressed in this article are not necessarily shared by the Bank.)

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