Germany's frugality bemoaned for inhibiting euro zone growth

By Anthony Faiola
Sunday, February 28, 2010; A08

BERLIN -- Greek extravagance touched off the biggest crisis in the 11-year history of the euro. But the world's most ambitious monetary union faces a less obvious problem that might be even harder to lick -- German frugality.

Adoption of the euro a decade ago ushered in an era of cheap credit, soaring salaries and big government in nations like Greece, Spain and Portugal. Their debt-fueled splurges are now coming home to roost, with Greece the first to come close to running out of cash to operate the government, raising fears of a default. Germany -- Europe's economic powerhouse -- is expected to take a leading role in a rescue effort to prevent a possible run on the euro and the outbreak of a new bout of turmoil in global bond, currency and stock markets.

Southern European profligacy is now the target of open distain in Germany, with many here ruing the day in 1999 that this nation of 82 million kissed goodbye to the once-mighty deutsche mark.

Yet in the years since, a significant part of economic growth in Germany, analysts say, was fueled by a surge of spending in Greece, Spain, Portugal and other European nations after they adopted the euro. In fact, a jump in sales of everything from BMW sedans to Miele washing machines in other parts of Europe helped make up for the lack of spending here in Germany -- where stagnant wages and a culture of conservative consumers has led to years of anemic domestic demand.

A growing number of economists now say that must change to ensure the euro's survival. If Greece must slash spending and put its books in order to restore faith in the euro, then Germans must also begin to consume more of what Germany and its neighbors manufacture.

The economic imbalances in Europe underscore a broader global problem, the solving of which President Obama and others have called key to laying a path to sustained growth in the wake of the financial crisis. They argue that nations like Germany, China and Japan must do more to open the wallets of their consumers, who have some of the highest savings rates in the world, just as nations like United States, Britain and Greece must begin to export more while weaning themselves off the kind of credit-fueled spending sprees that have generated the economic bubbles of recent years.

A culture of thriftiness

That won't be easy.

Like many Germans, Rosi Wicher, 40, a preschool teacher and single mother of one, got minimal wage increases over the last decade, with aggressive cost-cutting by German companies and government policies holding the line on private- and public-sector salaries.

And like many of her peers in this shabby chic capital where ostentation is frowned upon, she prides herself on being thrifty. She has used the same stereo set for 12 years, runs no credit card debt, does not own a car and happily gets by with furniture purchased back in the 1980s. "Why do I need more?" she asked. "My child is happy with a DS Lite instead of a PlayStation. And my stereo still works fine. It don't think it's a sign of progress to run yourself into debt."

As a result of lopsided trade, Germany now enjoys a relationship with its partners in the euro not unlike that of China and the United States, with one acting as supplier and financier and the other as an overextended buyer. Over the past decade, Germany -- which now has the world's largest trade surplus after Saudi Arabia -- saw sales to Greece, Spain and Portugal soar 66 percent, 59 percent and 30 percent, respectively. Just as China is the major holder of U.S. Treasurys, German banks have also invested heavily in Greek, Spanish and Portuguese debt. But Germany imported relatively little from those nations in return -- partly, many here point out, because those countries still have relatively little to sell.

In the meantime, Germany is in a tight fix -- loath to reward feckless Greece with a concrete promise of aid but fearful of the consequences to its own economy if it does not.

"The Germans were catering a big party that was going on in the euro area, selling the food and offering the credit to the party guests," said Thomas Mayer, chief economist for Deutsche Bank. "But the guests got drunk and ate too much, and now Germany is stuck with the bill. What this tells us is that the euro model must be adjusted. Yes, the Greeks are going to have to make reforms, but the Germans are going to have to change, too."

Indignation over Greece

In recent years, Germany has made painful cuts in social services even as countries like Greece had an explosion in government spending. Not surprisingly, resentment is running high here, with polls showing almost 70 percent of Germans opposing a Greek bailout even though most analysts believe it would be a German-led intervention involving other European nations and/or a consortium of banks.

Indignation only heightened as Greece's deputy prime minister, responding to German calls for deeper spending cuts, suggested last week that instead of criticizing its policies, Germany should compensate Greece for the Nazi invasion of 1941.

"There were always great skeptics of the euro in Germany, now those forces are strengthening, and gathering more support," said Frank Schaeffler, a lawmaker from the Free Democratic Party, part of Chancellor Angela Merkel's ruling coalition. Asked whether the Greek crisis has made him drop his own support for the euro, Schaeffler said, "no, but I think it is clear we let the wrong countries join."

Analysts note that when the euro was launched, nations like Greece were expected to see a boost in salaries and spending as they played catch-up to their richer cousins, like Germany. But if the Greeks overshot, Germany, some economists contend, may have fallen short.

Especially over the past decade, German manufacturers -- already juggernauts of industry -- became some of the most globally competitive companies. Just as American firms did, they turned to outsourcing and overseas production hubs. They kept salaries down at home, with average wages stagnating in Germany for a decade. Germany still has no uniform minimum wage, and aggressive cost-cutting has resulted in more and more Germans laboring in temporary or contract jobs with lower pay and less job security.

The Germans have taken some steps to boost domestic demand. The government temporarily spurred consumer spending during the economic crisis, for instance, with a cash-for-clunkers program that was later copied by the Obama administration. But analysts note that such moves have been offset by hikes in the value-added tax, which acts as a sort of national sales tax and drives prices higher.

German officials bristle at the suggestion that their country is too dependent on foreign markets, or that taxpayers here are not doing enough to sustain the economy in the euro zone. They note that German tourists flock to Greek resorts in summer, and that Germany has funneled hundreds of millions of euros into European Union development funds that get spent on projects in the smaller European economies.

Joining the global culture of debt, many here say, is simply not an answer.

"There are two sides of the coin here. The first side is that if people spend a little more, they would help the economy to recover, and that's definitely a fact," said Joe Kaeser, chief financial officer for Siemens, one Germany's largest exporters and a global powerhouse with 400,000 employees worldwide, including 64,000 in the United States. "But companies have a responsibility to get into the consumer's wallet, and they have not been providing the right solutions and the right products. But I think we also have to say that there are some countries [where consumers] have spent too much."