Starting Points: international trade

Jun 2, 2010

Smaller euro nations trail Germany's 'locomotive'

Image by net_efekt via Flickr

By Howard Schneider
Washington Post Staff Writer
Wednesday, June 2, 2010; A10

BAD MUNSTER-EBERNBERG, GERMANY -- Buy a bottle of champagne and it puts money in the pocket of Schneider and Co., a family-owned manufacturer that from a remote perch in the German countryside has created a global monopoly on the wire cages that secure the corks on sparkling wine.

Obscure in a country of marquee exporters such as Mercedes-Benz and Siemens, the company's international focus is common among small and often family-owned firms in Germany.

Schneider's highly automated plants here and in Italy, Spain and Brazil churn out 2 billion of the devices a year. Its dominant market share -- amassed over 30 years -- helps explain Germany's complex and controversial role in the European economy.

The nation's $200 billion annual trade surplus has been blamed as one cause of the current crisis -- Germany is cast as an industrial powerhouse drawing wealth from economically weaker nations like Greece with which it shares a currency. But conversations with economists and business people and an analysis of trade statistics paint a more complex picture of trade patterns that predate the euro by decades, and they show a German business culture organized around selling outside its borders.

German companies "follow a very conservative approach," said Thomas Kraus, Schneider's chief executive. "We are happy to have a small profit, but a sustainable profit, a long-term profit. We have to go outside because the domestic market is limited."

Calls have grown for Germany to "rebalance" -- to buy more from struggling European neighbors so they can keep more money at home. German officials including Finance Minister Wolfgang Schäuble have been adamant that it is better to be Europe's "locomotive" than its open-wallet patron.

Euro anxiety

Germany's export success may in fact be difficult to replicate or -- in the case of eurozone nations like Greece -- reverse in the near term.

"If you look at the volumes of exports and imports over the years, it has intensified," said Helge Berger, deputy chief of the division in charge of European policy at the International Monetary Fund. "But it is a very old pattern. The euro is a continuation rather than a structural break."

As Greece stumbled toward a possible default on its government debt, the structure of the eurozone was cited as putting the country at a disadvantage. It has also sparked anxiety of a renewed global crisis. Without a national currency, Greece as well as larger debt-ridden economies such as Spain lack an important tool -- the ability to devalue their money and make their goods cheaper and more competitive. Germany is seen as the flip side of that equation -- the industrial powerhouse that profits by drawing money from European countries caught in the orbit of the common currency.

But eurozone countries like Greece and Spain have run trade deficits with Germany since at least 1980 -- 20 years before the euro was established -- while a handful, like Ireland and the Netherlands, have trade surpluses with Germany. In one case, the countries serve as a large internal market for German manufactured goods and automobiles; in the other, they have profited by attracting German capital and business.

Global strategy

Talk to German businessmen and the conversation inevitably turns global -- a treatise into what supplies come from which countries, where finished products end up, and how niche manufacturing can support an industry.

On the factory line at Nord Micro, workers take material from the United States, Mexico and Israel to make parts for the climate-control systems that go into Boeing and Airbus passenger jets, said Bjorn Kranz, a purchasing agent for the company. The drop in the value of the euro might make him look in eurozone countries for parts, he said, but his real focus is whether factories in Poland can make some of the more-advanced pieces he needs.

"It is going more towards Eastern Europe because of the prices," he said.

According to IMF statistics, since the introduction of the euro in 1999, Germany's trade surplus with the rest of the world has grown faster than its surplus with the other eurozone countries -- and faster still with European nations that have not adopted the euro.

Some of Germany's most dramatic trade growth has been with the East European nations, like Poland, that opened themselves to market capitalism after the fall of the Berlin Wall -- a development that Germans were well positioned to exploit.

Trade between Germany and the former Czechoslovakia, for example, was a few billion dollars annually before the country was dissolved in 1992. Trade between Germany and the Czech Republic grew to more than $80 billion in 2008. Trade with Slovakia, which recently adopted the euro, is around $20 billion and last year provided Germany with a $1 billion surplus. The Czech Republic and Slovakia both joined the European Union in 2004.

In the United States, increasing exports -- a way to generate jobs from another country's cash -- is among the Obama administration's top economic priorities. It is encouraging smaller companies to look outside the domestic market -- or move beyond exporting to a single supplier in a single country, a practice U.S. trade officials say they have noticed among American firms.

For Axel Schramm, who has helped turn the upholstery and saddle-making shop created by his grandfather into a luxury mattress and bedding company, exports account for about 40 percent of his business. Most of those sales are to European countries, though the company is testing markets in Hong Kong, Japan and elsewhere for made-to-order, hand-assembled mattresses that start at around $5,000.

Unlike U.S. companies, Schramm said, German firms don't have a continent-size domestic market for their goods. So they have created one abroad, working the trade fairs and interior design shows and carefully picking sales agents.

"We don't have the power of a big company to start in a new country," he said at the showroom attached to the Schramm factory, where 100 employees produce about 7,000 mattresses a year, hand-fitting the metal springs into sleeves and sewing on the high-end coverings. "You have to work to find people in the right markets in the right place."