Tarnished Miracle

A team of Common Market economists finally said out loud last week what European businessmen have been whispering about for some time: the once wondrous West German economy is fast slipping toward the bottom of the class in the Common Market Six.

The report was prepared by a team headed by respected French Economist Pierre Uri. It predicted that over the next decade West Germany's gross national product will grow more slowly than that of any other major Common Market nation save Belgium (whose economy is only one-fifth as big as West Germany's). By 1970, said the Uri group, the average French worker will be producing $4,608 worth of goods and services a year v. $3,905 for the average German.

More Pay, Fewer Hours. Behind the slowdown in German growth lie severe shortages of two vital economic ingredients: manpower and money. In a nation where World War II wiped out much of a generation, there are now 562,000 job openings and barely 100,000 unemployed. Capitalizing on this, Germany's long-docile labor unions last year pressured wages and fringe benefits up 13.6% to $1.20 an hour, the highest in the Common Market; simultaneously, they pushed the average work week down to 41.3 hours, lowest in the Market. German executives, who once boasted of their nation's Spartan industriousness, now complain that many Germans do not work as hard as the 700,000 Spaniards, Greeks and Italians who have been imported to work in Germany. One piece of supporting evidence: since sick pay was introduced by law in 1954, the rate of absenteeism for "illness" has jumped from 4.1% to 6.7%, and among presumably more robust younger workers, it runs a shocking 9%.

The wage spiral has pushed up Germany's export prices. So did last year's revaluation of the Deutsche mark, which made it 5% more expensive for foreigners to buy German goods and 5% cheaper for Germans to buy foreign goods. As a result, German imports have risen 12% in 1962, while exports have leveled off. In the first half of this year, West Germany ran a payments deficit of $92.5 million.

That deficit would have been even greater had German exporters not pared their prices to the bone. Ruhr steelmakers have managed to hold their export customers only by charging lower prices outside the Common Market than within it. In Hamburg, the slumping shipyards glumly accept orders at below-cost prices rather than close down altogether.

Shaky Foundations. The decline in profit margins is especially painful because West Germany is woefully short of money for capital investment. In the booming postwar years, German companies financed most of their pell-mell expansion out of retained earnings. This year, with earnings leaner, German industry will not have so much to plow back into capital investment.

By using so much of their past earnings for current expansion, many German firms have also left themselves with dangerously small capital reserves. Undercapitalization caused the-recent downfall of Shipbuilding Tycoon Willy Schlieker. Heinz Nordhoff, the boss of mighty Volkswagen, thinks his company's reserves of less than $150 million are too small for a company with annual sales of more than $1.3 billion. To carry out adequate expansion and modernization programs, German industry as a whole needs an estimated $7.5 billion that it does not have.

One obvious solution would be to raise the capital through stock offerings. But with German stock markets currently off 47% from their 1960 peaks, new issues so far this year have raised less than half ($260 million) of the amount they brought in during the same period of 1961. And no matter how strapped they are, German companies are reluctant to turn to their bankers for money, because short-term credit in Germany costs 8% and bankers often demand a voice in the management of companies that borrow. Rather than entrust their fortunes to bearish markets or intruding bankers, many German companies have chosen to throttle down on expansion. The Saar steel industry has slashed capital spending by 50% this year, is currently investing in expansion and modernization only 44% as much as its competitors in the neighboring French province of Lorraine.

Lift from Consumers. But while German export and capital-goods markets are suffering, consumer industries continue to expand briskly, largely because Germany's long-underpaid workers at last have some folding money. With this year's production of autos up 11% and appliances up 8%, no one much fears that Germany will become the sick man of Europe. The new prognosis for Germany is orderly growth at a rate of slightly more than 4% a year--a prospect that many nations might envy, but that hardly seems exciting enough to a nation accustomed to an economic miracle.

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