German Push to Remodel Europe May Backfire

By Rainer Buergin and Simone Meier - Dec 20, 2011 6:01 AM GMT+0700

Germany’s drive to mold the rest of Europe into its economic image may come at a cost for the country’s export machine.

As governments from Italy to Spain and Ireland seek to convince Chancellor Angela Merkel and bondholders that they can fix their balance sheets, officials are pushing through policies designed to restore their competitiveness.

The risk to Germany, whose exports account for almost half of gross domestic product, is that transforming the region’s struggling nations into blueprints of itself may work too well. Efforts by euro-region governments to cut labor costs may help exporters across southern Europe challenge the dominance of German competitors, ranging from Siemens AG, Europe’s largest engineering company, to carmaker Bayerische Motoren Werke AG.

“It’s true, it’s our fate that competition will increase and we’ll have to hurry up to get better as well,”Wolfgang Clement, a former government minister who oversaw former German Chancellor Gerhard Schroeder’s economic policy revamp, said in an interview. “My big concern is that we become complacent amid all this talk of Germany being strong.”

Germany, dubbed “the sick man of Europe” after its struggles to cope with the aftermath of reunification that began in 1990, has turned itself into Europe’s growth engine and the world’s third-biggest exporter after China and the U.S. in 2010 by squeezing wages and diversifying manufacturing.

Export Growth

German labor costs rose at half the pace of Greece’s in the 10 years through 2010, according to the IMK economic institute in Dusseldorf. Export growth averaged 5.2 percent per year in the same period, compared with 3.1 percent for Italy.

With the euro region still Germany’s largest export market, Merkel is pushing debt-strapped nations to follow her country’s lead and push through measures to promote economic growth and reduce deficits.

“I would rather focus on growing competitiveness in Europe than constantly having to worry about rescue programs,” Merkel said in March. “We’re ensuring that Europe as a whole improves.”

That same month, Merkel and French President Nicolas Sarkozy got most of the European Union to sign up to the so- called Euro-Plus Pact to boost competitiveness.

While efforts to stem Europe’s debt crisis have focused on coordinating fiscal policies, leaders also have sought measures to foster growth. As market turmoil threatens economies and corporate earnings across the region, cash-strapped euro members are succumbing to such pressure in order to catch up with better-performing peers.

Revamp Call

Italy and Spain, Germany’s biggest potential rivals, should revamp their economies to improve competitiveness that is below the region’s average, the European Commission says. As both countries struggle to cope with bond yields close to euro-era records, Italy should make labor cheaper and Spain should improve productivity and reform its wage practices, according to the commission.

Increases in employment costs of all euro nations outpaced Germany’s in the decade through 2010. German hourly labor costs rose an average 1.7 percent per year, while they jumped 2.9 percent in Portugal, 3.2 percent in Italy, 3.4 percent in Greece and 4.1 percent in Spain, the labor union-affiliated IMK institute said Dec. 12. The figures were based on calculations from Eurostat, the EU statistics agency.

“Based on the wage restraint we’ve seen over the past years in Germany, we still have a certain head start,” said Thilo Heidrich, a Bonn-based economist at Deutsche Postbank AG. “Over the medium term though, competition should increase.”

Pledged Measures

Spanish Prime Minister-elect Mariano Rajoy pledged yesterday that his new government will overhaul the labor market in the first quarter and cut taxes for small companies. Italy, the region’s third-largest economy after Germany and France, plans to overhaul its employment laws. Details will be announced “within weeks,” Prime Minister Mario Monti said on Dec. 4.

The challenge for such countries will be to match Germany. Schroeder unveiled his package of labor, health, pension and tax policy changes in March 2003, focused on revamping the economy by 2010. It took almost two years before the labor market began to show results, said Clement, who served under the Social Democrat chancellor as economy and labor minister.

‘Long Process’

“It’s a very long process to become competitive,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “It took a long time for German companies to boost their competitiveness by means of wage restraint.”

Monti can change the nation’s economy for the better, maybe in a shorter period than it took Schroeder’s government, said Giancarlo Losma, president of filtration systems maker Losma SpA in Curno, Italy, which is about 55 kilometers (34 miles) northeast of Milan.

“I know that it took Germany more or less seven years to reap the benefits of the actions by Mr. Schroeder,” he said. “We need to move faster this time. I’m convinced that we’ll get some positive feedback in a shorter time.”

Some Italian exporters are already well positioned to benefit. Ralph Wiechers, chief economist at Germany’s VDMA machine maker’s lobby, said in an interview that Italy has always been “a competitive rival.”

Clement, who’s a member of supervisory boards at companies including Ascheberg, Germany-based Daldrup & Soehne AG (4DS), a provider of drilling services, agrees with Wiechers.

Italian Rivalry

“Northern Italy, especially the region around Milan, is as good as Baden-Wuerttemberg” in Germany, home to such companies as Daimler AG (DAI) and Robert Bosch GmbH, he said. “It’s as good as it gets in Europe.”

One Italian export champion is Milan-based Luxottica Group SpA (LUX), the world’s largest eyewear maker, which on Oct. 24 reported third-quarter earnings growth that exceeded analysts’ estimates. Chief Executive Officer Andrea Guerra said he sees “significant opportunities for growth.” The company’s 10 percent share-price drop this year compares with the 28 percent slump of the benchmark FTSE-MIB (FTSEMIB) stock index.

Companies outside Germany have started squeezing workers to increase productivity and ease pressure on margins. Italian carmaker Fiat SpA (F) and its former heavy-vehicle unit Fiat Industrial SpA signed a collective labor deal with 86,000 employees on Dec. 13 to lengthen shifts and shorten breaks in exchange for a 20 billion-euro ($26 billion) investment plan.

Employees and executives at Nicolas Correa SA, Spain’s biggest maker of milling machines, now clean up their own desks to reduce costs. They also voluntarily took a 25 percent pay cut in 2009, Ana Nicolas Correa, secretary of the board, said in an interview. The company exports 95 percent of its products.

Stronger economies in southern Europe would benefit Germany as it would bolster sales for exporters, said Ralph Solveen, an economist at Commerzbank AG in Frankfurt.

“If there were more people employed in northern Italy, they might also spend more money and possibly even buy German cars,” he said. “Overall, there’s a chance that Germany would benefit more than it would lose.”

To contact the reporters on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net; Simone Meier in Zurich at smeier@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; James Hertling at jhertling@bloomberg.net