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Viewing cable 10FRANKFURT283, The Future Viability of Germany's Export Driven Economy

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Reference ID Created Released Classification Origin
10FRANKFURT283 2010-01-28 11:56 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Consulate Frankfurt
VZCZCXRO0299
PP RUEHIK
DE RUEHFT #0283 0281156
ZNR UUUUU ZZH
P 281156Z JAN 10
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC PRIORITY 3324
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNFRG/FRG COLLECTIVE
UNCLAS FRANKFURT 000283 
 
SENSITIVE 
 
STATE FOR EUR/CE (SCHROEDER, HODGES), EEB (NELSON, HASTINGS), 
EEB/IFD/OMA (WHITTINGTON), TREASURY FOR ICN (NORTON) AND OASIA 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD PREL GM
 
SUBJECT: The Future Viability of Germany's Export Driven Economy 
 
ΒΆ1. (SBU) Summary: At the recent annual "Topics of the Year" 
financial event on January 14 in Frankfurt, the chief economists of 
Deutsche Bank and the KfW Group, Thomas Mayer and Norbert Irsch, 
called into question the future viability of Germany's export 
driven-growth model.  While both posited that the current recovery 
of the German economy will be led by exports, they also asserted 
that the country must, in the long term, overcome its export 
dependence.  Both economists stated that Germany also faces 
additional economic challenges, including the consequences of 
climate change, demographic change, and the looming loss of 
technological leadership to emerging economies. End Summary. 
 
 
Germany's Model Ultimately: "a Vicious Cycle"? 
--------------------------------------------- ----- 
 
2.(U)Deutsche Bank's Mayer argued that Germany's economy has taken 
advantage of globalization by disaggregating production processes 
and tailoring its export structure to demand from growth regions. 
While this practice created growth, it also reinforced the 
export-heavy structure of the German economy, making it vulnerable 
to external shocks.  Recently, the appreciation of Euro has 
decreased Germany's international competitiveness.  Instead of 
balancing this out with a shift from the manufacturing to the more 
labor intensive services sector-- which would ensure more balanced 
growth-- Germany has continued on what Mayer called a "vicious 
cycle" by sticking to its export model. Mayer likened the German 
business model to a highly volatile stock that generally does not 
earn an above average yield. Norbert Irsch likewise agreed that 
excessive export dependence has not served Germany well and overall 
has not created more growth and GDP per capita than the British or 
French models. 
 
 
Short and Long-Term Challenges 
------------------------------- 
 
3.(U)In the short-term, both economists consider an export-driven 
recovery and an expansive fiscal policy as crucial to moving out of 
the crisis.  Both, however, articulated fears that the government is 
not spending public money wisely and expressed hope that the 
government will prudently shape measures to promote growth 
efficiently. 
 
4.(U)The long-term challenge, Irsch and Mayer agreed, will be to 
initiate domestic structural reforms that will transform the 
country's overly high export dependence. Such measures would enable 
Germany to achieve more balanced economic growth but would require 
significantly increased investment in private sector innovation, 
education, and renewable energy.  Investment in these areas would 
also help to meet some of the other structural challenges in the 
German economy: i.e., responding to climate change, a shrinking 
supply of natural resources and corresponding price increases, 
demographic change, and the potential loss of its technological lead 
to emerging economies. 
 
5.(U)In addition, Germany must, Irsch said, return to a wage policy 
that is oriented towards productivity.  Germany diverted from such a 
wage policy between 2000 and 2008, which helped to contribute to 
Germany's export surplus, but contributed to weak domestic demand. 
Thomas Mayer also focused on wage policy in his address.  He argued 
for the balancing out of wage levels from the export sector (where 
wages are too low) to the domestic sector (where wages are too 
high).  In addition, he called for more differentiated wages across 
the board.  Unemployment benefits do not compensate for a reduction 
in well being derived from productive employment, Mayer said. 
 
6.(SBU)Comment: Irsch and Mayer's presentations indicate that there 
is an emerging discussion about the country's export-oriented model 
and its suitability for Germany's long-term economic future. 
However, thus far the discussion appears to be largely among 
economic experts and members of the finance and banking community. 
Politicians and government officials have yet to seriously engage in 
this debate. End Comment 
 
 
ALFORD