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Not long after futuristic airport architecture has given way to monotonous autobahn scenery on the drive from Düsseldorf to Essen, the traffic begins to slow. One lane of the bridge across the river Ruhr is closed for repairs. “The structure of the bridge is steel,” explains the taxi driver. “For 40 years they have done nothing about corrosion.”
Essen is the ancestral home of the Krupp industrial dynasty, and the Ruhr was once one of Europe’s biggest steel-producing regions. But when the bridge is repaired, it won’t be with German metal. “The steel comes from China or India,” says the driver. “It’s still from German companies, but it is made by cheaper workers.”
Germany’s place in this world of low-wage workers is top of its political and economic agenda. On June 16, representatives of German finance gathered in a corner of the cavernous Messe Essen conference centre for Hypothekenbank’s fourth biannual capital markets conference to discuss the country’s future competitiveness, among other things.
Herman-Josef Lamberti from Deutsche Bank’s board of managing directors was there. Lothar Späth, head of Germany and Austria at Merrill Lynch, and Philipp Vorndran, Credit Suisse Asset Management’s CEO for Germany, also attended. In a panel discussion, they concluded that whoever wins power in this year’s general elections has two years at most to complete economic reform and reverse the corrosion of Germany’s commercial infrastructure. If they don’t, the economy will remain sluggish.
According to the Ruhr economic research and policy advice organization RWI Essen, Germany’s strong recovery in the first half of 2004 is at a standstill. Real GDP will grow by just 0.7% this year. “Evidently,” reported RWI Essen in April, “the German economy suffers from a fundamental weakness… Latest sentiment indicators suggest that the economy may still have to find the bottom.”
The panel’s pro-reform comments went down well. Essen and the surrounding metropolitan area is managing its transition from heavy industry to service sector activities better than much of the rest of Germany. Some 75% of its active labour force works in the tertiary sector.
Perhaps the citizens of Essen are predisposed to see the upside of reform. Look at the labour market. It is said that Germans are alarmed by the influx of cheap labour because, with the EU accession countries on their eastern borders, globalization is a fact of life, not an abstraction. But not in Essen. The city experienced something akin to globalization about 150 years ago when over a million ethnic Poles from Germany’s eastern provinces came to the industrializing Ruhr, and is aware of the benefits.
Essen’s forward-looking stance could influence the rest of Germany and the rest of the continent. This is the commercial heart of the Europe – change here could have a ripple effect. Some 140 million people live within 500km of the city, 40% of the population of the EU. Of Germany’s 500 companies by turnover, 24 are headquartered here. RWE is one. The merged ThyssenKrupp industrial conglomerate is registered here and in Duisburg. Along with Berlin, Frankfurt and Munich, Essen is where the senior executives of Deutschland AG meet to discuss the country’s economic repositioning.
They have a lot to talk about. Essen is a wealthy city. “There’s a lot of money around here,” whispers one banker approvingly at Essenhyp’s post-conference party. In Essen and its environs live some of Germany’s richest families: the heirs to the Westdeutsche Allgemeine Zeitung publishing house; and the Albrecht brothers, founders of the Aldi supermarket chain, were born here.
For Germans who want to join the Albrechts at the top of the rich list, the outlook is mixed. Holger Schmieding, co-head of euro economics at Bank of America, told the conference that Germany had already seen the best of its export-led upturn. Weaker growth in the eurozone’s trading partners left industry relying on weak domestic demand. “Private consumption in the eurozone has been stagnant or even falling for four years,” Schmieding said. “It is the essential problem, and it is a German problem.” Making Germany a competitive economic location is vital to attract investment. “Labour market reforms are helping,” said Schmieding. “The number of vacancies has increased. And after the next general election it will be much more clear how changes to the social security system will work. That will remove uncertainty that has hindered private consumption. Germany has regained part of its attraction for investment, which it lost post-reunification. It will no longer be the sick man of Europe.”
Essen has already helped set the tone for the general election that is likely at the end of the summer. Chancellor Gerhard Schröder decided to bring it forward after his Social Democratic Party lost power in North Rhine Westphalia for the first time in nearly 40 years. Whether this was a vote in favour of economic reform or against it is unclear. On paper, the conservative opposition had a more liberal economic agenda, but the locals feel that the electorate voted for change without thinking what it may mean.
The finance community is excited at the prospect of transforming Germany into a real free-market economy. “We’re exactly where the UK was 25 years ago,” says one young treasury official. Schröder’s challenger, Angela Merkel, is frequently characterized – outside Germany – as the German Mrs Thatcher. That is premature. “Thatcher had an agenda, but we still don’t know what Angie’s is,” says one senior German banker. “She grew up in east Germany. Can she really be reform-minded?”
While Germany ponders, the economy struggles. “I wouldn’t buy a car tomorrow,” says the treasury official. “There is too much uncertainty.”
