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Long German Recession: Is it Cyclical or Structural?

Employer-worker relations are adjusting to tough economic realities

GERMANY is going through the same economic angst that the United States did a decade ago.

Then, during the deep American recession of the early 1980s, some analysts said the problems were cyclical. Good times would return when the recession was over, they promised. Others argued that the problems were structural and good times would not come back without fundamental economic reform.

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In the US, the ``structuralists'' turned out to be right. In Germany, the answer is not yet clear.

On the face of it, Germany needs radical change. Its economy is bumping along the bottom of the longest and most severe downturn since World War II. Last month, unemployment stood at 7.4 percent in western Germany; 15.2 percent in the former Communist east.

A major reason is that the country's employers cannot afford the country's workers. Germany has the world's highest-paid employees who, nevertheless, enjoy one of the shortest work weeks anywhere. Sunday and night work is highly restricted. Last year, German unit labor costs were 30 percent higher than in the US.

Chancellor Helmut Kohl has told employees that they will have to work longer hours with fewer benefits to maintain their high pay. Even the nation's left-of-center Social Democrats agree that something must be done. In their economic plan, released earlier this month, they urge more flexibility in weekend and night work and suggest German employees keep the short work week even though it will mean less pay.

Not everyone agrees with the advocates of structural change.

``They never understand what a cyclical recession is,'' says Heiner Flassbeck, an economist with the German Institute for Economic Research in Berlin. This is the third time in 15 years that Germany has debated ``structural'' problems only to see a boom follow, he says. The current situation ``is simply a cyclical downturn.'' The reason the situation looks worse today is exchange rates, Mr. Flassbeck adds. The German deutsche mark has appreciated so much in the past few years that German workers appear to have gotten big pay raises. But counted in the national currency, rather than in dollar terms, German wage hikes are not out of line, Flassbeck argues. In only two years of the past 33 has the rise in German unit labor costs exceeded the average increase in the 20 countries to which Germany exports. Those years - 1970 and 1992 - were boom years. So the answer to Germany's competitiveness problems is to let the deutsche mark depreciate, Flassbeck says.

This analysis faces two challenges. First, it is not clear when Germany's central bank, the Bundesbank, will lower rates. The bank is still trying to fight inflation caused, at least in part, by the federal government's budget deficits derived from the retooling of eastern Germany's bankrupt economy.

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The second problem with the ``cyclical'' argument is that German business is too dependent on exports to ignore exchange rates. One-third of Germany's gross domestic product is export-driven, a larger share than even Japan. A higher deutsche mark makes it harder to export and makes non-German locations more attractive as manufacturing sites.

``As a global player and as an industrial company, you have to see what's going on with the exchange rate,'' says Helmut Becker, chief economist at BMW. ``It has a tremendous effect on labor costs.''

BMW chose South Carolina earlier this year as the site of a new factory to build cars for the American market. In Germany, meanwhile, the company has cut production roughly 10 percent this year - the first such production decrease since 1974.

Other companies are also making cuts. Daimler-Benz has reduced the number of slots by more than 40,000. Robert Bosch, the electrical and engineering giant, has negotiated a $112 million cut in employee benefits. In all, manufacturing and mining companies have dismissed about one out of every 10 of their employees, mostly in eastern Germany.

More cuts loom. The danger is that they will strain the country's consensus-style relations between unions and management. Two weeks ago, for example, the engineering employers' organization, Gesamtmetall, announced it would unilaterally cancel labor contracts. It said it wants to cut fringe benefits. IG Metall, the labor union, retaliated by warning its members to prepare for strikes early next year.

``You have a lot of war noise,'' Mr. Becker says. But ``it is not in the German soul to have a fundamental dissonance. There is a common sense and I think also a common consensus.''

Martin Hufner, chief economist at Bayerische Vereinsbank in Munich, also is optimistic about the country's ability to compromise. ``One of the big competitive advantages of Germany that is often overlooked is the way the German companies are able to adjust to the new situation,'' he says.

What is left unanswered is how an economy of leaner companies is going to cope with rising unemployment. ``Economic growth is not sufficient to reduce unemployment,'' Mr. Hufner says.

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