Tuesday, April 24, 2007

Germany Avoids Race to the Economic Bottom

The German economy, Europe's largest and third in the world, is booming. Unemployment and corporate bankruptcies are down. Investor confidence and exports are soaring.

Germany is the world’s largest exporter of goods and has been for four straight years. Its export led growth has continued even as the Euro has surged to near record levels against the dollar and the yen, making German products more expensive, and in spite of a January tax increase that critics warned would stall the economy.

In contrast, the engine of economic growth in the United States has been consumer spending, driven by unsustainable levels of household debt and the high tech and real estate bubbles which have now burst. While U.S. trade deficits have soared to record levels, Germany is running record surpluses.

Wages are higher in German than in the US, as is union density. German workers also enjoy a significantly higher social wages (vacations, family medical leave, minimum wages, etc.). Labor markets are less ”flexible.” Co-determination which ensures labor union representatives a voice on corporate boards remains a fixture.

There is a lesson here for US policy makers and firms. You can compete globally and treat your employees fairly! But it requires that companies “get smart” and abandon strategies based on low prices and low wages!

Most U.S. multinationals seek competitive advantage based on high volume, low cost production. As result, they are aggressively anti-union and outsource production to lower wage nations. Concessionary bargaining has been a center piece of US labor relations for more than 25 years! In Milwaukee, Master Lock, Briggs and Stratton and Johnson Controls have hemorrhaged jobs as a result of this approach. It’s cheaper to produce high volume, low cost products in Mexico and China! Apologists for this approach justify their actions as the only rational response to globalization.

But German companies have responded to globalization differently by producing high quality global, niche products. They don’t attempt to compete on price and low wages. Rather they seek competitive advantage based on high quality, service and strong brands! From machine tools, to automobiles to lasers, the demand for German products has soared and the economy has grown. Germany is Europe’s engine of growth.

Germany is demonstrating that the race to the bottom is not inevitable; that you can succeed in the global economy without abandoning the labor market reforms of the 20th Century. It's a lesson and strategy far different than Walmarts’!

No comments: