Europe: a fortress against recession?
International Viewpoint #195 • November 26, 1990
WORLD ECONOMY economies such as the FRG and Japan. This is the other part of the question. A priori, a decoupling or desynchronization? between the American recession and the economy of the newly reunified Germany and Japan appears the most likely scenario for the year to come.
The international environment is fluid - made thus both by the Gulf Crisis but
THE American economy is clearly in recession, but can the unification of Germany pull Europe free from the effects? In the following article, first published in the November 2, 1990 issue of the Swiss revolutionary Marxist fortnightly La Brèche,
Charles-Andre Udry describes the costs and implications of unification for the German and world economies. This article is the second instalment of a series on the world economy - the first, dealing with the American economy, was published in IV 194.
CHARLES-ANDRE UDRY
E
VERY day brings sombre new reports on the state of the US economy!. The apparent glimmer of encouragement in the news that Gross Domestic Product grew by slightly more than the predicted 0.8% in the third quarter of this year overlooks a number of facts. In fact, this "growth"
is the result of increasing stocks, that is to say, of the impossibility of selling what has been produced owing to the weakness of demand. In order to get rid of these stocks, lower orders will be placed, production cut and jobs abol-
And in fact, in recent weeks we have been told that orders by American firms fell by 1.7% in September, the third drop in four months; the number of registered unemployed at the end of September had risen by 400,000 as a weekly average, the highest level since 1985 (when the rate of unemployment officially reached 7% of the active population); that preliminary results for firms in the third quarter of
1990 reveal that 50% of them are seeing a serious fall off in profits; that sales declined by 8% in comparison with
August; that General Motors is expecting to suspend production in 11 of its 28 plants in November and that "this Christmas will be one of the most wintry since the 1981 recession, with buyers looking for cheaper goods and buying everyday items rather than luxuries. "2
Indeed, during the budget debate, the
Democrats retreated on a plan for a special tax on fur coats costing less than
$10,000 so as not to upset their clecto-
Banks face mounting problems
The banks have more and more problems, giving rise to the Black Friday of
14 October 26. There are bad loans to the
Third World, and to bought up indebted enterprises. And then there is the crisis in the property and construction markets, with the repossession of properties which are now worth much less than the credits originally extended. increasing difficulty in meeting their
Anyone with several credit cards is able to get hold of an advance of some $50,000. Credit card lending by banks has been the object of intense competition. Personal loans have risen from $300bn in 1980 to $795bn in 1990.3
Impact of US recession on world economy
This raises the question of what impact the US recession - which looks set to be serious, quite long and accompanied by financial catastrophes — will have on the rest of the world economy, including on Europe and Japan. One part of the answer lies in a simple fact; in 1988 the USA imported goods worth $459.6bn -that is, 15.4% of the total imports and 16.6% of imports of manufactured goods*. It is the world's number one importing country. In were in second place, behind the Federal Republic of Germany (FRG), for the import of "commercial services" (dispatch, carrying services, travel and so on) which are related to the import of
The USA has been pulling the world economy along, fuelled by credit, over the past eight years. Thus, as George Melloan notes: "an American recession is equivalent to a world recession or at least to reduced world growth" above all through the reduction of American demand.° This depends of course on the size and duration of the recession, as well as on the internal dynamic of key more fundamentally by the effects of the gigantic economic shifts between the USA, FRG/Europe and Japan, against a backdrop of the opening up of Eastern Europe and increasingly strict control of the South. There is a weak link in the system, the American financial system, which has the potential to accelerate the onset of an international economic crisis of immeasurable dimensions. Economists known for their sober judgement are adopting tones which would make even the most unreconstructed catastrophist Marxists hesitate. Philippe Lefournier of Expansion magazine, in a long article entitled "Capitalism faces its real challenges", writes: "The US is facing the oil shock in a situation of structural weakness that calls into question the functioning of capitalism.
"A financial crisis with unforeseeable consequences is likely, because this is a crisis not in the system but of the system... As in 1929. This is the real challenge for capitalism....The system is being led off the rails by the dominant economy within it. Can it save itself?"8
What flows in can flow out
The "borrowed" growth of the US economy was thanks to the Japanese, German and other surpluses. The money that flowed to the USA could flow back in the other direction if there is bad news in America, such as a fall in the dollar, or an attractive rise in Japanese or German interest rates. This would add a massive stock market crash onto the wave of bankruptcies.
The synchronized falls in the world's stock markets - two in the past three years - have revealed the tensions in the money world. There is a financial system which is closely integrated and plugged in 24 hours a day on the one hand. On the other, there is no global control over this system. Furthermore tensions between the three main economic blocs - USA/ Canada/Mexico, Japan and its economic satellites, and FRG/Europe — will grow if there is an economic slowdown or 1. See the article by C-A Udry in /V 194. 2. Business Week (BW) November 5, 1990 and October 29, 1990. The Wall Street Journal (TWSJ), October 30, 1990 and October 24, 1990. 3. Sunday Times, October 28, 1990 and International Herald Tribune (IHT), October 22, 1990. 4. GATT, "Le Commerce International 1988-89" Vol. Il p.3 and p.40. 5. See my article in La Brèche, November 13, 1987, just after the 1987 stock market crash. 6. TWSJ, October 23, 1990. 7. La Brèche, June 29, 1990. 8. L'Expansion, October 18-30, 1990.
November 26, 1990 • #195 International Viewpoint recession. And this will take place at a time when the two "superpowers", the USA and USSR, through different kinds of economic crisis, to losing their superpower status.
The other unknown in the situation is the volatility of the oil price, which has been amplified by the Nymex futures market set up in 1983. Here, prices are set according to the predictions of the operators, such as whether there will be war in the Gulf, rather than the real state of supply and demand?.
A war or a prolonged crisis would tend inflation. This would affect the results of firms and drive up interest rates, thus holding back investment by squeezing profits. Nor is there any good reason for lower interest rates, given the weight of the American deficit, the general financial instability, which makes lenders more and the flow of capital
However the oil price unknown is far less dangerous than the the prospect of an implosion of the American financial system and a "segmentation" of the world financial network.
Then there is a third unknown visible on the horizon, which is already giving rise to unease in some economic institutes. How will the West German economy absorb the shock of unification in the coming two years and what effects will this have on the economies of countries that are closely tied to Germa-
One of the characteristics of the period of growth seen in a of European tries and in Japan since 1984a significant investment, even if this has been overshadowed by finanspeculation!°.
investment has been stimulated by the recovery in the profitability of firms, and helped since 1987-88 by accelerated modernization of the productive apparatus (computerization/communications) as well as by the enlargement of productive capacities given perspective of European unifierce competition on the world market.
investments rose by 6.7% in real terms in the European
Community 11.
This has contributed to a slight fall in registered unemployment in the EC - down from 10.8% in 1985, to 9.7% in 1988 and 9% in 1989. Predictions of further falls this winter, which were still being made in June, are now however in question. Most affected by unemployment are women (except in the UK), and those under 25 (except in the FRG), big differences between countries. There is, nonetheless, one general characteristic: the duration of unemployment has since 1974. Thus in the FRG, 39.3% of the unemployed had been out of work for more than a year in 1983, but the figure was 46.7% in 1988. In France the figure rose from 42% in 1983 to 43.9% in 1990, in Italy from 57.7% in 1983 to 69% in
Reorganization of work
Throughout Europe the organization of the work process is tending towards flexibility, part-time work, temporary subcontracting and so on. However, the forms in which the demand for flexibility is applied to the workforce differ depending on the relation of social and trade union forces and the contractual rules already established. At the same time bottlenecks appear in the labour market due to the lack of qualified workers given the rapid pace of technological change.
The slight decline in unemployment and a series of "good years" have seen a reappearance of wage militancy, both in the private and, even more strongly, the public sector. It is thus hardly surprising that, at the first sign of a change in the economic climate and with specific sec-
WORLD ECONOMY tors - cars, electronics — facing difficulties, the bosses are launching a campaign for new austerity measures and are making big cutbacks. Thus Fiat has put 70,000 workers on short time and Philipps is planning 15,000 redundancies.
Such sackings by the thousand are a foretaste of the brutal reorganizations that will take place with an economic slowdown and the redeployment of European production in the medium term (the single market and the East). A new phase of deregulation is about to begin, in a climate of intense inter-imperialist competition.
But let us return to Germany. Before the
West Germany world's biggest exporter of goods — with a total value of $323.4bn or 11.2% of $321.6bn for the USA and $264.9bn in Japan. It was the second biggest importer imports)'3. Thus, in 1989, West Germany received 15.4% of France's exports, 11.96% of exports of the UK, 16.98% from Belgium/ Luxembourg, 25.86% from the Netherlands, 34.42% from Austria, 20.52% from Switzerland, 12.70% from Sweden and 5.79% from Japan'4. The German locomotive cannot pull the European train by itself, but on the other hand, its principal European partners will have no chance of making it through the coming storms
West German capital keeps
East Germany for itself
The five new Länder of what was once East Germany, Sachsen, Thüringen ( the two most industrialized), Sachsen-Anhalt, Brandenburg MecklenburgVorpommern - were not an important market for West European exports. Here, Austria was in the lead with 1.3% of total imports. Thus it is the overall dynamic of the unified German state which matters for the "European partners" rather than that in the ex-GDR with its 15 million inhabitants. Certainly, there are opportunities in the East, but it is West German firms, operating as a mafia (according to Carlo Benedetti, the boss of the Italian firm Olivetti) who are going to exploit
In the current electoral climate in Germany, there are strongly divergent opinions on the situation being put forward. After the rousing declarations from the Kohl government and his finance minister Theo Waigel, the five main German economic institutes have come out with a much more sober assessment, predicting 10. See La Brèche, June 29, 1990 on the reasons for the unexpected continuation of the boom after the 11. Economic Forecast of the European Commission, 12. OECD, "Perspectives de l'emploi" July 1990. 15 14. Frankfurier Allgemeine Zeitung, October 24, 1990.
International Viewpoint #195 • November 26, 1990
WORLD ECONOMY a growth rate of 1.5% for 1991. No one knows precisely how the various aspects of unification are going to work themselves out. Every day brings new surprises, usually in the form of bills for billions of D-marks - including for one
DM18bn due to a technical error during monetary unification.
For the moment, the last survey by the DIHT (Deutscher
Industrie-und-
Handelstag) finds business confidence holding up. The
"In the is entitled survey
West an uninterrupted boom, in the East, the principle is hope. "IS still
Investment intentions remain as high as in autumn 1989. There is a weakening in the construction sector, but the openings in the five Länder are real
West German eco-business is also looking forward to good times, all the more so in that in the five Länder. Consumer durables can easily be sent eastwards from the West, where the productive capacities of the existing plants can be adjusted to meet the extra demand. In fact, productive capacity is being used to an increasingly high degree — 89.9% in 1990 as
/// pushing for the expenses to be met by the state, arguing that there are other investment possibilities (for Mercedes in Portugal) or financial difficulties (Volkswagen, whose pre-tax profits have fallen by DM
1.1 bn compared to 1989)21
The relation between the occupation of ern firms on the one hand and investment for reconstruction there on the other has not been
This, however, is only one facet of the problem. The other is represented by the social cost of unification over five years. Hans Fahning, director of Hamburg's Landesbank and a longtime member of the association of West German banks, has denounced the lack of glasnost concerning the various deficits — of the federal state, the Länder, the communes, the railways, the post state-supported credit will be important in the depollution of the exGDR. While at the moment SERGUEj*. all this is still on the drawing board, West German industry, which has international position strengthened.
Consumption plays a driving role in example, despite a rise in mortgage interest rates, the demand for house building strongly. In the first nine months of 1990, growth is 53% up on the corresponding period last year. It is estimated that some 300,000 new houses will be built in 1990 as against 239,000 in 198916. Since 1987 a total of 800,000
Boom in West German car
Another leading sector for demand is cars. While stagnation and even decline are afflicting the European motor industry, the German producers are stepping up production. 60% of consumer credit — which rose overall by 9% in 1989 is for the purchase of cars." The net growth of number of cars sold in the exGDR since the start of 1990 is 150,000, on monthly average. The one for one swap of GDR-marks for D-Marks has played an important role in this increase in purchasing power for consumer goods. Many of the cars being bought in the exGDR are secondhand, coming from West Germany and also Switzerland. But this makes room for sales of new cars in the West. There the overall growth is expected to amount to 1 million cars in 1990.18
Demand in the East does not represent an especially extensive market for a pro16 ductive apparatus with a global reach and • does not immediately require investments against 89.5% in 1989, 87.4% in 1988 and 84.5% in 198719
Large-scale investment in the East is going to take place more slowly than originally envisaged by the Treuhandanstalt, the body charged with privatizing the 8,000 big East German firms. According to Detlev Rohwedder, the Treuhand's
"this big salad 600bn"20. But, it seems, nobody wants to buy this salad. The machinery is obsolete and would in any case only duplicate productive capacities existing in the West. The interest payments on debt are prohibitive - DM 10bn. Refitting the plants in a way that would meet West environmental standards would be very expensive. Furthermore wages are not low enough to attract investors, since, in order to keep people from flocking out of the ex-GDR, wages there have been set at 70% of Western levels.
In addition, the ex-DR's traditional East European markets will shrink drastically as of the end of 1990. Prices of East German goods will thereafter be costed in DMs, at a time when the weaker US dollar is becoming more attractive. East German motorbikes will be replaced by Asian mopeds. Gorbachev meanwhile has just received two important credits allowing him to purchase goods in Spain (S1bn, of which half is for the import of consumer durables to be paid in three years) and in France (10bn francs, a part of which is to pay debts and the other to buy grain, and goods and services).
After dragging their feet for a time, Mercedes, BASF and Volkswagen have important agreements with the Treuhand. But these three giants are cost of unification is dissolved examination of various items of expenditure - the internal debt of the ex-GDR, the financial needs of the Treuhand, the debt of the ex-GDR's health insurance schemes, liabilities of East German state insurance schemes, not taken over by the Allianz group - Fahning arrived at a figure of DM 100bn?
Burgeoning state budget
The official federal budget deficit is expected to reach DM 66.8bn. This is not an enormous sum, taking into account Germany's wealth. However, this figure Icaves out most of the debt resulting from the unification. According to Die Zeit 23 the deficit will reach DM 100bn. At this rhythm of growth, the Federal public debt, estimated at DM 557bn in 1990 on the basis of the figure of DM66.8bn for this year, will reach DM1000bn in four
According to a study by Morgan Stanley, quoted by Klaus von Dohnanyi?, the social costs of unification - unemployment and sickness, old age and housing benefits - for the ex-GDR will reach DM 50bn a year for the next four years while reconstruction will cost DM130160bn each year for ten years.
Let us look at the problem of unemployment. On the basis of a growth rate of 1.5% in 1991, the various institutes come up with a figure of 3.7 million unemployed in East Germany and 2 million in the West. Other estimates have arrived at a total figure of 5.2 million unemployed25. How is such a wave of unemployment to be paid for, at a time when public debt is growing at an unprecedented rate? There seems little alternative to
Emperors and
November 26, 1990 • #195 International Viewpoint an increase in taxes and social charges.
This is certainly Hans Fahning's conclusion. Such rises will hold back consump-
WORLD ECONOMY / JAPAN time, tion after a time. At the same inflationary pressures, due to a deterioratconstitutions ing relation between debt and savings — even if this remains high — will appear and interest rates will rise, in an international climate that also pushes interest rates upwards. Some firms have big
ALTHOUGH the Gulf crisis has shown the fundamental unity capacities for self-financing, but others will be in difficulties, as was seen with of the imperialist states in slapping down any challenge to
Nixdorf computers, which was saved by their authority from the dependent countries, it has also
Siemens. Investments will be held back.
thrown a spotlight on long-simmering tensions between them.
The unification operation will in the