Germany Is Not Volkswagen, but the Wake up Call Should Not Be Ignored

Germany Is Not Volkswagen, but the Wake up Call Should Not Be Ignored

photo by: Adam Clarke

Dalia Marin recently published a Project Syndicate column titled “Germany is not Volkswagen”, which basically tries to portray the fraud by Volkswagen that was recently uncovered by the US authorities as an isolated case and stress the strength of the German manufacturing culture. Germany is not Volkswagen, indeed. BMW, for example, passed the very same US test that Volkswagen failed so miserably. Still, we see a dangerous attempt to hit the snooze button when the alarm clock is ringing.

Germany has come a long way from being the infamous “sick man of Europe”. In 2003-2005 the German government implemented wide-ranging labour market reforms, the so-called Hartz reforms (perhaps somewhat ironically now, Hartz was once a high level executive at Volkswagen). These reforms undoubtedly improved the competitiveness of the German industry. When the public finances had to be consolidated after several years of excessive deficit, it was mainly achieved by raising the VAT rate from 16% to 19% in 2007, that is, in such a way that did not harm export competitiveness.

As a result of reforms that helped its business stay competitive, Germany during last decade did not lose as much export market share as some of the other advanced economies. Indeed, it was one of a few EU countries that managed to benefit from the ascent of China and export to China significant amounts of technology goods while other countries were mostly just importing consumer products from China. The current account surplus and export market share development of Germany can be seen in the chart below.

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At the same time a decade has now passed since the Hartz reforms, problems are mounting and they are definitely much larger than the fraud by Volkswagen. Large German exporters such as Siemens and Daimler have been involved in bribery cases abroad in the past. Deutsche Bank just issued a loss warning for the third quarter of 2015, which will be partly due to it setting aside EUR 1.2 billion for legal costs as a result of being involved in a couple of scandals and investigations.

The obsession of the German elite with doctoral degrees has led to a deterioration of academic standards in German universities and widespread plagiarism. In March 2011 the German defence minister Karl-Theodor zu Guttenberg resigned after he was found to have plagiarised a part of his doctoral thesis. Two years later the education minister Annette Schavan resigned after her doctoral title was revoked in the wake of another plagiarism scandal. A number of less prominent German politicians have also been stripped of their doctoral titles after plagiarism was detected in their academic work. Plagiarism appears to have been particularly widespread among politicians from the Free Democratic Party. Although the above cases involve politicians of various ranks, it is difficult to believe that the business elite has remained entirely immune to the disease.

Another trend is also worrying. Germany during recent years has been unable to complete on time major investment projects. The new Berlin Brandenburg airport is undoubtedly the most infamous case. It should have been completed already in 2012, but now even opening in 2017 is increasingly in doubt. Stuttgart 21, which aims to give the home city of Daimler a modern train station is another case in point. It has experienced serious delays and cost overruns, not least because the hermit beetle, a protected insect, was found to be living in the nearby park affected by the reconstruction project.

The German export performance is currently still strong, but continuation of the success story is nowhere near guaranteed. The Volkswagen scandal is a wake up call that should not be addressed by hitting the snooze button. Talking away the current problems is a sure way for Germany to end up being “the sick man of Europe” again, perhaps as soon as a decade from now.

References

Augsburger Allgemeine. Wie der Juchtenkäfer noch immer Stuttgart 21 behindert. 31 March 2014.

BBC News. Deutsche Bank warns of large loss. 8 October 2015.

Financial Times. Daimler pays $185m to settle bribery case. 1 April 2010.

Marin, Dalia. Germany is not Volkswagen. Project Syndicate. 7 October 2015.

Stern. Welchen Politikern der Doktortitel entzogen wurde. 6 February 2013.

The New York Times. Siemens to Pay $1.34 Billion in Fines. 15 December 2008.

Zeit Online. Guttenberg tritt zurück. 1 March 2011.

Zeit Online. Bildungsministerin Schavan tritt zurück. 9 February 2013.

Zeit Online. “Der Termin 2017 ist gestorben”. 7 August 2015.