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September 29, 2002

For Germans, a Recession Is a Pretty Smooth Ride


IT'S hard to think of a cushier place to live through a recession than Germany.

So what if the unemployment rate is stuck near 10 percent, economic growth is close to zero, and the budget deficit is expected to exceed limits set by the European Union? With Germany's welfare payments, unemployment compensation, not to mention union-negotiated job security, salaries and benefits, life, for many, is still pretty good.

The conventional wisdom here is that the German chancellor, Gerhard Schröder, won re-election last weekend because he shifted people's attention from the country's deepening downturn to Iraq. But it is also true that voters didn't seem to want to hear politicians talk about how to fix the economy anyway.

Germans react differently to hard times than Americans, in large part because a recession feels very different here.

In eastern Germany, where unemployment hovers near 20 percent, many people have not had a job since just after the fall of the Berlin Wall. While they are unhappy, they regard their predicament as a fact of life rather than a failure of public policy, to be remedied at the polls. Their living standard on unemployment is often better than it was with the make-work jobs they held during the Communist era.

Germans are also not as vulnerable to a crashing stock market as Americans. Frankfurt's main stock index is trading at its lowest level in more than five years, and its high-tech index, the Neuer Markt, has collapsed so completely that the Frankfurt stock exchange decided last week to close it. But only one German in five, about 13 million people, owns shares in individual companies. That doesn't approach the United States, where half of all adults own stock, either directly or through employer savings plans. The retirement plans of Germans are likewise not as tied to the market.

In western Germany, signs of penury are hard to find. The luxury carmaker BMW sold more than 180,000 cars here in the first eight months of this year, an 8 percent increase over last year. Sales of Porsches are up too.

Few economists think that the economy can grow at a healthy rate unless German companies are given more freedom to hire and fire workers and unemployment benefits are cut back enough to force chronically jobless people to look for work. But neither Mr. Schröder nor his conservative challenger, Edmund Stoiber, seized on these themes during the campaign.

"There is no mandate for a change that would allow the government to modernize the economy, and there won't be for a long time," said Thomas Mayer, chief European economist at Deutsche Bank. "This is not the sort of environment that nurtures large-scale rebellion on the part of voters."

Given that, Mr. Mayer figures that Mr. Schröder's new government will be able to generate growth of only 1.5 percent per year, provided the global economy does not suffer a major shock.

Some economists have begun comparing Germany's economy, the world's third largest, to Japan's, the second largest. More than a decade since its bubble economy burst and fell into a gradual, seemingly inexorable decline, Japan still has not confronted its most basic weaknesses.

Germany has muddled along for years, too, though its economic vital signs are not as weak. That, in fact, that may be the problem. "We're like the frog who sits in a pot of slowly boiling water, and doesn't notice that it is killing him," Mr. Mayer said.

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