Ichiro Suzuki
Former European Central Bank President and Prime Minister of Italy Mario Draghi has issued a report calling for structural change in the European Union. Economic performances of Germany in particular have been less than impressive in recent years. Though Germany has eclipsed Japan as the third largest economy, it was due to the Japanese yen’s relentless fall against the euro as well as the U.S. dollar. In fact, Japan appears to enjoy better economic conditions overall than Germany does.
The world’s third and fourth largest economies over the last fifteen years have so much in common. Both were rebuilt from the ashes of WWII on strong export drives, especially of cars, electronics and machineries. Post-war economic miracles were financed by bank lending, with limited roles played by capital markets that remain under-developed to this day. Labor - management relationships in both countries are not as tense as they are in the U.S. Their economic successes were in part attributed to their tightly-knit culture though immigrants’ influx in recent years are bringing some changes to Germany.
On the other hand, there are huge differences between the two. Germany didn’t suffer an economic crisis that Japan was exposed to in the 1990s and the first decade of the 21st century. While Japan was struggling, the euro-zone had kicked off in 1999, making Germany’s future look so bright. In the very early years of the euro, Germany was called ‘the sick man of Europe’ as smaller countries grew much faster, due primarily to conversion of interest rates from the originally higher levels to that of Germany, the most creditworthy country in the eurozone. Over the years since then, Germany began to catch up with the rest of the eurozone. Some labor reform helped to boost the economy, making Germany less rigid.
However, it was China that lifted Germany out of stagnation. Germany took full advantage of super normal growth of the Chinese economy as the country entered the World Trade Organization (WTO). Angela Merkel made sixteen visits to China in her twelve years as Chancellor, often heading the delegation from her country’s business leaders. On the other hand, she visited Japan only six times, and half of them were participating in Summits, two G-7s a G-20. Germany AG to this day is deeply attached to China. Catering to demand from China has allowed Corporate Germany to operate as it has been since the late 20th century. While all the developed countries took advantage of China’s economic miracle, Germany stood out in its attachment to Beijing.
As Europe’s single currency started at the beginning of 1999, Germany entered the euro at a relatively favorable exchange rate to other European currencies. It was a kind of a compensation for Germany for giving up the Deutsche mark that the country was immensely proud of. The entry exchange rate into the monetary union gave an immense advantage to Germany as an export machine. The German manufacturing industries were already superbly competitive compared to those of other countries in the region before the inception of the euro, and they were given a favorable rate that would remain unchanged indefinitely.
The entry point exchange rate was such a luxury for Germany, especially as opposed to polar opposite experiences Japan went through in the 1980s and 90s. With no monetary union in Asia, of course, the Japanese yen rose explosively in the late 20th century against all the Asian currency that were pegged, at least to a certain extent, to the U.S. dollar. The period of the yen’s meteoric rise witnessed an exodus of factories out of Japan to other countries in the region. ‘Hollowing out’ of industries became a serious long-term problem for the Japanese economy. Germany had no such problems and remained an export superpower within the region as well as to the rest of the world. Only in 2024, Volkswagen is planning to close a factory in Germany for the first time ever, and politicians and labor are working frantically to stop it.
Another major difference between Germany and Japan has been energy cost. Ostpolitik since the 1970s brought Germany low cost crude oil and natural gas from the Soviet Union/ Russia. Inexpensive fossil fuel gave a material boost to German industries. In the years that followed the 2007-09 Global Financial Crisis, it was said that the Japanese economy was suffering from “three highs”. They were high (expensive) currency, high energy costs and high real interest rates (caused by deflation). Germany had none of them. As a result, Germany has long boasted of trade surplus of over 7% of GDP, which is obscene for one of the largest economies on earth. China in its heyday registered double-digit trade surplus but it is down to a few percentage points to GDP. Crude oil imports always weighed heavily on Japan’s trade account, which is often in deficits lately because of crude price’s rises as well as weak currency. Real interest rates were never high anywhere outside Japan since the problems were attributed to mild deflation that brought down inflation to below zero whereas nominal interest rates can’t go below zero.
Japan has struggled with these three handicaps while Germany has cruised. However, some of the advantages Germany has enjoyed for decades are disappearing. Russia’s Ukraine invasion has driven the EU to stop importing Russian oil and natural gas for security reasons. Germany is following the EU‘s policy only reluctantly since the loss of cheap energy is giving a distinct blow to German industries. Having been too close to China has allowed invasion of Chinese imports that are posing threats to the German economy as well as that of the EU, and Chinese demand has weakened considerably. The advent of AI could undermine traditional manufacturing industries. How would Germany respond?
About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.
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