As Japan's bubble bursts, a less spectacular but equally fundamental downsizing of expectations is taking place for the world's third-largest capitalist economy. Only a year ago, many pundits were describing the new, unified Germany as an economic superpower. And in a best-selling book, Lester Thurow told us that America would soon be going ''head to head" with a German-led Europe in the struggle for world markets.
What happened to Germany in 1992 was pretty much what happened to the Wizard of Oz when Dorothy pulled away the curtain: A terrifying power was suddenly transformed into a docile force. And guess what? Germany is no superpower. It is the biggest of the medium-sized economies, bigger than, but basically in the same class as, France. Given the hype about German economic might, it is somewhat surprising how relatively small the German economy actually is. According to the Organization for Economic Cooperation and Development, the real gross domestic product of West Germany in 1991 was only 28 percent of U.S. output and only 47 percent of Japanese output. Moreover, Germany is far more preoccupied with its own internal problems of reunification than it is with challenging America for global leadership. Of course there are now 80 million Germans, thanks to the reunification of West Germany and East Germany. But the East brought to its union with the West a dowry of antiquated factories, environmental disasters and socialist work habits. Early hopes that eastern Germany could stage an economic miracle like that of West Germany in the 1950s and '60s have faded. Instead, industries in eastern Germany have been unable to compete in the capitalist marketplace, and the former communist nation has become dependent on massive subsidies from the central government. Indeed, many German officials quietly worry that eastern Germany, like southern Italy, will become a seemingly permanent backward area. Worse yet, anger over massive unemployment in the East has spilled over into a frightening wave of racist attacks on immigrants.
Huge budget deficits. In the early euphoria of reunification, German politicians thought that the costs of rebuilding the East would be temporary, and they promised voters in the West that they would not have to face additional taxes. But with each passing year the estimated costs have grown, and the prospect of huge budget deficits now looms as far as the eye can see. In addition, Chancellor Kohl has backtracked on his no-new-taxes pledge, and voter backlash has unleashed the first serious labor unrest in decades.
All of these problems were apparent last summer. But the big news of the fall was the shattered myth of a German-led Europe. During this period of financial turmoil, Britain, Italy and a number of smaller countries stopped pegging their currencies to the German mark. This was a major change. During the previous decade, most of Europe had joined the European Monetary System, an arrangement in which, for all practical purposes, Germany's central bank determined monetary policy for Europe. Over time, the arrangement began to seem inevitable, a natural consequence of what was thought to be Germany's economic dominance. But the truth is that Germany was never all that dominant on the Continent: German output accounts for only about 25 percent of the total income of the European Community. The reason that Europe accepted German monetary leadership was that it was useful to governments that wanted to borrow some of the German central bank's credibility with financial markets. But real power means the ability to lead people where they don't want to go -- and ultimately the limits of German power became evident.
The key moment came last September. The cost of German reunification had driven German interest rates sky-high. Would Britain and Italy be willing to match those rates and see their own economies plunge deeper into an already punishing recession? The answer turned out to be a resounding no.
The latest data suggest that Germany is sliding into a recession of its own. This shouldn't be a surprise, because the devaluation of the pound and the lira since September has provided the producers in those two countries with a sudden gain in cost competitiveness over their German rivals -- and yes, Germany does have to worry about competition from within Europe, even from Britain and Italy.
It's important not to be too melodramatic about Germany's troubles. Germany is not on the verge of collapse; it remains one of the world's richest, most productive countries. What has collapsed is the myth of Germany as a superpower on a par with Japan, a myth that never made much sense anyway.
Originally published, 1.11.93