Germany's Drag on the Global Economy
-- If there's a threat of dangerous deflation -- a general fall in prices -- the causes lie as much in Europe and Japan as in the United States. The inevitable collapse of America's speculative boom would not have been especially damaging if the world's other advanced economies had been healthy. Their expanding appetite for imports would have bolstered the United States and emerging-market countries, from Brazil to South Korea. The trouble is that other advanced economies aren't healthy.</br></br>Far from offsetting the U.S. slowdown, Europe and Japan -- almost a third of the global economy -- are aggravating it. Jim O'Neill, Goldman Sachs's chief economist in Europe, forecasts that the European Union's economy will grow only about 1 percent in 2002, compared with 2.4 percent for the United States. Japan's economy will decline by about 1 percent. The Federal Reserve's decision to cut interest rates last week implicitly recognizes an unspoken reality: America's recovery has received almost no support from abroad.</br></br>Deflation could be the result of simultaneous slumps in the world's three major economies. Prices drop because there's too little global demand chasing too much global supply -- everything from steel to shoes. Japan's ills are well known. An economy dependent on exports stagnated once exports faltered. Its banks are awash in bad loans. Less understood is the fact that Europe's troubles stem significantly from Germany. It's the engine that drives other countries: Its population (82 million) is about a fifth of the EU's; its gross domestic product (about $2 trillion) is almost a quarter.</br></br>The engine is sputtering. In 2001 German GDP grew a meager 0.6 percent; this year it is expected to grow 0.4 percent. Since 1991 unemployment has averaged about 8 percent; the number of jobs today is roughly what it was a decade ago. Worse, things won't get better soon. "German underperformance could easily persist for another decade or more," concludes a study by economists Dirk Schumacher and David Walton of Goldman Sachs.</br></br>As they diagnose it, Germany has two major problems. One is common in Europe: overregulation, especially of labor markets. Laws make it hard to fire workers, so companies are reluctant to hire. Generous unemployment benefits discourage the jobless from seeking work. Wage bargaining remains too centralized; companies have too little flexibility to fashion contracts that fit their needs. High payroll taxes raise labor costs.