Germany now finds itself at the top of Europe's bankruptcy league, writes Derek Scally in Berlin
German business is well on its way to the number one - of bankruptcies. Almost 38,000 German companies bit the dust last year while another 42,000 are expected to pack it in by December this year, at a cost of nearly 700,000 jobs. This puts Germany at the top of Europe's bankruptcy league table.
The days of the hard Deutschmark and a well-oiled German industrial machine driving the European economy are a distant memory in the German business world. Business confidence is in freefall and unemployment is nearing its highest level since unification in 1990.
The economy grew by less than 1 per cent last year, narrowly avoiding recession, and is likely to grow by just 0.5 per cent this year.
The promised economic revival has hung like a mirage on the horizon for the last two years but now the Chancellor, Mr Gerhard Schröder, is banging the drum for a series of reforms to shake-up what he calls Germany's "encrusted" employment market and welfare state.
The proposed reforms will cap unemployment benefits at 12 months, cut non-wage employer payments and lift hire-and-fire restrictions for small and medium-sized businesses.
This is the sector to have been been hit worst by the downturn, according to Mr Dieter Plambeck, chairman of the Hamburg-based Federal Association of Debt Collection.
"Small and medium-sized companies make up half of the bankruptcies in Germany," he said. "The media slavishly cover the big bankruptcies, such as the collapse of the Kirch media empire, but the big names aren't as important as they're made out to be. Small companies die quietly and have next to no lobby."
None of the Germany's lobby groups has much to say in favour of the reforms, named Agenda 2010. Unions say the proposals are socially unjust and are determined to fight all the way, while employers are disappointed the reforms do not go further but have promised to work with the government.
"Germany needs huge co-operation to bring about the necessary reforms in economic policies," said Mr Michael Rogowski, head of the Federal Association of German Industry.
Germany's six leading think-thanks have given the reforms their blessing, but have warned they are just a first step and not a complete solution to Germany's structural problems.
"If this agenda contains everything that is supposed to be implemented by 2010, then conditions for growth will not improve considerably," the so-called six economic wise men said in their most recent report.
That feeling is shared by Irish business men working in Germany.
"There is still a philosophical gap here between what has to happen for commercial reasons and what should happen for social reasons," said one Irish businessman working in Frankfurt. "These reforms just chip at the edges and even then there isn't consensus."
According to the IDA, Ireland is in a favourable position to take advantage of Germany's structural problems. The opening of low-wage markets of central Europe means that Ireland can no longer compete on cost for manual jobs. Nevertheless, Ireland is well-placed to attract investment in the services sector, a rising source of revenue for many companies.
According to the IDA, German companies are taking advantage of IT to move abroad operations previously regarded as core activities. "The number of firms like Pfizer with Irish-based shared services operations, like basic book-keeping and supply chain management, is increasing all the time," said Mr Ken Kavanagh of the IDA's Frankfurt office. "That plays to Ireland's strengths."
But for every company which moves at least part of its operation to Ireland or elsewhere, there are dozens which make empty threats. The threat to leave the country is a card German companies like to play to scare the government, like Infineon, Europe's second-largest chipmaker.
"Many foreign competitors pay only half the taxes we pay. That's not acceptable," said Mr Peter Bauer, an Infineon board member last week, suggesting the company could move to Switzerland.
It could be an expensive move for the company. A newspaper pointed out last week that Infineon's year-long losses mean that it currently pays no corporation tax whatsoever and even received a tax refund of €139 million last year.
Under German tax law, corporations can stockpile unused losses during bad years and redeploy them in profitable years, meaning Infineon is unlikely to pay any corporate taxes for years to come.
Since that provision was pushed through in the last tax reform, corporate tax revenues have plummeted from about €22 billion per annum to just a few billion euro.
The proposals to slash dole payments and relax hire-fire laws are just another sop to industry, say unions, furious at the existing tax incentives and investment programmes.
The incentives available to German companies at home is a major reason why few actually follow through on their threat to leave the country, according to German business experts in Ireland.
"I hear from companies all the time who say they are planning to move abroad, possibly to Ireland," said Mr Bernd Reinhard of the German-Irish Chamber of Industry and Commerce in Dublin, "but after the initial call I never hear from most of them again."
Reforms were needed in Germany, he said, but the current crisis was to a large extent psychological. "When things improve in Germany all the calls for reform will be forgotten."
Non-wage costs in Germany are among the highest in Europe. For every euro an employee earns in the industrial sector in western Germany, the employer pays an average of 81 cents in non-wage costs.
The largest chunk of that pays the employer's contribution of an employee's social insurance, which includes a state pension plan, health care, unemployment and nursing care insurance.
The amount an employer pays on behalf of an employee to the social insurance system is generally equivalent to 42 per cent of the person's direct salary. Taken together, these costs total an average of €22,000 a year for each worker.
Employers are also obliged to cover the first six weeks of a sick employee's wages and social insurance premiums.
The non-wage costs vary widely from industry to industry. They are lowest in the wholesale sector, averaging 68.9 per cent of salary. In the banking sector, employers pay more in non-wage costs - 101.7 per cent of salary - than they do to the employee.
The picture is vastly different in former communist eastern states, where salaries are lower.
Non-wage costs average about €12,800 per person or 68 per cent of salary.
Many German companies have invested in eastern states in the last decade on the condition that they were freed from benefits packages in western states.
Tomorrow: Berlin's employment offices promote job opportunities in Ireland