'Korea should enhance fiscal power before expanding welfare expenses'

By Kim Jae-won

Germany once conquered Europe with strong arms under the flag of the Nazis, but now it has become a savior for the continent injecting billions of euros to help debt-driven countries such as Greece and Spain.

The biggest economy in Europe is maybe the only exception in the 27-member European Union, capable and willing to assist its neighbors amid the eurozone debt crisis. How can the country do this?

Hyundai Research Institute (HRI) looked into four key aspects of the country ― economy, fiscal policies, finance and politics ― to figure out how Germany managed to stay the course during the debt crisis. It found that its strong exports, fiscal soundness, financial sustainability and transparent political system are key drivers in Europe’s strongest economy.

The private think tank run by Hyundai Group said that Korea should benchmark the nation to become Asia’s leading economy, just like Germany is in Europe.

Implications for Korea

Cho Ho-jeong, a senior researcher at HRI and author of the report, says that Korea needs to follow Germany’s footsteps by increasing export competitiveness, improving fiscal soundness and monitoring crisis factors.

“We should diversify our exports destinations to imitate Germany, which could keep its economic stability thanks to diverse markets and high manufacturing competitiveness,” Cho said in the report.

The economist also stressed that the nation should consider its fiscal power before expanding welfare expenses.

His advice is timely because both governing and opposition parties promised too many welfare policies ahead of last week’s National Assembly elections and ahead of the presidential election scheduled in December.

However, politicians are unlikely to beat the temptation to promise more welfare policies to win more votes from the public.

Some experts point out that Germany has benefited from the relatively low currency power of the euro as the country’s economy heavily relies on exports. They argue that it is natural for the country to share the burden of the debt crisis because it has been the biggest beneficiary of the united currency.

Strong exports

Germany is well-known for its strong exports. It is one of the biggest exporters in the world and home of prestigious manufacturers from Mercedes-Benz and BMW to Mielle and Brown.

The country had 852 brands occupy the world’s largest market share in 2009. Thanks to the strong brand power, Germany’s export volumes continued to hit a record high last year with $1.4 trillion.

Germany’s current account marked about a $180 billion surplus for each of the last three years, while the other two economic powerhouses on the continent ― France and the United Kingdom ― saw deficits of a couple of billons euros during the same period.

The report points out that relatively low labor cost and diversified export destinations contributed to the nation’s high economic achievements. Germany’s labor cost per capita marked 106 points in December, while the United Kingdom and France posted 118.2 and 113.9, respectively at the time. Average labor costs per capita in the eurozone marked 110.7.

Germany also made efforts to diversify its export destinations. Its export ratio outside the European Union marked 40.8 percent in 2011, up 4 percentage points from 2006.

Fiscal soundness

Germany has managed to keep both state and private debts under control. Its fiscal deficit to gross domestic products (GDP) marked minus 1.1 percent last year, under the eurozone’s golden rule of minus 3 percent. Its state debt-to-GDP ratio also marked 81.5 percent in 2011, down 1.7 percentage points from a year ago.

The report says it is thanks to successful economic reforms, a high savings rate and stable housing prices. Its household savings rate marked 17.1 percent in 2010, higher than its regional rivals of France and the Britain, which posted 15.6 percent and 7.5 percent respectively at the same time.

Germany’s housing prices also increased 0.5 percent in 2011 for the past six years, while France and the United Kingdom each saw increases of 27.4 percent and 15.9 percent during the same period.

Transparent political system

Germany’s financial status is stable. The nation’s sovereign bonds are more credited than those of the United States, which are regarded as the safest assets in the world. The report says that it is because Germany’s exposure to the so-called PIIGS countries is relatively low, and the nation is well-equipped with a financial defense system against outside shocks.

PIIGS refers to a group of debt-driven European nations of Portugal, Ireland, Italy, Greece and Spain.

The report shows that Germany’s transparent political system contributed to the nation’s competitiveness and brand image. The country was sixth in a national competitiveness index by the World Economic Forum in 2011.

The country also ranked high in the anti-corruption index last year. It was 14th in the index with 8 points edging the United Kingdom (7.8) and France (7).