Germany

FOOTBALL IN GERMANY Football is by far the most important sport in Germany, in terms of both players and spectators. German clubs have been quite successful in European competitions, with Bayern Munich winning last years Champions League. Also in this years’ Champions League, two of the quarter finalists came from Germany with Bayer Leverkusen reaching the final. Financial risks for the Bundesliga emerge from the default of the Leo Kirch group who owns the television rights. The bankruptcy of the company endangers the payment of the remaining television fees, threatening to leave the clubs without one of their main sources of income. THE STATE OF THE ECONOMY The German economy fell into recession in the second half of last year. The downturn gained momentum after the September 11 terrorist attacks and real GDP contracted by 0.3% qoq in 2001Q4. Although the weak external environment weighed heavily on the economy, recessionwas essentially home-made:Total domestic demand fell by 1.0% in 2001 while net exports added 1.6% to GDP growth (thanks to a 4.7% rise in gross exports of goods and services). Gloomy sentiment caused by rising unemployment and uncertainty about the outcome of this year’s wage round weighed on private household and business spending in 2002Q1. Hence domestic demand growth was probably be weak in the first quarter. However, sentiment indicators point to a recovery around the second quarter this year. Firmer growth in the US should help German exports with the result thatGDPcould edge higher.Assuming a stabilisation of energy prices at lower levels, the fading price effects of the Euro changeover and a normalisation of food price inflation, private consumption and investment growth are likely to strengthen in the course of the year, raising annualised GDP growth to 2.5% - 2.75% during the second half. Growth is likely to average 1.8% next year, close to its potential rate of 1.75%, on the back of 1.5% domestic demand growth and a 0.4% contribution from net exports. The greatest domestic risk for recovery emanates from this year’s wage round. Union membership has declined since German unification mainly due to structural change towards less unionised service industries and discontent of union members about low increases of real take-home pay. Against this background, IGM, Germany’s biggest union, pursued a high profile wage campaign, which led to an acceleration of wage growth in 2002 compared to the previous two years. The World Cup and Economics 22 World Cup 2002 THE 2002 WORLD CUP Since winning the European championship in 1996, the German national team has produced many dismal performances. A low was reached at the 2000 European Football tournament where Germany dropped out in the first round. In the qualification for this year’s world championship the national team seemed to have regained some of its previous strength. However, a blowout loss to England showed that the team has still a long way to go.The recent failing of the German team has been, among other things, linked to deficits in tactics. While most of the European competitors have switched to a strategy of 4-4-2 the German national team still prefers a more traditional strategy with a central defender behind a line of 3. Younger players of the team are meanwhile used to the 4-4-2 system, as some clubs in the Bundesliga have started to introduce the new system. However, older players have trouble to adapt, leaving the coach of the national team, Rudi Völler, little choice but to stick to the old way of defence. Compared to it’s predecessor, the 2002 national team cannot claim to have a world class player within it’s ranks, with goalkeeper Oliver Kahn being the only exception. Those players that seem to have the potential are still considered to be too young to lead their team into the quarterfinals. Especially, in attack the team has shown considerable weakness. The German team travelling to Japan and Korea will be a team in transition. Even German football officials have remarked that they do not expect great things from this team. For the first time in decades, the German team is not considered to be a serious contender for the world championship. Planning seems to concentrate on 2006, when the tournament will be held in Germany. However, the team won’t be an easy pushover either. The team can rely on its physical strength and will show great determination. With the domestic economy weak and the Euro unlikely to depreciate much this year, companies will have difficulties in passing on the wage increases to prices. The resulting squeeze on profit margins is likely to dampen investment growth and lead to further job losses. The weak labour market will weigh on consumption growth. After a bumpy start to 2002, headline inflation is likely to resume its downward trend and fall below 1% by the middle of this year. Core inflation is likely to remain moderate and ease below 1.5% next year. Apart from transitory shocks due to variations in food prices, the greatest risk to the inflation outlook comes from energy price developments. A renewed rise of the latter could exert upward pressure on inflation while at the same time weakening economic growth, again raising fears of stagflation. THE STATE OF THE NATION There are intriguing parallels between the condition of the German national team and the state of the nation. Both are former heavyweights, apparently on a path of secular decline or before a future comeback. To avoid continuing economic decline relative to its peers, Germany needs comprehensive reforms of the tax, regulatory, social security, and education systems as well as comprehensive labour market deregulation. These reformswill only be successful if they allow market forces to play a much greater role in all areas of the economy. Although both the incumbent Chancellor and his challenger are keenly interested in strengthening the economy through structural reforms, their economic policy track records show a significant leaning towards interventionist industrial policies and a rather conservative approach to social policy and labour market reforms. Hence, progress in reforms will depend more on the composition of a new coalition government and the relative strength of the ruling parties than on the identity of the Chancellor. Previous Appearances: 14 1934, 1938, 1954, 1958, 1962, 1966, 1970, 1974, 1978, 1982, 1986, 1990, 1994, 1998 Honours Winners: 1954, 1974, 1990 Runners-Up: 1966, 1982, 1986 Semifinalists: 1934 (3rd), 1958 (4th), 1970 (3rd) Hosts: 1974