According to a survey of German executives by influential Ifo think tank, German business confidence rose in January for first time in eight months - albeit imperceptibly, from 87.3 to 87.4. A poll conducted by ZEW, another brain trust, confirmed these findings. On past form, though, this confidence level heralds a contraction of 5-6 percent in industrial production.This is consistent with other dismal figures: negligible growth, stiflingly high real interest rates imposed by European Central Bank, an export-discouraging strong euro and a disheartening surge in unemployment to more than 10 percent. German woes are compounded by a global recession, evaporation of entire industries (such as telecoms) and a sharp, universal decline in investments.
The main victims are Mittelstand - 1.3-3.2 (depending on definition) million mostly family-owned German small to medium enterprises (SMEs). Of every 1000 German businesses, 997 are Mittelstand by one liberal definition. The real figure is closer to one third. Strict criteria reduce it to one in thirty firms.
These differences of opinion reflect fuzziness of concept which has more to do with style of ownership and management and with a unique historic-cultural background than with objective, economic yardsticks.
The Mittelstanders form backbone and trusty barometer of German economy. They engage close to 22 million workers and apprentices as well as well over 3 million "self employed" (owner-employees) - 70 percent of Germany's total active workforce. More than two fifths of all commercial turnover in country are generated by them as well as half value added and one third of all exports.
The investment requirements of Mittelstand firms total $20 billion annually. But access to capital is narrowing. Tottering local banks are risk averse, capital markets are lethargic, private investors are scared and scarce. The Basle 2 capital adequacy requirements will considerably increase cost of bank loans to risky borrowers, as are most Mittelstand firms.
According to a survey by Kreditanstalt für Wiederaufbau, German state-owned development bank, one third of all companies found access to bank credits restricted last year. In 12 months to March 2002, German banks approved 7 percent fewer new credits. Listed banks reduced lending by a debilitating one sixth.
According to The Economist, lending to Handwerk (craft) companies declined by half in last ten years. Public sector savings banks, hitherto main source of Mittelstand financing, are hobbled by an increasingly intrusive European Commission. The Neuer Markt, touted as Germany's answer to NASDAQ, slumped by staggering 96 percent and is about to be merged out of existence.
The family is not what it used to be. Less than 40 percent of Mittelstand businesses are handed down generations nowadays. Many are forced to introduce pesky outside investors and directors, or hired management. The banks are far more inquisitive than they used to be. A traditional long-term, epochal, business horizon gives ground to a quasi-American focus on tyranny of bottom line. Capital spending, product development and job security all suffer.
Founders are often to blame, unable as most are to calmly contemplate their own death, or retirement and prepare a plan for orderly succession. It is at these junctions of regime change that most business failures occur, according to Sir Adrian Cadbury, author of "Family Firms and their Governance".
According to Creditreform, quoted by The Economist, a record 37,700 companies went under last year. The Financial Times puts figure at 45,000. This year will witness another bumper crop. The figures, according to Institut für Mittelstandsforschung in Bonn, are even more harrowing. In 2001, 386,000 startups were liquidated and 455,000 formed to yield 69,000 new firms.
New startup formation is at a low ebb. In 1991, net creations amounted to 223,000, in 1995 - 121,000, in 1998 - 100,000. The picture is especially grim in east. About 129,000 net new startups sprouted there in 1991. But dilapidated east succeeded to spawn only 6000 a decade later with its bloated and venal construction sector all but wiped out. Last year was only marginally better.
Half-hearted measures declared by fragile coalition government on Jan 6 - grandiosely titled "Mittelstand Offensive" - are unlikely to reverse tide of red ink. Less red tape, more generous financial support, simplified accounting and a fusion of country's cumbersome development banks will do little to help flood ravaged east, for instance, where crumbling domestic demand cripples local entrepreneurship.
Eastern businessmen sorely lack management experience and skills. Their networks of customers and suppliers are thin on ground. Most of them are single-product outfits. Successes are few and far between and usually involve foreign equity-holders. Luckily, labor market in east is more flexible than its ossified and bureaucracy-laden western counterpart. Hourly labor costs - wages plus inanely vertiginous and generous social benefits - are also substantially lower in eastern Lander.
An arthritic and worker-friendly regulatory framework and a pro-big business tax regime have, indeed, burdened Mittelstand. Still, if anything, Germany's labor market has been liberalized under Chancellor Schroeder's governments and tax rates went down across board. One must look elsewhere for causes of inexorable deterioration of country's SMEs.