Ifo Viewpoint No. 77: Germany: World Champion in Tourism

Hans-Werner Sinn
Munich, 1 August 2006

Germany failed to become the world champion in football, and many now realise that Germany’s claim to be the world champion exporter is a canard. The country tops the export league only in merchandise exports. In the overall exports sweepstakes, where services are also taken into account, Germany slips down a notch—even if the exports of SAP and the foreign sales of German consulting engineers are included.

But in tourism, Germany is truly the world champion. The tourist services that Germans purchased abroad amounted to $73.2 billion dollars in 2005, topping that of the United States ($69.2 billion), although the US has a population three and a half times larger than Germany’s. From the Bahamas to Bahrain, from Phuket to Panama, from the North Cape to the Cape of Good Hope, German holiday-makers span the globe.

Despite miserable growth rates and mass unemployment, Germans are enjoying themselves. No other developed nation on this earth has so few children in relation to its size; no population is shrinking faster than the German one. And still no nation spends so much money on foreign trips than Germans do. The Germans no longer invest in their future; they are too busy enjoying the present. German luxury liners ceaselessly plough the seas, Lufthansa flies from one record year to the next and the German language is spreading to the last remaining paradises on earth.

What could possibly lie behind this tourism boom?

One possible reason is that Germans still enjoy relatively high incomes, despite the current economic problems. This argument falters, however, if one considers that Germany lies only in the mid-income range of European countries. Not only the English and French have overtaken Germany in per-capita income but also the Irish, the Austrians and the Dutch.

A second reason could be the long holidays. With about 6 weeks of holiday entitlement, Germany ranks in the top group, still behind Sweden, the Netherlands and Denmark but above the Western European average and more generous than countries such as France and Britain, with only 5 weeks of holiday.

Income distribution is a third reason. Even though average incomes do not stand out in an international comparison, the income of those who have ample time for holidays does. German pensioners are better off than pensioners in almost any other country. The eastern German pensions are even ten percent higher than those in western Germany. Also the unemployed, who have lots of free time on their hands, are not short of money in Germany. And students, with five months of vacation a year, can, as a rule, rely on generous transfer income. Fully 41% of the adult population in Germany are recipients of government transfers. Thus, there is ample time and money for holidays abroad. The broad swathe of hotels along Europe’s southern edge, from Tenerife to Rhodes, would not have its present shape without money from the German social insurance systems.

But why do Germans take their holidays abroad instead of vacationing at home? Indeed, those who are just barely able to afford a holiday from their transfer income are particularly keen on a vacation abroad.

This could be because of the weather, which is usually better elsewhere. But German summers are also becoming more attractive thanks to global warming. This summer has certainly been warm enough.

A more important reason is the wage structure in Germany. Tourists buy services, and the price of these services depends directly on wages and taxes. Germany has a very flat wage structure in an international comparison, with extremely high labour costs for simple services. This has destroyed domestic demand for these services.

Labour costs themselves are the result of government transfers. On the one hand, these transfers lead to taxes and social contributions that make labour more expensive. On the other hand, they create a wage competition that drives up the market wages for simple services. The transfers are defined, as a rule, as wage replacements, i.e. they only flow to their full extent if people are idle and they are withdrawn progressively if people work. They act as a minimum wage in wage bargaining, and compress wage distribution, pushing it up from below.

State transfer payments have increased the purchasing power of the masses, but at the same time they have made simple work more expensive and have thus diverted demand for tourist services to other countries. This is the simple reason why Germany is the world champion in tourism.

The increase in wages for simple work is also the reason why the customers of German holiday areas have changed. While mass tourism has turned away from Germany, higher income groups continue to use the high-quality services of German hoteliers. Formerly only rich people could afford a vacation on Mallorca. Poorer people went, if at all, to the North Sea or to the Alps. Today the opposite is true. The rich nowadays dine in Norderney or Garmisch, while the masses must fly to Mallorca.

Hans-Werner Sinn
Professor of Economics and Finance, University of Munich
President of the Ifo Institute

Published under the title "Sylt oder Mallorca“, Wirtschaftswoche, no. 31, July 31, 2006, p. 138.