Hans-Werner Sinn and the German Economy

As discussed on Herdentrieb, Hans-Werner Sinn just told us his assessment of the crisis in a Wirtschaftswoche article.

He sticks to his usual theme: German labor costs are too high, particularly at the low end. As a result, manufacturing has migrated abroad, and capital is also fleeing abroad.

I don't get it:

First of all, he says that Germany has needlessly chased away work-intensive manufacturing such as textiles. Textiles as in "clothing"? Is there any developed country that still produces lots of clothing? Surely nobody will accuse the US of overpaying low-skilled workers and being "too egalitarian". Yet most of America's labor-intensive manufacturing has long migrated to Mexico and China. Can Sinn name a single country on a similar level of development as Germany that still has lots of labor-intensive low-skill manufacturing? I doubt it. Is he aware that the British and American press and public opinion see Germany as an example of a country that still has a "broad industrial base", whereas the US and the UK no longer have it? How does that fit into his world view?

Then there's the point about capital flight: According to Sinn, we have a massive current account surplus because Germans save like crazy, but due to high labor costs, it is unattractive to invest in Germany, so capital is tempted to travel abroad. He claims that Germany has the lowest investment rate among OECD nations. I am not sure that's true - I think the US is investing less as a % of GDP (I didn't check the data for other European countries). But even if it is in fact true, isn't it natural that an ageing society with a declining population invests less than a younger and growing country? What sort of investments does he think Germany is lacking? More industrial production capacity? More real estate? One hundred billion Euros more of it per year?

The only bit where I tend to agree is the service sector: Services are comparatively expensive in Germany. And for those services that compete with "doing it yourself", tax and social security costs are a big disincentive. Therefore, I do agree that it makes sense to think about ways of encouraging certain parts of the service sector. But there isn't all that much leeway to lower wages even further. The only practical way would be to reduce indirect costs such as VAT or social security contributions.