Financial and Monetary Systems

Is Germany’s luck about to run out?

Michael Heise
Chief Economist, Economic Research and Corporate Development, Allianz
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Germany is still the poster child of the Eurozone. The economy is growing briskly, and even the usually cautious IMF has now upped its economic forecast. In global competitiveness rankings, Germany has overtaken the United Kingdom and the United States. With a population that is 6% of China’s, Germany manages to sell almost as many goods around the world. However, there is a risk that Germans are becoming too complacent and starting to squander their economic success. There are signs that the country’s luck is turning.

Germans – usually better known for angst and restraint – are now Europe’s most upbeat people. The latest Eurobarometer survey shows that over 90% of French, Spaniards and Italians are still steeped in economic gloom. By contrast, more than 80% of Germans think the state of their economy is fine and dandy.

Economic numbers seem to underpin rising confidence. Since the trough of the crisis, the German economy has expanded by more than 10%. Private consumption is accelerating after a period of anaemic growth. Capital investments, which had been contracting two years in a row, are likely to grow by about 5% this year. The general government budget now shows a slight surplus, thanks to plenty of tax revenue. Unemployment is at a 20-year low. With the euro crisis seemingly under control, only geopolitical developments in Ukraine and Germany’s eastern neighbours could pose an immediate threat to this sunny picture.

The wholesome economic backdrop is also reflected in politics. The country’s two big parties are ruling together in a “grand coalition”. The inevitable internal squabbles notwithstanding, there are few fundamental disagreements over the coalition’s policy programme. Germans seem to like this outbreak of consensus at the top: two-thirds told a recent ZDF poll that they were happy with their national government. In France, the Netherlands and Italy, populist and anti-European parties can expect to come first or second in the upcoming European Parliament elections in May. Germany’s only small Eurosceptic party remains on the fringe.

However, not all Germans are cheerful. Many in the business community are deeply worried about the direction the country is taking. While Germany is chivvying its European neighbours to implement reforms and cut social security, Berlin is heading in the opposite direction. The grand coalition’s policy programme is mainly about redistribution. The retirement age for certain workers is to be lowered to 63 years. A national minimum wage will be introduced, which will destroy at least 100,000 jobs and fail to boost consumption. Stricter rent controls are planned, which are likely to suppress the supply of new housing.

Meanwhile, much-needed reforms – for example, a rationalization of the tax system, improvements concerning the infrastructure and the availability of qualified labour – receive little attention. The government is putting some additional money into education and infrastructure, but nowhere near enough to sustain healthy growth rates over the medium term. The government’s to-do list is long. For example, in global education rankings, German universities do not usually make it into the top 50. Broadband penetration is much lower than in Germany’s northern European neighbours. And investment rates in Germany are extremely low by international standards, which is a severe constraint on growth.

For years now, our team of economists has been much more bullish about the German economy than the consensus. But now our forecasts are more cautious than most. We see growth of no more than 1.6% from next year onwards. Prices will be pushed up by growing wages and capacity constraints. Germany’s competitive advantages are declining while those of some of its European neighbours – which are now busy with belt-tightening and reforms – are rising. Germany’s share of global markets will start shrinking next year.

It is only 10 years ago that Germany was branded as the sick man of Europe. At the beginning of this century it had very high unit labour costs, a gaping external deficit and an unattractive investment environment. Germany is still a long way from becoming a laggard again. But with its ageing society and faced with ongoing globalization, the country’s political class cannot afford to rest on its laurels. Europe needs a strong economy at its core.

Author: Michael Heise is the chief economist at Allianz SE

Image: A tie hangs from an empty chair on a trader desk after the end of a trading day at the Frankfurt stock exchange August 12, 2011. REUTERS/Alex Domanski

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Financial and Monetary SystemsEconomic Growth
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