The Merkel star is waning but hasn’t solved Germany’s excessive surplus, a big problem for Europe
After 13 years of living intensely, Angela Merkel is stepping away from her party’s driving seat, just as the European Union reaches a critical crossroads that could deeply affect its economy with Brexit, global trade wars, protectionism, a slowdown in China and elsewhere, and social unrest on its doorstep.
Yet despite the outlook and thanks to Gerhard Schröder’s labour market reforms, the economy led by a former East German physicist is soldiering on with its 1.5% growth in 2018. Unemployment in January stood at 5.3%, higher than in November, but still lower than a year ago.
Over the last few years, economic activities increased manufacturing capacity up to over 87%, a rate not seen since 2007. According to a statement issued by the German Ministry of the Economy, many businesses can’t keep up with their orders and are now calling for improved training for refugees since the demographic dynamics have resulted in a lack of qualified workers.
Fatter wage packets lead to upbeat consumers, demonstrated during Christmas when Germans spent 100 billion euros, up from last year’s €95 billion.
Germany does however still hold a central position in a global value chain, and its companies have worldwide operations and re-export products assembled domestically, so they’re still feeling the pinch. The Ifo Institut recorded three successive quarters of rolling decline in business confidence from 2.9 to 2.2 points and between May and September business uncertainty grew as much as it had at the height of the Great Recession.
The Bundesbank forecast GDP growth of 1.6% for 2019. At the end of January, Economic Minister Peter Altmeier adjusted the figure to 1%. Orders have been declining in the last few months, but Jens Weidmann, the Bundesbank chairman, claimed that the fall off in the fourth quarter was due to adjustments made by the powerful German auto industry to comply with emission standards.
One in five German cars assembled in the US – 260,000 total – is bound for China, the third outlet after the US, which buys around 500,000 cars. The bulk of German car exports (770,000) go to the UK. Should the UK crash out of the EU, German car prices there would increase by 10% and lose their competitive edge.
This said, the Bund’s coffers are on the up and up, and capable of withstanding a slowdown, so why is Merkel taking such a knocking?
Some recall how she went along with the hawks in her party by agreeing to German exceptionalism according to which a well-balanced economy depends on price stability and balanced government budgets. The austerity policies Germany forced on the countries of the EU periphery in exchange for endorsing bailouts – having provided the resources that triggered these debts in the first place – were bound to make a lot of people angry sooner or later.
Germany under Merkel has kept its vast exports rolling, thanks certainly to the quality manufacturing, but in the long run, as many point out, such a surplus – a staggering world record of close to €300 billion – was bound to become unwieldy. This has played into the hands of populists and is taking its toll across Europe and the rest of the world.
From a domestic point of view, critics say that Merkel, with no obstacles in sight, did not implement any important economic reform and let the country run on autopilot while focusing on small-scope fiscal and social issues. She is blamed for a politics-first approach that involved channelling incoming wealth towards a number of long-term policies such as phasing out nuclear power and gradually coal as well, and extending the welfare state. By not letting the market direct investments, her critics say, she has been undermining the principles of a market economy in order to allow the state to impose its own policies whenever policy makers didn’t fancy where the market was headed.
However, it is Germany’s economic performance that the government presents as key evidence for championing a social market economy. It sees it as the foundation of a free, open and solidarity-oriented society that protects the freedom of the economy and efficient competition while at the same time promoting welfare and social security.
Considering that until recently some elderly Germans had lived through four regimes – Weimar, Nazism, communism and democracy – Germany has come a long way, but the debate about the optimal level of taxation and how to foster investments is all but settled.
The government is committed to investing strongly in innovation – batteries, artificial intelligence and self-driven vehicles – and Germans tend to put their money where their mouth is. Such was the case with Industry 4.0, a German brainchild, which speeded up the process of updating its industrial model. So, once again, the nation that dear “Mutti” will have governed longer than Konrad Adenauer is now third in the WEF’s ranking of the most innovative countries.
Thanks to the abundant reserves in Frankfurt, Merkel’s Germany could weather a global slowdown and even a steep domestic downturn. Berlin will have a harder time hammering out common economic policies with its fellow EU members along the Mediterranean and Eastern corridors, and even with France, if the Aachen Treaty is anything to go by.
This article is also published in the March/April issue of eastwest.