Is Germany’s economy a perfect storm?
- 1 March 2012
The media seems to think it is. Germany is now the poster for old Europe, reported The Times this month. "Booming exports account for 47% of German GDP and youth unemployment has almost halved in the past five years…These gains are the result of a ten-year programme of labour reform that provides an excellent blueprint for the British Government to turbo-charge the jobs market here."
Meanwhile, in the Daily Telegraph, Chukka Umunna wrote a controversial article suggesting that UK policymakers had some lessons to learn from Germany. He cited the underlying strength of the German economy and its resilience in the face of a global slowdown as reasons to emulate it.
It's true that Germany is in a strong position, with low unemployment and a deficit of just 0.1% of GDP. It is the country leading the bail-out package, after all, and having its flag burned on the streets of Athens. Meanwhile, German chancellor Angela Merkel's appearances on the French campaign trail are boosting the re-election hopes of Sarkozy.
But is its strength being over-estimated?
After all, the economy shrunk by 0.2% in the last quarter. Growth in both manufacturing and services is stalling. And things may be about to get even worse.
Simon Ward, chief economist at Henderson, and Mindful Money blogger, says: "The powerhouse image is overdone. German firms are competitive but this reflects a suppression of wages over the last decade or so, rather than strong productivity performance. A chart we've seen, sourced from the US Bureau of Labor Statistics, shows that manufacturing output per hour rose by less in Germany in the 10 years to 2010 than in the US, Japan, the UK and France."
And exports are declining. In its latest economic statistics, investments in Germany – particularly construction – remained robust. But it is too simplistic to suggest that Germany is getting everything right. The weakness in Germany came from exports and private consumption, says Reuters here: "Exports in particular dropped 0.8% in the fourth quarter after growing 2.6% in the previous three months. Economists put this down to weaker demand in the Eurozone."
Germany's exports are under threat
This is worrying, as Germany has always relied on exports to drive growth. The strength of the deutschemark, and the costs of unification after 1990, kept the sector in check. However, the advent of the euro made it easier to build up trade surpluses, because weaker countries like Greece and Portugal could no longer make their currencies cheaper as a way of competing with Germany.
For this economic model to keep working, other eurozone countries had to keep buying German goods. To do so they ran up huge debts, both public and private, funded by lending – much of which came from German banks. However, now debt levels in Greece and many of its peers have spiraled out of control.
So what can be done?
The obvious solution would be for Germans to consume more – boosting domestic demand – but this isn't easy, of course. Contrary to myth, German households do borrow – in fact, the household sector has a higher debt-to-disposable income ratio than Greece.
There is little doubt that Germany remains on of the strongest economies in embattled Europe, with a debt level that pales into insignificance when compared with the likes of Greece, and an array of strong companies.
But it is not immune to problems, and should not be considered the Eurozone's saviour.
Shaun Richards, Mindful Money's economist blogger, says it's easy to see Germany's relative strength as a ‘miracle' and be tempted to copy it.
However, he adds in his blog post: "However, history tells us that such thoughts are in general prevalent at exactly the wrong moment. Looking at Germany reminds me of the concept of a "perfect storm" and this came mostly from her labour market. Here the gains from reunification were reinforced by the reforms of the early and middle parts of the last decade. These meant that the new employment regulations of the credit crunch were able to succeed and the combination led to where we are now.
"Even better keeping employment up meant that Germany was able to recover quickly in terms of economic output and bring her fiscal deficit back to near balance by avoiding a surge in social security payments. Such economic strength means that her debt costs are low too as there is little perceived risk in lending to her and she can borrow for 30 years at an interest rate of 2.44%.
"However, there is a shark in the water. If we look at Germany's national debt to GDP figures we see that it has risen over the period of the credit crunch by much more than you might think by looking at her fiscal deficit numbers and is now 81.8%. Tucked away in there is a small part of a big danger and yet again it is the banks. Germany's banks lent on a large scale around the world and they are involved in all of the casualties such as the American mortgage market and the peripheral Euro zone nations."
It seems the image of Germany as an economic powerhouse needs to be reconsidered…
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