Weekend Economists: Spock Lives! March 6-8, 2015

[Demeter]

60. Germany’s sickly economy

http://europesworld.org/2015/02/23/germanys-sickly-economy/#.VPxWc44epx4

“Be more like us” say German policymakers to their EU partners. But Philippe Legrain warns that appearances can be deceptive as Germany suffers from stagnant wages, broken banks, inadequate investment, poor productivity growth, a dismal demographic outlook and anaemic output growth...

When Germany won the World Cup last summer, it wasn’t just the soccer fans who rejoiced; most Germans are convinced that their economy too is a world-beater. Finance minister Wolfgang Schäuble boasts of it as Europe’s most successful economy, and German policymakers lecture their neighbours on the need to be more Germanic. Chancellor Angela Merkel celebrated her re-election 18 months ago by saying, “What we have done, everyone else can do.” Not just can do, must do: Germany is using its clout in the EU’s institutions to try to reshape the eurozone in its own image. But the truth is that far from being successful, Germany’s economy is dysfunctional – so trying to impose its model on the eurozone is dangerous for Europe and potentially damaging for the rest of the world. If you drive a Volkswagen or a BMW, and have a house full of Bosch or Miele appliances, it is easy to leap to the conclusion that Germany’s economy is a hot ticket. Appearances can be deceptive, for Germany also suffers from stagnant wages, broken banks, inadequate investment, poor productivity growth, a dismal demographic outlook and anaemic output growth. Merkel’s mercantilist model, which involves suppressing wages to subsidise exports, is beggaring Germans and also their neighbours. Back at the euro’s launch in 1999, Germany was being dismissed as the “sick man of Europe”. Its economy was stagnant and there were four million unemployed. The German myth is that thanks to Chancellor Gerhard Schröder’s labour-market reforms a decade ago, the country is now, in economic terms, an Olympic athlete. While it is true that unemployment has plunged with millions of Germans finding low-paid and often part-time “mini-jobs”, the rest of its economic record is unimpressive.

Germany’s economy is once again stagnant: it was no bigger in the third quarter of 2014 than six months earlier. Since the crisis struck in early 2008, it has grown by 3.1%, which isn’t as awful as the rest of the eurozone but a bit less than Britain and only half as much as Sweden, Switzerland and the United States, the epicentre of the financial earthquake. Since 1999, Germany’s GDP growth has averaged only 1.2% a year, placing it 14th out of what until this January had been the 18 countries in the eurozone, less than France and well behind Britain (1.7%) and America (1.9%). Germany has not become more dynamic since the sick-man era; it has simply cut costs. Businesses have stopped investing and so has the government. Investment has plunged from 22.3% of GDP to 17% in 2013 – lower even than in Italy. After years of neglect, infrastructure is crumbling: highways, bridges over the Rhine, even the crucial trade artery of the Kiel Canal that connects the North Sea to the Baltic. The education system is flagging too, with the number of its much-vaunted apprentices at a post-reunification low. The country has proportionately fewer young graduates (29%) than Greece (34%), and its top-rated university ranks 49th globally. Handicapped by under-investment, Germany’s sclerotic economy struggles to adapt. Despite Schröder’s reforms, it is harder to lay off a permanent employee than in any other OECD country. Starting a business is a nightmare: Germany ranks 114th place globally, behind Tajikistan and Lesotho, according to the World Bank’s Doing Business rankings. No wonder 50,000 German entrepreneurs have emigrated to Silicon Valley. Its major corporations are all old and entrenched; there is no German Google – its nearest equivalent in business software, SAP, was founded in 1972. The services sector – over three-fifths of the economy – is particularly hidebound. Productivity in those sectors – everything from transport to telecoms – is often dismal, not least because they tend to be tied up in German officialdom’s red tape.

The regulation of professional services is stricter than in all but five of the 27 countries ranked by the OECD. In the liberal professions, which account for a tenth of the economy, strict rules dictate who may offer what sort of service, the level of charges allowed for professionals and how they may advertise. Only qualified pharmacists, for example, can own a pharmacy, and they are each limited to four outlets. Other shops may not compete, even for non-prescription drugs. The government has itself also become complacent, introducing fewer pro-growth reforms over the past seven years than any other advanced economy, again according to the OECD. The upshot is that productivity growth has averaged only 0.9% a year over the past decade, less even than in Portugal. German workers have paid the price for this poor performance. Starting with the corporatist agreement struck between government, companies and unions back in 1999, wages have been artificially held down. While German workers’ productivity has advanced by 17.8% over the past 15 years, their pay has actually fallen when set against inflation. Schäuble and others perversely celebrate this wage stagnation as part of Germany’s superior competitiveness, but countries are not companies. While a business owner may wish to minimise wage costs, for society as a whole wages are not costs to be minimised but benefits to be maximised, provided they are justified by productivity. Suppressing wages also harms the economy’s longer-term prospects, because it erodes incentives for workers to upgrade their skills and businesses to invest in moving upmarket. Stagnant wages sap domestic demand, and have left Germany reliant on exports for its growth. And exports have indeed doubled since 2000, subsidised by Germans’ artificially low wages and with the euro itself providing a triple boost: it has been much less buoyant than the Deutschmark, it has prevented French and Italian competitors from devaluing and until recently it provided booming export markets in southern Europe. Germany has also been lucky because its traditional exports – capital goods, engineering products and chemicals – are precisely those that China needed for its breakneck industrial development since the turn of the 21st Century.

With southern Europe now in a slump and with China’s growth slowing and shifting towards services, the German export machine is beginning to sputter. Its share of global exports fell from 9.1% in 2007 to 8% in 2013, as low as in its sick-man era. Since cars and other “made in Germany” exports now contain many parts and components produced in central and eastern Europe, Germany’s export share is, in value-added terms, at a record low. Germany’s export obsession has resulted in a whopping current-account surplus of $289.6bn up to October last year, dwarfing even China’s $206bn in the year to the third quarter and exceeding 7% of GDP. Schäuble and others see this surplus as emblematic of Germany’s superior competitiveness. But if Germany is so competitive, why don’t more businesses want to invest there? Germany’s huge surplus is in fact a symptom of a sick economy. Stagnant wages swell corporate surpluses, while subdued spending, a stifled services sector and stunted start-ups suppress domestic investment, with the resulting surplus savings often squandered overseas. A study by the DIW economic research institute in Berlin suggests that Germany lost €600bn, the equivalent of 22% of GDP, on the valuation of its foreign portfolio investments between 2006 and 2012.

Compressing wages to subsidise exports is bad for Germany and disastrous for the rest of the eurozone...

SO, THE GERMAN MODEL IS THE AMERICAN MODEL....AND THE EURO IS ONLY 15 YEARS OLD?
WHAT A MESS!