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Germany: from ‘sick man’ of Europe to engine of growth
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Germany: from ‘sick man’ of Europe to engine of growth
Rising competitiveness and exposure to emerging markets helped the good times roll
https://www.ft.com/content/bd4c856e-6de7-11e7-b9c7-15af748b60d0
Any politician would love to head into an election with the kind of economic record that Germany has shown under Angela Merkel.
Bidding for a fourth term in office in elections in September, Germany’s chancellor can point to brightening economic growth forecasts, bulging state coffers and a booming jobs market.
"Employment growth is strong, the unemployment rate is at a record low, output growth is above potential and the fiscal position keeps strengthening,” is the judgment of the International Monetary Fund.
Ms Merkel will hope to reap the benefit of dramatic change in the German economy since the period when the country was mocked as the “sick man of Europe” — and the origins of that transformation lie in the period before she took office in 2005.
Here we examine the origins of that transformation.
Why was Germany in such a mess?
Throughout the 1990s and the early 2000s Germany’s economic growth was lower than that of the eurozone as a whole, largely due to the cost of the reunification of West and East Germany in 1990.
“The shock of absorbing an economy with 16m people, thousands of outdated smokestack factories and a 50-year legacy of central planning would have brought any economy to its knees,” noted Katinka Barysch, of the Centre for European Reform, in a 2003 paper.
The consequences strained Germany’s jobs market and its budget.
By 2004 unemployment rates were higher than for most of its peers, including Italy and France. And with a fiscal deficit of 3.7 per cent of gross domestic product, Germany was breaching the Maastricht treaty limit of 3 per cent — again faring much worse than its main peers.
How did the German economy turn around so rapidly?
According to Christian Odendahl of the Centre for European Reform, a lot of the answer lies in good timing.
In the mid-1990s, wage bargaining became more decentralised, with less negotiation at the sectoral level and more within companies.
This lowered labour costs, argues Alexandra Spitz-Oener, in the Harvard Business Review.
Mr Odendahl says: “Unions and works councils agreed to hold down wage growth, helping German businesses adapt to a higher level of international competition.”
The competitiveness of German companies was further helped by having more of their production chains abroad, particularly in eastern Europe. More than 1,800 German companies invested in over 3,500 projects in eastern Europe, creating more than 650,000 jobs since 2003.
No other country invested that much in the region, especially in automotive, electronic components and industrial machinery.
What else helped Germany become an export Weltmeister?
German companies looked at exporting to emerging markets earlier than most of their peers “in response to the rigidities of the domestic economy and expectations of falling domestic demand”, explained Carlo Bastasin in a paper published by Brookings. As a result, they were able to offer high-quality and increasingly competitive capital goods to countries in the throes of an investment boom.
In 2003, Germany became the largest source of imports in eastern Europe, a market that has grown fourfold since 2000. In 2005, Germany surpassed the US to become the leading source of machinery imports into India: the value of that market has multiplied eight times since 2001. Germany is the largest exporter of vehicles to China, the value of those imports multiplied 18 times over the same period.
In the seven years before the financial crisis, real German exports increased 76 per cent, compared with about 20 per cent for its peers.
What about the role played by government reforms?
Some believe that the country’s economic recovery was largely the result of the Hartz labour market reforms introduced in 2003, named after the former Volkswagen executive who headed the commission that came up with the package. They were aimed at making the labour market more flexible and providing stronger incentives to take up work.
Others argue that the economic impact was modest. The Hartz reforms are widely considered to “have contributed to the recent decline in long-term unemployment” but critics points to the resulting rise in in-work poverty and insecure jobs.
What problems might lie in store?
As far as the rest of the world is concerned, the biggest problem is Germany’s soaring current account surplus, what Donald Trump has called “bad, very bad”.
Over the longer term, the IMF warns that “growth over the medium term is expected to decline” as a result of adverse demographics — Germany is a rapidly ageing society — and slow progress in structural reforms.
It proposes that Germany contemplate longer working lives, higher female labour participation, better integration of immigrants in the labour market and higher public spending — particularly in infrastructure.
According to the fund, that should support domestic demand and reduce savings — and that in turn would reduce the current account surplus that annoys the world so much.
