Hamish McRae: Germany has got itself a new government, but how will it face the social challenges ahead?

The deal is a compromise, as it must be, and one that highlights sharply the tension within the country

So Germany has a government – or at least it has the crucial agreement between the Christian Democrats and the Social Democrats that will almost certainly be approved by the SDP membership next month and hence lead to the so-called grand coalition of the two major parties.

The deal is a compromise, as it must be, and one that highlights sharply the tension within the country between the twin objectives of economic growth and social harmony. In these negotiations the CDU has tended to emphasise the first, while the SDP has stressed the second. So the CDU’s red lines that there should be no increase in taxation and no softening of fiscal policy have been held. But the SDP has achieved its objectives of a minimum wage, a cut in the pension age for some people, and some less important policies such as certain rent controls.

I suppose the big question here is to what extent Germany will retreat from the radical reforms that propelled it from being dubbed the sick man of Europe in the early 2000s to becoming the eurozone’s powerhouse. The most important single element of this transformation was the labour market reform that took effect in 2004. This introduced short-term contracts, encouraged part-time working and made changes to social security legislation that encouraged job growth at the cost of a reduction in worker rights. It worked. You can see the way the number of employed people turned round in the top graph.

But there was resentment. Many young people found they had to take several part-time jobs, or accept insecure ones, rather than enjoy the conditions enjoyed by people who had entered the job market a decade earlier. That resentment has built and shows in the push for a minimum wage, for currently Germany is one of the few countries in the developed world that does not have one. Ironically the SDP has been the party pressing on this, though it was an SDP government that introduced the labour market reforms. It was voted out shortly afterwards, which perhaps colours its current view.

So Germany keeps its fiscal orthodoxy. Any increase in social spending will, it is assumed, be funded by the natural increase in tax revenues. The plan is still to maintain a balanced budget and the assumption is that unemployment will continue to decline. Germany also keeps its resistance to the pooling of eurozone debt, and will maintain a stern line against future bailouts. But the prospect of further structural reform has disappeared, so the country will in a sense be “using up” the progress it has made. On a three or five-year view that probably makes little difference, but on a longer perspective it is more troubling. Hanging over Germany is the prospect of a falling population, while it already has a declining labour force. With an unchanged retirement age and limited immigration, the working population is expected to fall by about 15 per cent over the next 15 years.

 You can see some projections for this in the bottom graph. This comes from a paper by the economist at the private bank Berenberg, Holger Schmieding, which looks at prospects for Europe to 2020. He is relatively optimistic about the EU in general, arguing that it could become “a more dynamic region with an excitingly diverse culture”. But he is concerned that Germany might become over-complacent and be outpaced by a reformed France and a resurgent Spain.

People will have a variety of views on this. Dr Schmieding is a German national who has spent much of his career abroad – he is currently based in London – and this doubtless gives him a perspective on Germany that we non-nationals cannot have. Many of us have been surprised and impressed by the German resurgence over the past decade because the country really was in a mess, with over 12 per cent unemployment in 2005. I suppose just as many of us over-emphasised the evident problems of Germany in the early 2000s, so there may be a parallel danger of over-emphasising its apparent strengths now. A country’s economic performance can flip remarkably swiftly, as we know here.

However, it is not very wise to bet against Germany. Time and time again it has appeared sclerotic, and time and time again it has surprised us by being able to reorient itself. It has been able to bear macro-economic burdens, such as the costs of incorporating East Germany and the entry into the euro at an uncompetitive exchange rate. But what it will find hard to do is cope with a declining population, for it has never faced such an experience in peacetime. So I think what we should be looking for over the life of this new grand coalition will be whether the country acknowledges the demographic mathematics and starts to adapt policy to this, or whether it will mark time and leave coping with this issue to a future government.

These are good years for Germany. The re-election of Angela Merkel as Chancellor (and nearly giving her an overall majority) showed the extent to which the voters felt they were being guided safely through the economic downturn and the eurozone crisis. Whatever view you take about the long-term future of the euro, there will be a period now of modest eurozone growth. Germany will benefit from that. The question is whether these good years will be used to prepare for tougher times ahead. At a fiscal level they will. There is not much doubt about that, for Germany is one of the few large economies at or close to running a surplus. But at a structural level it is not so clear that these years will be used wisely, and the first sight of the coalition agreement suggests they will not.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Operations Manager

£30000 - £38000 per annum: Recruitment Genius: They are a financial services c...

Guru Careers: Stockbroker

£Basic (OTE) + Uncapped Commission: Guru Careers: A Stockbroker (qualified / p...

Recruitment Genius: Financial Adviser

£20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...

SThree: Graduate Recruitment Resourcer

£20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

Day In a Page

Robert Fisk in Abu Dhabi: The acceptable face of the Emirates

The acceptable face of the Emirates

Has Abu Dhabi found a way to blend petrodollars with principles, asks Robert Fisk
Nepal earthquake: One man's desperate escape from Everest base camp after the disaster

Escape from Everest base camp

Nick Talbot was sitting in his tent when the tsunami of snow and rock hit. He was lucky to live, unlike his climbing partner just feet away...
Adopting high fibre diet could dramatically cut risk of bowel cancer, says study

What happened when 20 Americans swapped diets with 20 Africans?

Innovative study in the US produces remarkable results
Blake Lively and 'The Age of Adaline': Gossip Girl comes
of age

Gossip girl comes of age

Blake Lively is best known for playing an affluent teenager. Her role as a woman who is trapped forever at 29 is a greater challenge
Goat cuisine: Kid meat is coming to Ocado

Goat cuisine

It's loved by chefs, ethical, low in fat and delicious. So, will kid meat give lamb a run for its money?
14 best coat hooks

Hang on: 14 best coat hooks

Set the tone for the rest of your house with a stylish and functional coat rack in the hallway
Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?