Satyajit Das: Beware, Ms Merkel, Germany’s economy is not as strong as it seems
Das Capital: ‘The Economist’ called the grand agreement a recipe for “die grosse Stagnation”
Satyajit Das writes the Das Capital Column in the Independent. He has worked in financial markets for over 35 years, as a banker, a corporate treasurer and now as a consultant to banks, fund managers, governments, companies and regulators around the world. He is also the author of Traders Guns and Money and Extreme Money as well as a number of reference books on derivatives and risk-management, which double as 'door stops'. He became a banker because he wasn't good enough to be a professional cricketer, but would give up finance if anyone offered him a job as a cricket commentator or allowed him to pursue his other passion- wildlife (he is the co-author with Jade Novakovic of In Search of The Pangolin: The Accidental Eco-Tourist). He lives in Sydney, Australia.
Tuesday 10 December 2013
If the SPD membership approves (a likely but by no means certain outcome), then Chancellor Angela Merkel will once more preside over Germany in a “grand coalition”. But there are doubts about German strength and wealth, as well as its ability to underpin Europe’s slow recovery.
But the country faces significant economic challenges. Its economic power and financial strength may be overstated.
German economic strength relies on its often criticised export fetish. The assumption is that the country can de-couple from the eurozone, increasing its focus on emerging markets. But German exports to European countries total around 69 per cent of the total, including 57 per cent to the member states of the EU.
In 2012, Germany ran a trade deficit of €27bn (£23bn) with Russia, Libya and Norway, mainly for energy imports. Germany also had trade deficits with Japan (€4.7bn) and China (€11.1bn). In contrast, Germany had a trade surplus with the eurozone (France, Italy, Spain, Greece, Portugal, Cyprus and Ireland) of €54.6bn. It also had a surplus with the US (€36.2bn) and UK (€29.3bn). In effect, Germany’s overall global trade surpluses are reliant on exports to the eurozone. Continued weakness in these troubled countries will affect Germany’s economic prospects.
German export performance also depends on the value of the euro. If it continues to rise due to the US continuing its quantitative easing plan for longer than expected, then Germany’s competitive position will weaken. High energy prices and the increasing problems in emerging markets will exacerbate its problems.
A slowdown in German exports will have secondary effects. The recovery in economies such as Spain’s are dependent on exporting intermediate goods to Germany which are then re-exported as part of finished products. Reduction in German exports will decrease economic activity in these countries, in turn reducing demand for German exports within Europe.
German industrial competitiveness is also overstated. Not so long ago Germany was regarded as the sick man of Europe.
Between 2000 and 2010, German productivity increased by a modest 0.6 per cent per annum, roughly half the OECD average. Despite reforms, the labour market remains inflexible. The German banking system remains fragmented and weak. The problems of the state-owned Landesbanks are well documented.
Germany’s infrastructure is ageing, and requires investment. Energy costs remain high, some 30 per cent above that of the rest of Europe and double that of the US, reducing competitiveness. High natural gas costs (four times the US cost) disadvantages its petrochemical industry.
OECD and World Economic Forum studies rank Germany modestly in terms of education, communication infrastructure, financial system soundness and business environment. It ranks 106th for starting a firm, 31st for mobile broadband, 75th for soundness of banks, 127th for hiring and firing and 139th for wage flexibility.
Its ageing population compounds its problems – it has the highest median age (45) in Europe. In 1970, Germany’s dependency ratio (number of workers for each retiree) was 4.1; in 2010, it was 3 and is projected to go to 1.6 by 2050, only slightly above that of Japan.
The coalition does little to address pressing issues. If anything, it seeks to reverse some of the Agenda 2010 reforms launched in 2003 by now vilified Chancellor Gerhard Schröder, which did much to restore German economic strength.
Whatever their social merits, the minimum wage and increased retirement benefits will reduce competitiveness, particularly in the old East Germany. The plight of younger workers is largely ignored. The targeted increased share of renewables in energy production and the closure of nuclear power plants will increase costs. Constrained by rigid adherence to budget discipline and reducing debt, there are no major investment initiatives.
The terms of the coalition also limit Germany’s operating flexibility. The Economist called the grand agreement a recipe for “die grosse Stagnation”.
Germany remains vulnerable to continuing problems in Europe. The minimum wage and retirement benefit changes also are inconsistent with Chancellor Merkel’s austerity message to troubled European nations. This will make it difficult to insist on further sacrifices.
Chancellor Merkel, who is now considering her place in history, may have been handed a poisoned chalice.
Satyajit Das is a former banker and author of ‘Extreme Money’ and ‘Traders, Guns & Money’
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