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”

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’

PROMOTED VIDEO
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmReview: A week late, Secret Cinema arrives as interactive screening goes Back to the Future
News
Chancellor George Osborne, along with the Prime Minister, have been 'complacently claiming the economy is now fixed', according to shadow Chancellor Ed Balls
i100... which is awkward, because he is their boss, after all
Travel
travel
Arts and Entertainment
Sydney and Melbourne are locked in a row over giant milk crates
artCultural relations between Sydney and Melbourne soured by row over milk crate art instillation
Arts and Entertainment
Adèle Exarchopoulos and Léa Seydoux play teeneage lovers in the French erotic drama 'Blue Is The Warmest Colour' - The survey found four times as many women admitting to same-sex experiences than 20 years ago
filmBlue Is The Warmest Colour, Bojack Horseman and Hobbit on the way
Arts and Entertainment
Preparations begin for Edinburgh Festival 2014
Edinburgh festivalAll the best shows to see at Edinburgh this year
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
i100
News
Kenny Ireland, pictured in 2010.
peopleBenidorm, actor was just 68
Environment
View from the Llanberis Track to the mountain lake Llyn
Du’r Arddu
environmentA large chunk of Mount Snowdon, in north Wales, is up for sale
Arts and Entertainment
arts + ents
News
Morrissey pictured in 2013
people
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

Financial Analyst - Forecasting - Yorkshire

£300 - £350 per day: Orgtel: Financial Analyst, Forecasting, Halifax, Banking,...

Business Architect - Bristol - £500 per day

£500 per day: Orgtel: Business Architect - Banking - Bristol - £500 per day A...

Regulatory Reporting-MI-Bank-Cardiff-£300/day

£200 - £500 per day + competitive: Orgtel: I am currently working on a large p...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Day In a Page

Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

In grandfather's footsteps

5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

Martha Stewart has flying robot

The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

Do women cyclists need 'pootling lanes'?

Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

The dining car makes a comeback

Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

Gallery rage

How are institutions tackling the discomfort of overcrowding this summer?
Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

Eye on the prize

Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

Women's rugby

Tamara Taylor adds fuel to the ire in quest to land World Cup
Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices