Has Germany Peaked?

If demographics is destiny, some nations seem threatened - and Germany may be most obvious example.

For the past several years - and some might argue, decades - Germany has been the de facto ruler of Europe. As much as that rankles, given the unhappy history in question, the strength of the German economy has given its voters and policy makers the power to dictate terms to others. This has not always (ever?) gone down well with many, but given the relative affluence the continent enjoys and the uncertain alternatives, resistance has been muted. Even the triumph of its soccer teams has seemed to underscore the power of the German model.

It is especially difficult to claim that a nation has peaked when it is at the summit of its powers. But a confluence of forces suggests that the present and recent past may be more anomalous than enduring.

So it is with some interest that those inclined to peer a bit further into the future sense that this phenomenon may not be sustainable. That, in fact, it may already have reached its zenith. The evidence, as the following article explains, has to do with demography, but also with entrepreneurialism, innovation, availability of capital, technology and a host of other factors that threaten Germanic hegemony.

The issue is not some sort of internal rot, but rather that success has been relative, based on the weakness of those to which it is being compared. The growth of other economies, however chaotic they may seem, are on larger bases and, as the US has ruefully learned, success based primarily on others' impotence is rarely sustainable. JL

Ambrose Evans-Pritchard reports in The Telegraph:

If demography is destiny, it may be clear within five years that aging Germany is going the way of Japan. Within 20 years it may equally be clear France and Britain are regaining their 19th century role as the two dominant powers of Europe, albeit a diminished prize.

The European Commission’s 2012 Ageing Report says Germany’s population will shrink from 82m to 66m over the next half century due to social structures that cause low fertility, while France jumps to 74m and Britain to 79m. This is out of date already since the German census revealed in May that the country has 1.5m fewer inhabitants than thought. They miscounted foreigners going home. The total is down to 80.2m.

The old age dependency ratio will jump from 31pc in 2010, to 36pc in 2020, with the workforce shrinking by 200,000 a year this decade. The ratio will climb to 41pc in 2025, 48pc in 2030, and 57pc in 2045. The UK and France will see a much gentler rise.

“Germany is at the high point of its economic output. It will not get any stronger,” said Germany’s EU commissioner, Guenther Oettinger. He accuses his nation of turning flabby, obsessed with “welfare benefits, female quotas, the minimum wage and 'no’ to shale fracking”.

Jorg Asmussen, Germany’s man at the European Central Bank, made much the same lament recently, warning that the country risks becoming “the sick man of Europe again in five to 10 years” if it does not get a grip on infrastructure and education. Germany’s top university – Munich Technical – ranks 53 in the world. All of the top 19 are Anglo-Saxon.

We have come to believe the narrative that Germany was transformed into a Teutonic Tiger by the Hartz IV reforms of Gerhard Schroder in the country’s Thatcherite blast a decade ago. As always with such stories, it is half true.

The reforms did make it easier for Volkswagen to secure longer hours for no extra pay at German plants by threatening to decamp to Eastern Europe. It is why unit labour costs fell 4.4pc across German manufacturing in the single year of 2005, gaining a spectacular edge over Club Med rivals struggling with ECB-induced credit bubbles. The side-effect for Germany has been the fastest rise in income inequality between rich and poor of any rich country. Life expectancy is falling for poor Germans.
This is the same “internal devaluation” policy now being foisted on Italy, Spain and Portugal, but without the tail-wind of a global boom that made it so much easier for Germany. Wage compression is not the same as reform in any case.
What Germany has is a superb engineering base and an all-conquering car industry, selling the premium brands so much in vogue in China and the Gulf. All effort goes into exports.
This trading miracle is married to sclerotic services and swathes of inefficiency at home, again like Japan. Annual productivity per worker grew by just 0.6pc from 2000 to 2010, compared with 1.4pc for the OECD bloc, lagging so badly that the OECD said Berlin should take lessons from the Australian Productivity Commission.
Germany ranks 20 in the World Bank’s ease of doing business index, falling to 106 for starting a business. The World Economic Forum ranks Germany higher at 6 for competitiveness (the UK is 8), excelling in capacity for innovation (3), product sophistication (3) and local supplier quality (4).
But weaknesses abound, too: mobile broadband (31), availability of venture capital (34), access to loans (44), soundness of banks (75), hiring and firing (127) and flexibility of wages (139).
So no, there is nothing special about Germany’s reforms. It is the business cycle that flatters the profile right now, and so does the wage squeeze that has left Germany with an intra-EMU exchange rate undervalued by 30pc against the South. That anomaly is why Berlin calls the shots in Europe today.
Simon Tilford, from the Centre for European Reform, says Germany was never as weak as it looked earlier this decade, and is not as strong as it looks now. But success goes to the head in politics. The national mood has swung from “self-flagellation” to “hubris”, with some questioning the need for Europe at all. “Germany is much more vulnerable than German policymakers appear to believe. Its economic and political ascendancy will be short-lived,” he said.
A current account surplus of 7pc of GDP is deemed a success when it is really a function of crushed internal demand. The surplus must be recycled as capital, so the country is a prisoner of its own imbalances.
It is easy to see what can go wrong. Japan has just devalued the yen by 35pc against the euro, stealing a march in Chinese and US markets where it competes head on with Germany’s champions.
Angela Merkel’s post-Fukushima decision to wind down Germany’s nuclear industry and opt for Baltic wind turbines is a reckless gamble. Power costs are already going through the roof. Germany risks a full-blown energy crunch.
The US shale bonanza is already bringing matters to a head. “The price of gas in America today is just a quarter of the price in Europe. That is a dramatic competitive shift,” said Harald Schwager from the chemicals giant BASF. His firm is building its new plant in Louisiana.
Germany’s leaders seem sure once again that they have solved the euro crisis: once again I beg to differ. The internal devaluation strategies in the South are self-defeating. Falls in nominal GDP are causing debt dynamics to spin out of control, while youth job wastage is degrading skills.
There will be rupture in the end: either EMU-exit by victim states seeking liberation; or defaults within EMU. Either way, Germany will take it on the chin. Hans Werner Sinn, from the IFO Institute, fears Germans may wake up to find that much of the money put aside for the nation’s old age has gone up in smoke.
Germany is not the villain in this saga. It is as much a victim of the EMU project as any other country, though the damage is delayed and the biggest loss is intangible goodwill. Festering anti-German feelings across half Europe are undoing 50 years of enlightened diplomacy.
As for Germany’s qualities, they are beyond dispute. The country has become the stoutest defender of freedom and democracy in Europe. Its reform miracle, however, is overrated.