Why Germany Won’t Be a Dominant Power in Western Europe

an aerial photo of a sports car is seeing thru glass inside a factory — picture source

Why Germany Won’t Be a Dominant Power in Western Europe

Source: Peter Ginter/Corbis

Japanese-style stagnation in Europe

September 22, 2014.By Olaf Gersemann

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Why you should care

Contrary to popular belief, Germany won’t be an economic engine for Europe but rather a drag on the continent’s growth.

A confident country doesn’t care much about what other nations think. According to this measure, Germans are rather insecure people, at least compared to, say, Britons or the French.

The Economist once dubbed Germany “the sick man of the euro.” That was 15 years ago, but German elites haven’t forgotten it. Equally famous is that Newsweek magazine, in the 1990s, wondered about a country with growing mass unemployment where you still can’t buy milk on Sundays.

By the year 2100, both France and the U.K. will have populations 40 percent larger than Germany, according to U.N. projections.

Since then, mass unemployment gone down and, yes, milk can be had on Sundays — in some places. In July, just after the German soccer squad became world champion, a new Newsweek cover read “Welcome to the German Century.” Germans lapped it up.

German haughtiness, however, is misplaced. And Newsweek ’s prediction will be wrong. My prediction: Germany will cease to be the dominant political and economic power in Western Europe.

It’s simple demographics. In 2000, the population in Germany was 40 percent larger than in either France or the U.K. But both countries will pull ahead of Germany by midcentury, and by the year 2100, both France and the U.K. will have populations 40 percent larger than Germany, according to U.N. projections. No realistic increase of fertility or net migration in Germany will halt this trend.

Germany could still be a beacon for Europe and the world — if it had a recipe to guarantee comfortable incomes for its shrinking population, if it were dynamic and innovative, if it had a vibrant labor market. But don’t be misled by BMWs on the streets of Boston, by Volkswagens in Shanghai, and Mercedes and Porsches in Dubai and Doha. Don’t be misled by a Germany that looks healthier than sick countries such as France or Italy.

couple of business men wearing suits walk the streets of Frankfurt in Germany

Source: Matt Mawson/Corbis

In fact, Germany has been one of the slowest growing countries in the world. It’s annual growth rate between 1993 and 2013 averaged just 1.3 percent — much closer to Japan-style stagnation (0.8 percent on average) than to the kind of dynamic growth that other Northern European countries such as the U.K. (2.4 percent) or Sweden (2.5 percent) enjoyed. German per capita GDP will be just 75 percent of the U.S. level this year, according to International Monetary Fund estimates. The process of steady convergence toward American levels stopped some 30 years ago.

Germany has succeeded in getting unemployment down from 5 million less than 10 years ago, to about 3 million officially unemployed today. But the underlying data is sobering.

The number of new pensioners hit a 20-year low in 2012. This will soon change as Germany’s first baby boomers (those born in the early ’50s) retire.

First, prolonged wage restraint plays a large role in explaining why unemployment has come down — and an even larger role in explaining why exports have soared. Today, the average monthly salary in Germany is still below the level of 1995. This has pushed unit labor costs down at a time when unit labor costs escalated in all those countries that had to be saved by the European taxpayer or the European Central Bank since 2010.

In the past, exchange rate adjustments would have corrected divergence, with the deutsche mark, for example, strengthening against the Italian lira. But that’s now impossible with the European currency union. Thus, Germany enjoyed a long period of so-called internal devaluation that made it competitive. Going forward, this has to stop. Italy, Spain and others need to regain price competitiveness if the euro is to survive. Any German attempt to counter falling unit labor costs in the crisis countries by further wage restraint could devastate the economic and political integration of Europe.

book cover from author about Germany's economy

Second, while numbers of employed reached record levels thanks to high net migration and homemakers entering the labor markets, unemployment is still high. In Western Germany, in absolute terms, it’s higher than it was in 1982 when the government of then-chancellor Helmut Schmidt broke up over concerns about mass unemployment. Long-term unemployment essentially stopped decreasing years ago. And unemployment is increasingly concentrated among low-qualified workers, single mothers and workers age 60 and over. Even labor secretary Andrea Nahles, a left-winger, concedes as much. “We have tried everything, including spending lots of money,” Nahles said in February at a conference. “But we have experienced again and again that we don’t really reach [the remaining unemployed].”

Germany, with a median age of 45.3 years, already has one of the oldest populations in the world. But it’s enjoying a brief calm before the storm. Because fewer births around the end of World War II reduced the numbers reaching retirement, the number of new pensioners actually hit a 20-year low in 2012. This will soon change as Germany’s first baby boomers — those born in the early 1950s — reach retirement age. As of 2020 at the latest, this will leave labor productivity as a sole source of economic growth in Germany.

Productivity, however, is on a long-term downward trend. Since the alleged second “Wirtschaftswunder” — economic miracle — began in 2005, hourly labor productivity only grew by 0.9 percent on average. And it doesn’t look like a reversal is in the making. High levels of investment don’t guarantee fast productivity growth. But low levels of investment make it almost impossible.

And low levels of private investment are what you see in Germany. In 2000, net fixed capital formation in the private sector stood at more than 6 percent of GDP. In 2013, it dropped below 2 percent. The public sector is doing even worse. The general government’s overall net fixed capital formation in the 21 ^stcentury has been minus 6 billion euros so far. Public infrastructure is suffering. If you want to enjoy a nice, comfortable fast ride on the German autobahn, better hurry before it gets even worse.

It’s late in the game already. And virtually everything the newly elected, and hugely popular, government in Berlin has done this year will only make matters worse. Permanent near-stagnation is about to become the new normal in Germany. The 21^st might become a Chinese century, an American, or even an Indian or Arab. But surely not a German one.

Olaf Gersemann is a business and economics editor of the German newspaper Die Welt and author of Die Deutschland-Blase: Das letzte Hurra einer großen Wirtschaftsnation (German Bubble: Last Hurrah of a Great Industrial Nation).

Why Germany Won’t Be a Dominant Power in Western Europe

Why Germany Won’t Be a Dominant Power in Western Europe

Why you should care

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Mark Leonard

Germany’s Economic Mirage

Why Germany Won’t Be a Dominant Power in Western Europe

Why Germany Won’t Be a Dominant Power in Western Europe

Why you should care

admin

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