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After the re-election of Chancellor Angela Merkel, much is being made of the economic strengths of modern Germany. I remember a time when it was just as fashionable to deride the country with equal enthusiasm.
This reminds me that the mood about such things can quite easily change. In the 1990s, the phrase “eurosclerosis” was widely used to describe the lack of competitiveness and unattractiveness of Germany, its apparent hollowing out and the tendency of German companies to invest anywhere but in their own economy.
As with the economy, its football teams were not seen as Europe’s elite, a status they do enjoy today. Bayern Munich is heralded as the star football team of Europe, earning as much praise as the companies from the same city. Meanwhile, the nation’s ability to have weathered the euro crisis with strong job creation and its admired export model are apparently the envy of the developed world.
Watching Manchester United dismantle Bayer Leverkusen in the Champions League last month got me thinking whether all of this is a bit over the top. United are struggling in the Premier League this season, yet they could easily have put more than the four goals they scored past the German team. Even in their pomp, United rarely beat German opposition and yet Leverkusen came third in last year’s Bundesliga.
Germany clearly has a few outstanding football teams and some fabulous international companies, but is the depth of the country’s success that deep?
In any economy, economic growth is sustained by good demographics and rising productivity. With these, it should be able to sustain growth over the medium to long term and see its share of the world economy rise.
Germany does not have good demographics. By 2050, it is quite possible that its population will be smaller than that of either France or the UK – which, if the European Monetary Union still exists then, means it probably won’t be such a dominant voice on Europe.
Without strong productivity, Germany may grow less than the other two, a possibility today most would think highly unlikely.
German productivity does not look especially strong to me, although neither does it elsewhere in the developed world. Germany’s strong labour market since 2008 has been associated with decent, but not especially strong, GDP growth.
The driver of that cyclical growth has largely been exports. Despite Germany’s crisis-hit European neighbours shifting from current account deficit to surplus, there has not been a corresponding drop in Germany’s surplus. It is almost as though the eurozone has seen its competitiveness rise against the rest of the world.
However, in the future Germany might not do so well relative to many of them in their home markets, nor in competing third markets. With China, Russia and some other large emerging areas slowing, Germany’s exports may find it tough to keep up the same momentum, especially with the euro now some way above $1.30.
There has been some strength in areas of domestic demand, notably some of the regional housing markets, but this does not seem to be driving accelerating domestic demand more broadly, so how Germany is expected to remain so “robust” is unclear to me.
A hint of this was shown in the latest German IFO, along with the regular monthly PMI surveys, a pretty useful leading indicator of the economy’s near-term potential. While there were increased expectations, the current conditions were essentially flat. Optimistic forward-looking expectations are not supported by actual investment spending, which remains quite disappointing and not reflective of a strong Germany.
Chancellor Merkel will probably have to preside over a complex coalition with the SPD, which won’t be as easy for her as her relationship with the outgoing FDP. Some might hope Germany’s stance towards its European neighbours will be less demanding because the SPD is likely to be more aligned to the current governments in Paris and Rome.
But this is far from evident in Chancellor Merkel’s comments in the immediate aftermath of the election, nor was it from the finance minister, Wolfgang Schauble, just before the election. “Steady as she goes,” appears their mantra – which does not strike me as the basis for a lasting solution to the euro’s woes, nor a great reason to think Germany’s traditional export markets will be buoyant.
As always, the realities are quite complex, and with the new anti-euro party waiting in the wings, along with the Bundesbank and the Constitutional Court, to pounce on anything seen as too lax or unjust to the German taxpayer, the Chancellor remains alert to that pressure.
So don’t hold your breath for a major shift in Germany’s strategy on Europe to one in which the big, structural and organisational issues are dealt with, let alone solved. Banking union for common fiscal agreements and a genuine common eurobond – the ultimate hope of the pro-Europeans – don’t seem as though they are around the corner, although I still believe for the euro to survive, they are inevitable. It has become fashionable to regard this as an impressive sign of German resilience too, but I find it hard to see how this can be a lasting position.
I spent some time last weekend with the board of a major German international company and they didn’t seem so excited about their domestic economic outlook or the alternatives facing policymakers dealing with the future of the euro area.
Given Manchester United’s current performance, perhaps I should have waited until they play the return game in Leverkusen next month before writing this piece, but a repeat of the first game – which United won 4-2 - will really get me thinking that not all is quite as fabulous with Germany Inc as is currently perceived.
Jim O’Neill is former head of Goldman Sachs Asset Management and chairman of education charity Shine
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Sir Alex Ferguson retired after last season.
After the re-election of Chancellor Angela Merkel, much is being made of the economic strengths of modern Germany. I remember a time when it was just as fashionable to deride the country with equal enthusiasm.
