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Germany has consistently been the world’s most successful exporter while importing relatively little. The result has been that Germany’s current account surplus has been higher than that of any other country. For example, in 2017, Germany’s current account surplus was $296 billion versus $195 billion for Japan and $164 billion for China. Yet despite Germany’s impressive export performance, its economic future appears grim. Its population is shrinking and its economic growth rate is diminishing. Its infrastructure is increasingly decrepit and its export reliance on automobiles and machine tools is no longer sufficient to propel growth. Its largest export market has been China whose growth is diminishing. Even worse, there appears little impetus within the German government to do anything to address these negative forces.
——Marvin Zonis

Germans Living In 'Cloud Cuckoo-Land' As Economic Decline Sets In

By Ambrose Evans-Pritchard

It might surprise some Britons that Germany has been one of the world's slowest growing economies over the last twenty years

Britain risks relegation from the advanced league of global economic powers within a decade if it is not careful, but less obviously so does Germany.

The close siblings have opposite flaws. While the British are gambling wildly on political and economic upheaval - full of dangers, yet also breath-takingly bold - the German people are doubling down on ideological certainties, a 20th Century pre-digital model, and the status quo. 

There is a whiff of the Brezhnev era about the long cautious reign of Angela Merkel. Some Germans are vaguely aware that Deutschland Inc is no longer entirely fit for purpose but there is no sense of urgency.

“We’re living in cloud-cuckoo land. We think we are the superstars and that other Europeans should follow our example,” said Marcel Fratzscher, president of the German Institute for Economic Research in Berlin (DIW) and author of The Germany Illusion.

“If you compare us with southern Europe or Italy we look fantastic. Compared to the Nordics we don’t look so good at all,” he said.

It might surprise some Britons - rightly impressed by Germany’s superb manufacturing exporters, but less exposed to the protected, archaic, over-regulated service sector - that Germany has been one of the world's slowest growing economies over the last twenty years. East Asia, the Anglosphere, and Scandinavia have done better. Much-mocked Japan has done better. 

The Bundesbank says Germany’s trend growth rate is heading for 0.75pc by 2021 if productivity continues to stagnate. OECD data shows German labor productivity growth has averaged 1.2pc since 1995 (it was zero last year.) This compares to France (1.2pc), the UK (1.3pc), Australia (1.5pc), the US (1.7pc), and Korea (3.9pc). Has the euro really done any favours for Germany, or has it been a trap?

Die Welt's Olaf Gersemann warned as far back as 2014 in The Germany Bubble: the Last Hurrah of a Great Economic Nation that his countrymen had mistaken a confluence of particular events for a second Wirtschaftswunder. Germany was briefly able to ride the ‘China wave’, becoming the supplier-in-chief of machine tools and capital goods for the industrialisation of Asia.

That Chinese catch-up phase is over. Worse yet, the Lehrer has outgrown the Meister. “China is increasingly exporting products that coincide with Germany's top export categories,” says the German Council of Experts. The annihilation of Germany’s solar champions by Chinese upstarts - with stolen technology and export subsidies - shows how fast the tables can turn.

Trade dependency on China has become Germany’s Achilles Heel. The Council said a permanent 10pc decline in exports to China would cut German GDP by 4.8pc within a four-year period. This damage is already becoming visible. Germany has been in recessionary conditions on and off since early 2018. Each time the Chinese stimulus cycle fades - and the impulse is becoming progressively weaker - the German economy wilts.

Ashoka Mody, the International Monetary Fund’s ex-deputy director in Europe, said no country has come to rely so heavily on Chinese perma-growth. The country is now suffering a systemic shock as a consequence. "It is almost a heart attack,” he said.   

“Korea has diversified into the electronics, which Germany has not done. The Germans pride themselves on engineering excellence and they have been wizards at it since the late 19th Century. But that technology is becoming obsolete,” he said.

“We are on the cusp of a fundamental change in the way the world produces and distributes things and I don’t think German society recognizes how deep the problem is.”   

Yet much of this structural decline is home-grown. Prof Fratzscher says public investment has been negative almost every year since the early 2000s and is still negative. It is why the Kiel Canal - the Baltic shortcut - has had to be closed repeatedly over recent years. The old locks are crumbling.

Most investment is carried out by the Lander and municipalities. Many are broke, including the 18m-strong Nordrhein-Westfalen. “They are over indebted and close to default. It has caused a huge decline in the quality of infrastructure,” he said.

It is one reason why fibre-optic cable coverage across the country is less than 5pc, but it is not the only one. Deutsche Telekom took the monopolist's cheap route of upgrading or ‘vectoring’ existing copper lines. No surprise that Germany has been an absent player in the digital revolution, SAP excepted.

Why was public investment slashed to the bone when Germany could borrow at steeply negative real rates for 10, 20, or even 50 years? Because the policy establishment thought it had to salt away money to meet the coming old-age crisis, but also because it fetishized a balanced budget for its own sake: hence the infamous ‘black zero’, and the constitutional debt-brake. The zero-sum economics of the Schwabian Hausfrau has prevailed. 

This structural corrosion has been masked by monetary union. “Life can get very comfortable when you have a massively undervalued currency,” said Charles Dumas from TS Lombard.  

The EMU debt crisis gave Germany and the creditor states the whip hand over the debtor bloc. The saga became a false morality play of saints and sinners. This distorted perceptions. It also “went to Germany’s head”, says Olaf Gersemann.

The dark side of Germany's export miracle is little understood abroad. It relies on a tax, energy, and regulatory structure that favors the exporting elites at the cost of the bottom half. The pre-Merkel Hartz IV policies of wage compression caused real pay to drop back to the levels of the late 1990s.

The legacy is a lumpen-proletariat of 7.8m people on “mini-jobs”, part-time work up to €450 a month. Companies love it because of tax concessions. This underemployment flatters the jobless rate. It has left Germany more unequal than at any time in its modern history. Prof Fratzscher the percentage in poverty has risen from 12pc to 17pc since 2005. Two fifths of Germans have no net wealth.

What is remarkable is that the political Left has made such little headway protesting this pauperization. German workers have mysteriously accepted the mercantilist belief-system against their own interests. One day the spell will break. 

Nowhere is Germany's predicament more obvious than in cars. German industry misread the Tesla threat and clung to the combustion engine for too long.  “Our manufacturing companies are a victim of their own success. They became lazy and arrogant. They are trying to catch up again but can they transform themselves quickly enough?” said prof Fratzscher. 

Electric vehicles are computers on wheels. The advantage switches to California. Or equally you might say they are batteries on wheels, and the advantage switches to Asian companies like Korea’s LG Chem and Samsung SDI, or China’s CATL, which have locked up lithium supply. These rivals now produce the power packs for VW and BMW and capture much of the value added.  

Daimler’s Dieter Zetsche says the profit margin on an EV is half that of fossil car. Will Germany’s great auto industry support an army of 870,000 workers and an economic ecosystem of millions in ten years time?

The euro years have been a lost era for Germany. The chance was missed to future-proof the country by investing in the next wave of technology before its turns old. It drifted off too long and now its demographic dividend is reversing with a vengeance. 

The Bundesbank says the workforce will shrink by 200,000 a year from now on even under any plausible scenario of immigration. The old-age dependency ratio will rise from 26.5pc to 39.3pc by 2025, before spiraling above 50pc by mid-century.

There is much ruin in a great nation, and Germany has shown an extraordinary ability to reinvent itself before. But first it may need to shed some illusions. Much like Britain.

 

Posted October 9, 2019 in The Telegraph at:  https://www.telegraph.co.uk/business/2019/10/09/germans-living-cloud-cuckoo-land-economic-decline-sets/

 

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