miércoles, 31 de julio de 2013

miércoles, julio 31, 2013

AGENDA

Updated July 28, 2013, 6:01 p.m. ET

Germany Needs a Dose of Its Own Medicine

Beneath the impressive headline numbers there is a darker side to Germany's success.

By SIMON NIXON
 

While the rest of Europe heads to the coast, German politicians are heading to their constituencies to prepare for September's elections. The campaign is shaping up to be a lackluster affair: The economy has performed well, living standards are rising and Chancellor Angela Merkel has a commanding lead in the polls.  

At the same time, Ms. Merkel's habit of appropriating popular issues such as the introduction of a minimum wage has denied other parties political space. Although there is a mathematical possibility that the Social Democrats and Greens win enough seats to cobble together a coalition, senior opposition politicians privately expect Ms. Merkel will re-emerge as chancellor, possibly of an unchanged coalition.

 
image
Reuters
German Chancellor Angela Merkel at a CDU election campaign rally in the Baltic resort town of Heringsdorf last week.

Neighbors can only look on with envy, marvelling at Germany's transformation in less than a decade from the "Sick Man of Europe" into the Continent's economic powerhouse.
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Foreign governments have beaten a path to Berlin, eager to learn the secrets of Germany's success. The number of visits by U.K. ministers and officials has quadrupled since 2010 to 140 in 2014, according to a Foreign Office source. 

Even Boris Johnson, the mayor of London who has made his career pandering to the xenophobic wing of his Conservative party, recently expressed himself amazed to find that Germans weren't "clicking their heels or restraining their arms from performing a Strangelovian fascist salute." Instead, he declared Berlin to be "hip" and encouraged Britons to look at Germany as a role model.  

But nothing is ever quite what it seems. Beneath the impressive headline numbers there is a darker side to Germany's success. Germany may have enjoyed robust growth in 2010 and 2011 on the back of booming Chinese and emerging-market demand, but since 1999 and the introduction of the euro, Germany has in fact experienced among the slowest growth of any euro-zone country—and that's despite the recession in the periphery. 

More worrying, Germany's longer-term growth potential may not be as strong as often supposed without some structural reforms of its own. The economy risks being held back by low investment rates, weak labor productivity and a shrinking population. With already close to full employment, delivering non-inflationary growth may be challenging.  

Some of these challenges are the flip side of Germany's recent success. The Agenda 2010 reforms introduced a decade ago by former Chancellor Gerhard Schröder, frequently held up by Berlin as a model of successful structural reform, were hardly the exercise in radical new-Thatcherism that is sometimes supposed 

But they did overhaul the social-security system in a way that created incentives for the unemployed to return to work. The result was to increase the supply of labor, keeping wages down, reducing unit labor costs relative to the euro zone and boosting German competitiveness. 

But the reforms also encouraged German firms to hire more workers rather than invest, with consequences that are only now starting to become apparent. Germany now has the largest low-cost labor sector in Europe.

"In 2008, almost seven million Germans, or almost 20% of all employees, worked for low wages, defined as wages below €9 [$11.95] per hour. The lower quintiles saw their real wages fall between 2000 and 2006," says Sebastian Dullien, senior policy fellow at the European Council on Foreign Relations. 

But the corollary is that German labor productivity growth over the past decade has been among the weakest in the euro zone while public- and private-sector investment—the key to future growth—have been among the lowest among industrialized countries, according to Marcel Fratzscher, president of the think tank DIW Berlin 

"In 1999, [the investment rate] was approximately 20% and today the rate is only just under 17%," Mr. Fratzscher argued in a recent report. "Since 1999, Germany has generated an average annual investment shortfall of three percentage points, which corresponds to over 40% of the country's GDP."  

Indeed, the situation is getting worse: Gross-fixed-capital formation has declined for five consecutive quarters, resulting in a level of investment spending that is almost 5% lower than at the end of 2011, notes Huw Pill, chief European economist at Goldman Sachs.
 

This is particularly troubling for a country whose economy depends to such large degree on research-intensive industries. Instead of using the country's vast private-sector savings surplus to fund domestic investment, the German financial system has tended to invest overseastypically with disastrous results.
 

"From 2006 to 2012 alone, losses [on foreign assets] were as high as approximately €600 billion, which is 22% of the country's GDP," says Mr. Fratzscher.
 

Of course, some of the recent investment weakness may be cyclical, notes Mr. Pill. Economic conditions are currently favorable for investment spending, given that borrowing costs are very low and corporate balance sheets are healthy. But some spending may be being held back amid concerns over the euro crisis or until the domestic political landscape becomes clearer: the Green party and SPD are both threatening tax rises 

Even so, Berlin can't afford to be complacent. Germany needs to update its economic money to encourage much higher investment growth to boost productivity and create the conditions for faster growth. And with government debt currently at 90% of GDP, this investment must necessarily come primarily from the private rather than public sector. But it will be up to the government to put in place the tax and regulatory policies to encourage the private sector to take long-term bets on the country's future. 

For example, Germany needs to spend up to €38 billion a year on energy infrastructure if it is to complete its switch away from nuclear power and meet ambitious renewable energy targets, estimates Mr. Fratzscher. But that will require regulatory clarity after years of shifting policy priorities.

Germany also needs to spend about €11 billion ($14.6 billion) a year to upgrade its neglected transport network. Housing and education have also suffered from years of underinvestment. At the same time, further deregulation of the services sector, long resisted by Berlin, would help boost productivity. 

Of course, this requires Germany to take its own dose of the economic medicine it has been prescribing for others.  

If it does, the boost to growth would be good for Germany and good for Europe. And if it doesn't, how long before Germany falls sick again? 

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