Three illusions

“OUR euphoria is dangerous. It makes us overbearing, blind and dull.” So writes Marcel Fratzscher, head of the German Institute for Economic Research, in a new book, “The Germany Illusion”. The book’s message is that Germany, for all its economic strength, has weaknesses. It should be “required reading”, declared Sigmar Gabriel, Germany’s economy minister, who joined Mr Fratzscher for its launch. Mr Gabriel, who also leads the Social Democrats, junior partner in the coalition government, has already drafted Mr Fratzscher into an expert commission. Its goal, derived from Mr Fratzscher’s thesis, is to work out how to boost investment by both German firms and the government.

Plugging the “investment gap” is all the rage in Berlin. On September 20th Chancellor Angela Merkel devoted her weekly podcast to the subject. Growth only happens “when people really invest”, she said, talking up electricity grids, computer networks, roads and other opportunities for private or public investment. Such rhetoric is a personal success for Mr Fratzscher. Having spent much of his career outside Germany, he has an international perspective that nowadays counts as leftish in German economic circles, dominated by such conservatives as Hans-Werner Sinn of Munich’s Ifo Institute. The conventional narrative starts with a triple triumph: a “jobs miracle” thanks to labour-market reforms in the previous decade, export prowess due to competitive firms and a more-or-less balanced federal budget.

Germans are right to be proud of these achievements, Mr Fratzscher concedes, but they must not be blind to the problems they mask. The jobs miracle was achieved in large part by creating lots of part-time and “precarious” jobs. Total hours worked have barely risen, even as the number of unemployed has fallen (from more than 5m in 2005 to fewer than 3m this year). Export success came not from greater productivity but from holding down wages. Meanwhile, much of Germany’s non-traded service sector is notably uncompetitive. And credit for closing the budget deficit goes mainly to big tax receipts that came with high employment.

Germans have derived from this tale three illusions, Mr Fratzscher thinks. The first is that Germany will stay strong just by doing more of the same. The second is that it doesn’t really need the euro zone. The third is that its euro-zone partners are only after its money—and that German taxpayers are the real “victims” from all the rescue efforts to save the euro.

The real story, Mr Fratzscher argues, has more to do with a huge imbalance between saving and investment. Germans “save much but save badly,” he says. They send their savings abroad, where they earn meagre returns. They could have got higher returns by investing at home. Whereas Germany invested 23% of GDP in the early 1990s, it now invests only about 17%, less than most comparably rich countries. Government gross investment as a share of GDP is also strikingly low (see chart).

This missing domestic investment means imports have been lower than they might have been. The capital outflow creates huge current-account surpluses, about which America and the European Commission complain. And low investment is partly responsible for low productivity growth. In many industries the capital stock is smaller than it was in 2000. This means Germans are less wealthy than they could be and their economy will be less strong in future than it should be.