Is Germany’s economy getting too weak to pull Europe out of its crisis?
|BERLIN
“THE world cannot afford a European lost decade,” says Jacob Lew, America’s treasury secretary. The latest European figures were uninspiring. In the third quarter the euro zone grew by just 0.6% at an annualised rate. This sluggishness was not primarily due to the countries hit hardest by the crisis—Greece’s economy grew faster than any other euro-zone country, and Spain and Ireland are recovering. Rather, it is the core countries that are exhausted—and few more so than the biggest, Germany. It grew by just 0.1% in the third quarter, after contracting by the same amount in the previous three months.
Angela Merkel, the German chancellor, has been subject to a rising chorus of foreign criticism. Germany should do more to stimulate domestic consumption and investment, goes the refrain. This would help countries like France and Italy as they undergo tough structural reforms. Higher imports would also reduce Germany’s current-account surplus, the largest in the world and a cause of imbalances within Europe and beyond. Stimulating demand would push up prices, which could save the euro zone from tipping into deflation. Prices in the zone rose at an annualised 0.4% in October, far below the 2% ceiling set by the European Central Bank (ECB).
Such demands are echoed by some at home. Marcel Fratzscher, an adviser to Sigmar Gabriel, the economics minister, says that Germany should boost investment for its own good. Much of Germany’s recent success, he argues, has been an “illusion” bought by underinvestment in everything from roads to education to factories. Wolfgang Schäuble, the finance minister, has responded by pledging an extra €10 billion ($12.5 billion) in investment by the federal government over three years from 2016, on top of €5 billion already earmarked for roads and bridges. Yet at barely 0.1% of GDP, that is more symbolic than substantial. And it will not raise the budget deficit because Mr Schäuble’s top priority remains the “black zero”: balancing the budget from 2015.
Christoph Schmidt, chairman of the council of economic experts that advises the government, suggests that “the black zero should not be a fetish”. Germany’s municipal governments, not the federal one, should be the ones to raise public investment. But the bigger problem, he thinks, is that private investment is too low. In a free-market economy such as Germany’s, the government cannot command firms to invest more at home than abroad. If businesses have chosen another course, he says, it must be because, for whatever reasons, they find Germany an unrewarding place for investment.
As it may indeed be, Mr Schmidt’s council of five sages scolded Mrs Merkel’s government this month. Businesses worry about its largesse in public pensions, which defies Germany’s mix of an ageing population and shrinking workforce. Her coalition with the centre-left Social Democrats is raising pensions for mothers and letting people retire as young as 63 if they have worked for long enough.
Entrepreneurs also fret about the new minimum wage, due to take effect in January at the relatively high level of €8.50 an hour. Contrary to hopes that this might boost domestic demand, says Mr Schmidt, some workers will simply lose their jobs. Moreover, those whose pay goes up will then claim less in welfare top-ups, so they will not have much extra income to spend. A further misstep, Mr Schmidt believes, is a muddled energy policy—subsidising solar and wind power and phasing out nuclear—that is merely raising companies’ energy costs. And yet another is a law to cap rising rents, which is likely just to discourage the building of new properties.
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The differences between foreign economists who want more stimulus and German ones who think the problems lie elsewhere partly reflect diverging philosophies. Anglo-Saxon economists assess the problems of Europe and Germany in terms of insufficient demand. Most German economists do not. “We don’t have a Keynesian crisis in Europe, so Keynesian measures won’t work,” says Hans-Werner Sinn, boss of the CES-Ifo Institute in Munich. German economists worry more about the conditions, or “order” of the economy, in the tradition of Ordoliberalism that disdains state intervention and dates back to an early 20th-century economist, Walter Eucken.
In practice, says Mr Schmidt, the dichotomy is exaggerated. “We don’t deny Keynesianism” when appropriate, he says—as it was in 2009, when Germany responded to a demand shock with a hefty stimulus. Demand-side sceptics respond that “Keynesianism is not the answer” when what is most urgently needed is structural reform in crisis-hit countries.
Yet low inflation in Germany is both a sign of weakness and a source of pain for peripheral countries. The ultimate aim of reforms, says Mr Sinn, is to lower prices in the south of the euro zone relative to those in the north, so as to reflect lower productivity. He reckons that would require German inflation of 5% for ten years, or a similar level of deflation in the south, or some combination of the two.
Progress towards that goal is slow. The economics think-tank of the Hans-Böckler foundation, which is tied to the trade unions, says German wages are growing only slightly faster than the euro-zone average. Unit labour costs in Germany rose by 2.3% in 2013 and 1.7% in the first half of 2014, compared with the euro zone’s 1.2% and 0.7%, respectively. At that snail-like pace, Europe may be lucky only to lose a decade.
This article appeared in the Europe section of the print edition under the headline "The sputtering engine"
