As cracks in its economy widen, is Germany’s miracle about to fade?

As cracks in its economy widen, is Germany’s miracle about to fade?

As the markets tumbled last week, Germany, hailed only months ago for its resilience in the European crisis, came under fresh scrutiny. What lies ahead for the European powerhouse?

Philip Oltermann

The Observer, Sunday 19 October 2014 / http://www.theguardian.com/world/2014/oct/19/german-economy-miracle-about-to-fade

Locals call the cantilever truss bridge that connects the Dresden suburbs of Blasewitz and Loschwitz the “blue miracle”. Built in 1893 without the support of river piers, it is the kind of German engineering tour de force that could rightly claim a place in the British Museum’s current Memories of a Nation exhibition, were it not impossible to transport.

However, in recent years the blue miracle has lost some its sheen. The blue paint has faded to a dull turquoise (“the grey misery” is a common jibe), and a 2013 inspection revealed a persistent problem with rust and erosion due to the 25,000 cars that pass over the bridge every day. Local author Uwe Tellkamp, a winner of the German Book Prize, has even called for cars to be banished altogether, as on Venice’s Rialto bridge.

Dresden city council is aware of the problem, but it is under financial pressure. Twenty-one million euros are being spent on overhauling the Albert bridge in the city centre, which was crumbling away so badly that bits of concrete were falling on the heads of cyclists passing underneath. The Augustus bridge, the jewel in Dresden’s eight-bridge crown, will have to come next after it was damaged by floods last year.

“Busy roads and bridges have a 70-year cycle. Sometimes they all come up for renovation at the same time,” says Jörn Marx, Dresden’s mayor for development, walking through the building site on the Albert bridge. “I know politicians across the country who are really struggling to find the money at the moment.”

Crumbling bridges and potholed roads are a politically sensitive issue in Germany these days. Forty per cent of all bridges and a fifth of the motorway network are said to be in a “critical state”, causing traffic jams and delays up and down the country. Worse still, a growing choir of economists and politicians warn that such cracks in the country’s infrastructure are only the beginning of a much bigger problem. Germany, Europe’s model austerian, they say, is saving itself to death.

Only months ago, the German economy was widely championed for its dynamism and resilience; its industry had weathered the eurozone crisis surprisingly well and looked like the only engine capable of pulling the rest of the continent out of the mire. Newspapers announced a repeat of the “economic miracle” of the postwar period; books predicted that the country was in for a “bright future”.

But in October 2014 it is the pessimists who are setting the tone: the German economy is looking about as rusty as the blue miracle in Dresden. In his book, The Germany Bubble, Olaf Gersemann describes the current boom as the “last hurrah” of a nation that faces almost certain decline after six successive generations of rising living standards, while economist Marcel Fratzscher’s The Germany Illusion argues that the country needs to shed itself of the fantasy that it can thrive while the rest of the continent continues to struggle.

Both identify a lack of investment in infrastructure as symptomatic of a wider malaise. Cliche may forever have Germany as the country of efficient autobahns and trains that run on time, but in reality it has invested less in maintaining its roads and bridges than other European state. Its investment rate in 2013 was the fourth lowest in the EU; only Austria, Spain and Portugal spent less. Fratzscher, who is head of the German Institute for Economic Research, calculates there is an “investment gap” of €80bn (£63bn

But at least potholes can be spotted and filled. Missed investment in education, research and industry, on the other hand, might only be felt once it is too late. Gersemann, a journalist for the centre-right daily Die Welt, points out that official statistics show negative net investment in seven of the eight largest manufacturing industries since 2000, with the car industry the only exception. “The government needs to think urgently about how it can convince businesses to stay in Germany,” he said.

Fratzscher points out that Germany only invests 5.3% of its overall economic performance back into education, 0.9% less than the average Organisation for Economic Co-operation and Development country, the equivalent of €25bn. “Among western European countries, only Italy spends less money on its education sector than Germany,” he said.

Chancellor Angela Merkel and her allies are increasingly struggling to dismiss such warnings, with her finance minister, Wolfgang Schäuble, coming under attack from Merkel’s coalition partners, the Social Democrats. Schäuble’s plans for the next budget see Germany taking on no new sovereign debt for the first time since 1969, a historic achievement in the eyes of many German conservatives and an important demonstration of fiscal discipline to the rest of the eurozone.

However, many on the left say the obsession with a balanced budget – colloquially known as the “black zero” – is starving Germany and the rest of Europe of much-needed investment. “The black zero is a fatal signal,” said Fratzscher. Balancing the budget has become a “holy grail” for a succession of German finance ministers, wrote Jakob Augstein in Der Spiegel, the stuff of mystery and folklore, not genuine economic policy.

Die Zeit likened Schäuble’s team to mountaineers who were so focused on reaching the summit that they had become blind to the storm gathering around them. When Social Democrat deputy chairman Ralf Stegner pointed out that “the black zero is not a Social Democratic zero”, the Christian Democrats’ Peter Tauber retorted tetchily by calling Stegner a “red zero”.

To add to Merkel’s woes, she is facing dissent from her own ranks within the CDU for the first time in years. Last week 50 young Christian Democrats signed a manifesto urging their party leader to push for an “Agenda 2020”. While Germany had been urging other states in Europe to reform their labour markets, they said, it had been slow to implement reforms in its own backyard.

“While we have been enjoying our success, we’ve been falling behind in key areas such as the digital economy,” said Jens Spahn, one of the initiators. “Today people across the world may be buying BMWs and Mercedes cars because of their quality engineering, but tomorrow we may be choosing one car over the next because it has superior software.”

The government, he said, needed to do far more to support startup companies, teach IT skills at schools and actively attract qualified immigrants: “Do we really need to wait until we are the ‘sick man of Europe’ again until we have the strength to change?”

Assessments of the gravity and inevitability of Germany’s downturn differ. The government may have been forced to downgrade its growth forecast for 2015 from 2% to 1.2%, yet the economy minister and vice-chancellor, Sigmar Gabriel, refused to sound too pessimistic. Compared with 0.7% growth in 2012, Germany was still on a path to prosperity, he said last Tuesday: “Employment is still rising; unemployment is still decreasing.”

China’s slowdown and the impact of Russian sanctions were always bound to have a knock-on effect on the German economy, say others. Some, such as Kiel university’s Rolf Langhammer, go as far as arguing that the latest growth figures aren’t bad news at all, but encouraging signs that Europe may be rebalancing. By keeping down workers’ wages, Langhammer said, Germany had for years profited from rising labour costs in southern Europe. Now there were signs that the trend had been bucked: German workers were not only spending more thanks to low interest rates, but the introduction of a minimum wage in 2015 was also set to make German unit labour costs more expensive.

“What we’re seeing is precisely what we’ve been asking for from economies in southern Europe: they are exporting more, starting to kill their deficits and becoming more competitive,” he said. “Yet somehow some German politicians didn’t realise that this would also have an impact on our own economy.” Germany, he maintained, wasn’t doing as well as people said during the boom years – but it wasn’t headed for quite the disaster some were making out now either.

Economist Fratzscher remains positive that strategic investments and sufficient “political will” would allow Germany to avert the looming crisis – which is hardly surprising given that he is currently advising the government on its investment plans.

Gersemann is much more pessimistic: “The current success of the German economy is built on a much less stable foundation than the government pretends. Consumers have been stabilising the economy, but that’s partly because the central bank’s base rate is being kept artificially low – people are effectively forced to spend rather than save. That’s hardly a stable footing.”

Current demographic trends, he said, painted a bleak picture for the German economy in the long run. UN forecasts see ageing Germany losing its status as Europe’s most populous nation to both Britain and France some time after 2040.

“We’ve been talking about the pending demographic crisis for years, but we’ll only start to feel its impact in the next few years,” said Gersemann. “The baby boomer generation of the 50s and 60s will slowly start to disappear from the labour market. Total hours’ work will start to fall within a couple of years, depressing Germany’s growth potential.

“Germany in 10 years’ time will feel so different that we will look back on today as the good old days.”