By Tyson Barker, Guest Contributor – Bertelsmann Foundation
Summer 2009
The most recent GDP growth numbers for Germany for the second quarter of 2009 provide welcome news for the senior partner in the German government. The unexpected 0.3% GDP growth places Germany (with France) at the heart of a boon-let for Europe, a potentially quick recovery from what has been touted as the worst recession since the 1930s.
Buoyed by these numbers, German Chancellor Angela Merkel and her CDU colleagues could be charting course for a heavy election win on the back of a vindicated economic policy following the crash of Lehman Brothers in September 2008. The CDU is weaving a narrative that seems to have all the trappings of electoral gold: a steady, resolute leader (Merkel), a dashing, patrician economic steward (Economics Minister Karl-Theodor zu Guttenberg) and a headwind of public opinion support.
The capstone of this election strategy will be Merkel’s visit to the G20 Summit in Pittsburgh on September 24-25, just two days before the German elections (September 27). Already the stage is being set for the G20 to be the climactic final stop on the campaign trail. In the American industrial city, she will roll out Germany’s vision for a “Global Charter for Sustainable Economic Governance.” She returned from Russia where she won the support of President Dmitri Medvedev for the initiative.
Merkel and the CDU are blessed to have this year’s SPD as an opponent. In an election climate that is becoming increasingly personality-driven, Frank-Walter Steinmeier – because of his role as German foreign minister—has not been associated with the economic policies of Berlin’s Grand Coalition. The SPD’s economic proposal has also failed to provide a boost to the party’s campaign. The so-called Deutschland Plan has the ambitious goal of creating four million jobs by 2020, a proposal that would lead to full employment in Germany. But the plan relies on vague statements about creating jobs in the so-called “creative sector” and in healthcare (an element that has been derided in the press as essentially proposing to turn the country into a national nursing home).
If support continues to harden for the so-called Mini-Mehrheit coalition of Merkel’s CDU and the Liberal Free Democrats, it is time to for the Chancellor and her team to begin addressing how they plan on keeping Germany’s house is in order before they talk about essentially globalizing the German social market economy.
Here are four places to start:
- Create a long-term plan to boost German domestic demand: The elephant in the room for fixing the imbalances of the German economy has long been domestic consumption. The €5 billion cash-for-clunkers scheme, part of the German stimulus package was obviously a good start and has become a model for other many other industrialized countries, in particular the United States. But this and other measures taken recently could prove too Keynesian to be true. It’s time to create sustainable incentives for domestic consumption across sectors, and this means cuts in VAT, among other things.
- Prepare for tail-end increases in unemployment: The Kurzarbeit solution provided an enormous cushion to the German employment market by allowing employers to maintain workers while cutting back on production. The doubling of the Eurozone trade surplus in June has provided some solace to those who believe that a return to export-led growth is possible. But expected global shifts in demand, particularly in the United States could leave markets with less of an appetite for German goods. Combined with the traditional lag in unemployment raises, Germany will probably exercise some increase in unemployment levels in the next year. The German government must communicate this to its public and withstand calls from the opposition and some interest groups to take measures that would curb competitiveness and make long-term job creation elusive.
- Pay attention to the solvency of German banks and credit in the system: The issue of solvency and liquidity is still a big one in Germany. The trade surplus-driven German economy invested large sums of its surplus capital in the footloose mortgage-backed security, CDO and other derivative markets of the US. This left the German banking sector more exposed to the US-led downturn than almost any other nation’s banking sector (China’s financial markets were still relatively decoupled from the financial alchemy that led to the current crisis). Corporate debt in Europe is over 100% of 2009 GDP; in the US, that number stands at less than 50%. While German business is not the worst culprit, some companies in the Mittelstand, the small and medium enterprises that are the backbone of the German economy, could witness difficulty borrowing under newly tightened lending requirements of German banks, particularly in early 2010.
- Encourage investment in tomorrow’s industries: Germany ranked 25th overall on the latest World Bank Doing Business Report’s “ease of doing business” index. The United States ranked third. Germany’s rank for protecting investors gives some insight into the investor climate that exists in Europe’s largest economy. Here, Germany ranks 88th, tied with countries such as Russia, Bosnia, Kenya and Tanzania. Without engaging in a sort of investment protectionism that traps capital at home, Germany needs to work on creating a favorable investment climate that encourages job creation in industries in which Germany has a comparative advantage. Green industries, such as solar and wind energy and electricity-saving smart-grid technology, would be great areas in which to start. Beyond that, Germany should encourage EU-level projects such as the Desertec Program, which will diversify the continent’s energy supply, promote increased use of renewable energy, and encourage the development of this growing sector.
Even as the German government begins planning to stride onto the world stage with its visionary Global Economic Charter, it must be mindful of these four challenges. As German Bundesbank President Axel Weber warned this week, it’s still too soon to declare that Germany and Europe are out of the woods. The German social-market model is a unique hybrid that balances growth and productivity with social protection. But as the Export Weltmeister and its leaders should know, something has to work before it can be exported.
