Forbes India – Germany: Merkel leaves German economy with problems under the hood

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An electric Mercedes Benz on display at the Munich International Motor Show on September 7, 2021. Germany has only recently decided to align with US incentives for electric car buyers. Image: Felix Schmitt / The New York Times

During 16 years as German Chancellor, Angela Merkel became an international avatar of calm, sanity and democratic values ​​for the way she handled crises which included a virtual financial collapse of the eurozone, the arrival of more than a million migrants and a pandemic.

Today, Germany is an economic colossus, the engine of Europe, enjoying prosperity and near full employment despite the pandemic. But can it last?

This is the question that arises as Merkel prepares to leave the political scene after the national elections on September 26. There are signs that Germany is economically vulnerable, losing its competitiveness, and unprepared for a future shaped by technology and rivalry between the United States and China.

During her tenure, economists say, Germany neglected to build a world-class digital infrastructure, missed a precipitous exit from nuclear power, and became alarmingly dependent on China as a market for its cars and other exports.
The Chinese question is particularly complex. Germany’s strong growth during Merkel’s tenure was largely the result of trade with China, which she helped promote. But, increasingly, China is becoming a competitor in areas such as industrial machinery and electric vehicles.
Economists say Germany has not invested enough in education and emerging technologies like artificial intelligence and electric vehicles. The Germans pay some of the highest energy prices in the world because Merkel pushed to shut down nuclear power plants, without expanding the country’s renewable energy network enough to cover the deficit.

“It will come back to haunt Germany in the next 10 years,” said Guntram Wolff, director of Bruegel, a Brussels research institute.

There was never much pressure on Merkel to focus on fundamental economic policy because the German economy exploded during her tenure. Germany has recovered from the pandemic faster than other European countries such as France or Italy.

But the pandemic has also exposed Germany’s economic dependence on China.

In 2005, China accounted for a fraction of German exports. Last year it overtook the United States as Germany’s largest trading partner. China is by far the biggest market for automakers Volkswagen, Mercedes-Benz and BMW. German companies also prospered by equipping Chinese factories with machine tools and other industrial products that made China an export powerhouse.
Merkel supporters say she has helped the German economy dodge some bullets. His sharp political instincts came in handy during a eurozone debt crisis that began in 2010 and nearly destroyed the currency Germany shares with 18 other countries. Merkel arguably kept hard-line supporters of her own Christian Democratic Union in check as the European Central Bank printed money to help affected countries like Greece, Italy and Spain.

But its longtime finance minister Wolfgang Schäuble was also a key enforcer of policies that protected German banks while imposing severe austerity on southern Europe. At the time, Germany refused to support the idea of ​​a collective European debt – a position Merkel abandoned last year, amid the fallout from a pandemic that threatened European unity.

Merkel was also lucky on her side. The former communist states of East Germany largely caught up during his tenure. And Merkel profited from the reforms of her predecessor, Gerhard Schröder, which made it easier to hire and fire companies and put pressure on the unemployed to take low-paying jobs.

Schröder’s economic overhaul brought unemployment down sharply, from over 11% when Merkel took office to less than 4%. But the changes were unpopular because they weakened regulations that protected Germans from layoffs. They paved the way for Schröder’s loss to Merkel in 2005.

The lesson for German politicians was that it was better not to touch German privileges, and for the most part Merkel did not. Many of the jobs created were low-paid and offered limited opportunities for upward mobility. The result has also been an increase in social disparities, with a rapidly aging population increasingly threatened by poverty.

“Over the past 15 to 16 years, we have seen a marked increase in the number of people living below the poverty line and at risk,” said Marcel Fratzscher, economist at the DIW research institute in Berlin. “Although the 2010s were very successful economically, not everyone benefited from it.”

Merkel’s failure to invest more in infrastructure, research and education, despite her training as a doctor of physics, also reflects German aversion to public debt. Schäuble, as finance minister, imposed fiscal discipline that prioritized budget surpluses over investments. The German parliament, controlled by Merkel’s party, even enshrined balanced budgets, a so-called debt brake, into law.

Frugal policies were popular among Germans who associate deficit spending with soaring inflation. But they also let Germany fall behind other nations.

Since 2016, Germany has fallen from 15th to 18th place in the digital competitiveness rankings of the Institute for Management and Development in Lausanne, Switzerland, which attributes the decline in part to lower training and education. as well as government regulations. Between 40% and 50% of all workers in Germany will need to retrain in digital skills to continue working over the next decade, according to the Ministry of Labor. Most German schools lack high-speed internet and teachers are reluctant to use digital learning tools – a situation which became woefully apparent during the coronavirus lockdowns.

“Technology is strategic. It is a key instrument in the systemic rivalry we have with China, ”said Omid Nouripour, a Green Party MP on foreign affairs, in an online discussion this month hosted by Berenberg Bank. “We haven’t realized this enough in the past.

Click here to see Forbes India’s full coverage of the Covid-19 situation and its impact on life, business and economy

© 2019 New York Times Press Service


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