Article / 11 September 2017 at 9:00 GMT

'Zip, zero, zilch: that's what Merkel has delivered' — #SaxoStrats

Head of Macro Analysis / Saxo Bank
  • Merkel sure to win upcoming German election
  • Chancellor has largely shied away from economic reform
  • German investment rate, productivity growth languishing

BMW headquarters in Munich: Germany has an enviable assortment of international firms, but its economic fundamentals are shakier than many assume. Photo: Shutterstock 

By Christopher Dembik

It is unquestionable that Germany has incredible strengths, such as its low unemployment (5.6% at the national level and down to 3% in Bavaria), its triple-A credit rating, and its pantheon of international firms whose reach spreads over the globe. 

That’s the shiny side of the coin, but there is also a more tarnished one: fundamentally, Germany’s economy is dysfunctional. 

The country's massive current-account surplus, reaching 8% of GDP, is praised by policymakers as an undeniable characteristic of high competitiveness, but it is also a sign that local businesses are reluctant to invest in the country. A similar trend, though less exacerbated, can be found in the Nordic countries.

Current account surplus
Consequently Germany has the lowest investment rate of any developed economy, according to the International Monetary Fund. The most worrisome factor is the low level of investment in equipment, leading to a lesser accumulation of capital that could hamper economic growth in the medium term. 

The decline in capital stock could also be accentuated by negative demographic trends. All forecasts put forth by the German statistics agency confirm a population decline that could prove crucial over the next few decades, depending on the fertility rate and (especially) immigration.

Population projections

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Source: Saxo Bank 

The low level of investment in equipment has been partly offset in recent years by higher investment in research and development, but so far it has not been enough to increase potential growth through higher overall productivity. 

This fact is not known by many people: Germany’s average annual productivity growth over the past decade has not been that high at just 0.7% – lower than both Portugal (0.9%) and Spain (1.2%). This clearly underscores the limits of the so-called German economic miracle, which is largely based on low-paid and low-skilled jobs in the service sector.

German productivity
Since 2005, Merkel has delivered zip, zero, zilch in terms of economic reforms. Her most prominent decision was the introduction of a minimum wage, which proved a tough battle. As a matter of fact, her time as chancellor has mostly been spent curating Schroder and Hartz’s legacies. 

According to the Organisation for Economic Co-operation and Development, Germany has pushed through the least amount of pro-growth reforms among developed countries over the past seven years. As a result, it should not be surprising to observe that Germany languishes in 114th place globally for ease of starting a business, versus 56th for Greece and 27th for France. 

Ease of starting a business
Source: World Bank

For now, no European Economic and Monetary Union country is in a position to challenge Germany’s economic and political leadership. However, Berlin would be wrong to be complacent and push back the necessary reforms to boost productivity, reinvest the current-account surplus, and pay fairly workers for their due. 

The longer it takes to do so, the more painful it will be for the economy. There is no doubt that Merkel will be reelected. However, this term might be quite different from the others since she has no other choice but to push through these difficult reforms.

Angela Merkel
It is increasingly a question of her legacy. Photo: Shutterstock

— Edited by Michael McKenna

Christopher Dembik is head of macro analysis at Saxo Bank


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