Economic Weekly

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The German economy is running surprisingly well. Source: DPA [M]

The Ifo Index is always good for a surprise. On Monday, the most important German economic indicator unexpectedly gained 1.2 points to reach 112.3 points, the highest value since July 2011. Because incoming orders in the commercial sector saw the sharpest decline at the beginning of the year since the 2009 global economic crisis, the economic euphoria among the roughly 7,000 companies polled is difficult to explain – especially as the geopolitical risks resulting from Brexit and the election of Donald Trump as U.S. president are not going away.

There is also good news in the labor market. According to the latest job market forecast of the Institute for Employment Research (IAB), there should be 32.26 million employees paying mandatory social security contributions this year. This would be an increase of 760,000 over 2016. The total workforce is also expected to increase this year by 670,000, to a record level of 44.26 million, while the forecast calls for the number of unemployed people to decline to 2.53 million, the lowest level since 1990.

The extremely favorable development of employment in the last 10 years or so may explain why, according to a study by the German Institute for Economic Research, people living in Germany since reunification have never felt as satisfied as they do today. Even the refugee crisis has not put a damper on this sense of well-being. It is worth noting, however, that the same study found that two-thirds of the households surveyed believed that economic conditions are unfair in Germany. Apparently many people believe: I am doing well, but Germany is still unfair. This is probably what they would call the perceived truth today. Against this background, the rhetoric about injustice coming from Martin Schulz, the center-left Social Democratic Party’s candidate for the chancellorship in September, makes sense.

Many exporting nations, committed to the principle of open borders and multilateral agreements, now see Germany as less of a competitor and more the tamer of an unpredictable U.S. president.

The receipt in Brussels of British Prime Minister Theresa May’s Article 50 withdrawal request Wednesday marked the beginning of the negotiation process over Great Britain’s exit from the European Union. The British negotiating team, headed by David Davis, will now attempt to keep the costs of the Brexit as low as possible for their country, while the European Union’s team, headed by Michel Barnier, intends to achieve precisely the opposite result. For the Europeans, it is important to make it abundantly clear to all remaining member states that withdrawing from the E.U. is not worth it. The conflict threatens to turn into a predictable War of the Roses. In the end, it will be said that it was very regrettable but probably necessary to allow Britain to run up against the proverbial brick wall, so that the remaining countries could be brought more closely together.

On Thursday, the German Federal Statistical Office reported that the inflation rate is expected to be 1.6 percent in March, compared to 2.2 percent in February. That was followed on Friday with a Eurostat release that showed inflation in the euro zone at 1.5 percent. The fears of a return of inflation have apparently not materialized.

It is astonishing to see all the things Donald Trump has made possible. The International Monetary Fund or, to be more precise, its managing director Christine Lagarde and her deputy, David Lipton, recently called upon Germany to show more leadership, both in the IMF and in the G7 and G20 groups of countries. At the same time, representatives of the rapidly aging export nations of Japan and South Korea have approached the German government to develop a joint defensive strategy against potential attacks from U.S. President Trump, who has shown a predilection for protectionism.

Mr. Trump is flirting with the end of free trade in favor of trade based on bilateral agreements. This apparently entails that many exporting nations, committed to the principle of open borders and multilateral agreements, now see Germany as less of a competitor and more the tamer of an unpredictable U.S. president. German Chancellor Angela Merkel’s confident performance in Washington two weeks ago suggests that she intends to take on this role.

Frank-Jürgen Weise, who is retiring this weekend, was the head of the German Federal Employment Agency for 13 years. In 2004 Mr. Weise, a colonel in the reserves and successful manager who had no experience in labor market issues but was well-versed in efficiency, replaced Florian Gerster, who had stumbled over a series of mistakes. He transformed the once-sleepy Federal Labor Office into an efficient service provider, and he is leaving the proverbial “big shoes” to fill to his successor, former Hamburg Minister of Social Affairs Detlef Scheele. Of course, Mr. Weise is not leaving without giving lawmakers a piece of advice: Instead of paying out more “Hartz IV” benefits for the long-term unemployed, they should establish a subsidized job market for certain long-term unemployed people.

The fifth or third attempt – depending on your counting method – to merge the Frankfurt and London stock exchanges, mainly promoted by Deutsche Börse CEO Carsten Kengeter, appears to have failed once and for all. The European Commission blocked the proposed merger on Wednesday. It would have “significantly limited competition,” said European Competition Commissioner Margarethe Vestager.

The Handelsblatt Research Institute has presented its spring economic forecast this week. We reported on the forecast today. Since we do not wish to withhold this forecast from you, we suggest it as our first suggested analysis of the week.

Germany has come under fire for some time over its high current account surpluses. The country could face an internal European Union proceeding over excessive imbalances, and the Trump administration is also sharply critical of these surpluses. As every current account surplus is offset by a capital export, Michael Heise, chief economist at Allianz SE, discusses, in his guest commentary in Handelsblatt on Tuesday, how criticism of the country’s high export surplus could be countered and conditions for growth could be improved through an increase in capital imports to Germany. Mr. Heise believes that reforming corporate taxation can be “a lever against the surpluses.” We offer you his commentary as a second analysis of the week.

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