Economic woes

Listen to the Money Men, Ms. Merkel

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  • Why it matters

    Why it matters

    Germany’s government has sacrificed a lot to be able to balance its budget next year, but also promised financial breaks to many groups. Economists say such policies will land it in hot water.

  • Facts

    Facts

    • The German Council of Economic Experts has criticised government policy in its annual report.
    • Growth in Germany is expected to be just 1 percent a year until 2019.
    • France’s economy has grown at a higher rate than Germany in the past 15 years.
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    Audio

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The relationship between German chancellor Angela Merkel and economists has never been easy. Ever since the financial crisis broke out in 2007, the chancellor has distrusted these experts: They didn’t see the meltdown coming and offered no clear ideas on what to do about it. The chancellor was disappointed — and she has made little effort to conceal her displeasure.

Now, the German Council of Economic Experts, a panel of five “sages” appointed by the government to advise it, has presented its annual report – and it reads as if the economists are getting their own back. Current government policy is “a burden for economic development,” they write. In other words, the government itself is an obstacle to growth.

The economists address one painful point after another. They say lowering the retirement age to 63 for many people is a “backward” move and call it one of the most expensive plans in the history of old-age insurance. Public finances, in view of the country’s aging population, are “not sustainable in the long run,” they write. And the minimum wage is described as “a social-political experiment with an unknown outcome.”

Whether the economists’ criticism is justified on every point is debatable. For instance, they may have overestimated the effects of the minimum wage, which is due to be introduced next year. A clearly irritated chancellor said she doesn’t see how a decision that hasn’t yet been put into practice “can already conjure up an economic downturn.”

Her comments don’t exactly show profound economic knowledge, however. Political interventions of tomorrow have an impact on investment decisions today. It is part of the very nature of economic activity.

Ms. Merkel is keen to blame recent economic woes on “geo-political challenges.”

Mrs. Merkel is keen to blame recent economic woes on “geo-political challenges.” Her message: We are pursuing sound economic policies, but the crisis with Russia and the war against Islamic State creates uncertainty.

But here the chancellor is mistaken. The policies of her Grand Coalition government also clearly contribute to the depressed mood.

It is not a matter of whether a recession is again around the corner – that is probably less likely than many pessimists would have us believe. The much more important issue is whether the government is pursing an economic policy that will make the country’s economy more durable over the long term. It must be more resistant to external shocks, but also to irreversible and catastrophic demographic developments within Germany.

On this point, economic experts are justifiably skeptical. Unless something major changes, annual growth in the coming five years will be just 1 percent — an alarming signal for the economy, and especially for those who hold the reins of government.

The Grand Coalition – an alliance of the ruling center-right Christian Democrats and Christian Social Union with the center-left Social Democratic Party – has been in office for almost a year now. It is frightening to observe how meticulously the parties are working through the individual points of their coalition agreement — even though the world around them has changed dramatically. The coalition negotiations were conducted according to the principle: “If you give your supporters the minimum wage, then I’m allowed to give my supporters pensions for mothers.”

Unless something major changes, annual growth in the coming five years will be just 1 percent.

Both parties show themselves to be generous. They seek a road toll system that targets foreign users and does not burden Germans. They pursue a pensions policy that will impose negligible costs on the younger generation. And the consequences are fatal.

So where are the grand projects befitting a Grand Coalition? The government contents itself with paying lip service to the truly important issues of education, research and tax reform. It has declared the fact that it will balance the country’s budget next year an end in itself, as if it could stand in place of political concepts. And its most ambitious project – the shift to cleaner, renewable energy – is proving to be an extremely difficult undertaking.

Germany continues to see itself as the great anchor of stability on a floundering continent. The chancellor travels throughout Europe as the ambassador of a typical German housewife, whom she praises as the epitome of virtuous economizing. Germans gaze with pity across the River Rhine at profligate spending and consumption in France.

But these vision of themselves and the French are not accurate. For example, who in Germany knows that, in the past 15 years, the French economy grew at an average rate of 1.3 percent a year, while the German economy managed just 1.1 percent?

Germany is not the superstar that it considers itself to be. The country is a little above average at best — and German politics must undergo some major changes to even maintain this position.

 

The author leads Handelsblatt’s coverage of economics and monetary policy. To contact the author: muenchrath@handelsblatt.com

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