Economic Hubris

Too Fat and Happy

Mann mit Uebergewicht
Dangerous satisfaction.
  • Why it matters

    Why it matters

    • If you look at the bigger picture beyond the euro zone, Germany’s situation suddenly doesn’t appear so rosy, the author argues.
    •  
  • Facts

    Facts

    • The German government’s budget has a surplus, the labor market is running smoothly and wages and salaries are rising.
    • But about a fourth of last year’s economic growth was due to population increases, a trend unlikely to continue.
    • The economies of the United States and Britain are growing faster than in Germany.
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    Audio

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Germany’s position seems exceptionally comfortable right now.

The economy is growing more vigorously than any other large economy in the euro zone. The government’s budget is in the black, the labor market is humming along, and there are decent increases in wages and salaries.

Germany’s consumers are satisfied with their economic situation and hence with the policies of the federal government. Actually, Chancellor Angela Merkel and her team could give up governing altogether. Just a few new acts of beneficence shortly before the next election and her re-election would be assured.

Focusing exclusively on the current mood may make sense from a political perspective, but from an overall economic point of view, that’s a mistake.

Take a look at the growth forecast published Wednesday in the annual economic report and examine the assumptions upon which it’s based and it’s clear that this year might well bring more than the expected 1.5 percent growth rate. Because this prediction is based on a euro exchange rate of $1.22 and an oil price of $59. Currently, the exchange rate is $1.14 and oil costs $49 a barrel.

Focusing exclusively on the current mood may make sense from a political perspective, but from an overall economic point of view, that’s a mistake. Germany is currently profiting from an interim demographic upswing. Baby boomers are still in the workforce. More and more women are entering the labor market, and many foreigners from southern Europe are coming to Germany because of its economic vitality. Consequently, employment is rising, and along with it, economic performance and governmental revenues. About a fourth of last year’s economic growth was because of the population increase. It’s clear this trend will not continue.

Moreover, Germany is benefitting massively from the currency union. With its extremely loose monetary policy, the European Central Bank is mainly combating problems that don’t even exist in Germany — and is thereby fueling the country’s upswing further. 

Reports from Germany's Federal Audit Office and the Association of Taxpayers show that wasting money through state investments is the order of the day.

Take the example of deflation. In Germany, the rate of inflation is consistently about half a percent higher than in the overall euro zone. If Germany is excluded from the figure for the euro zone, the difference is almost three-fourths of a percent. If one takes into account Germany’s new minimum wage and upcoming wage settlements and their upward pressure on prices, then the difference quickly becomes 1 percent or more. No wonder there’s no serious talk about deflation in Germany.

Example: the euro exchange rate. The weak euro is expected not only to fuel inflation through rising prices for imports. It’s also supposed to send imports from the euro zone soaring. But Germany’s trade surplus with the rest of the world is already more than 11 times greater than that of the other 18 euro countries combined. Thus it’s not surprising that, in view of the euro’s weakness, the export expectations of German companies have already risen for the fourth time in a row in the forecast of the Ifo Institute for Economic Research.

Example: the government budget. Preliminary figures show Germany has achieved a surplus close to €12 billion — more than Volkswagen, Germany’s most successful company. Already now, Germany’s finance minister needs to offer investors in long-term government bonds only as much interest as the current, extremely low rate of inflation. For short- and mid-term bonds, investors are content to receive zero percent interest.

It’s obvious the European Central Bank’s decision to purchase government securities will push yields even lower. Since budgetary sins don’t actually cost anything any more, there’s little motivation to handle tax revenues efficiently. This becomes a problem when ongoing expenditures are initiated in good times that cannot be easily eliminated in bad times. It’s likewise erroneous to always present investments as positive state expenditures. The disaster of Berlin’s still-unopened new airport, which has been plagued by horrendous cost overruns and years of delays, is only one example. Reports from Germany’s Federal Audit Office and the Association of Taxpayers show that wasting money through state investments is the order of the day.

Moreover, if you look at the bigger picture beyond the borders of the euro zone, then Germany’s situation suddenly looks less rosy. Through the decline in the currency, every German has become significantly poorer in relation to the rest of the world. Furthermore, despite their strong currencies, the economies of the United States and Britain are growing more strongly than the German economy.

Without a doubt, Germany can be justifiably proud of having developed within a decade from being Europe’s weakling to its powerhouse. But caution: Satisfaction dulls the senses.

 

To contact the author: schrinner@handelsblatt.com.

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