Uncomfortable Truths

Germany's Economy Brought to Book

Glass dome of the Reichstag
The Bundestag (pictured). Germans see themselves in many different ways. 
  • Why it matters

    Why it matters

    The economist Marcel Fratzscher offers deep insight into what he calls “the German illusion.”

  • Facts

    Facts

    • Fratzscher argues that fundamental weaknesses in the German national economy are being ignored.
    • He values the annual investment gap at being up to €100 billion.
    • An average German household has almost 3 percent less income today than it did in 2000.
  • Audio

    Audio

  • Pdf

 

There are two types of economists in Germany. One type is dedicated to research. These economists aim to learn for the sake of learning. They fear that being too close to politics could hinder their search for economic truths.

The second type wants to be close to politics. These economists engage in power games because they would like to see their scientific knowledge applied. They advise politicians and are less interested in what is theoretically possible than in what is politically doable.

Marcel Fratzscher wants to belong to this second group, and has actually succeeded in penetrating the center of power in a short amount of time since becoming president of the Berlin-based German Institute for Economic Research, or DIW, in 2013. The newspaper Frankfurter Allgemeine Zeitung recently selected him as the second most prominent economist in the country, just after Hans-Werner Sinn, the long-time president of the Munich-based Ifo Institute for Economic Research, who is omnipresent in German media.

As chairman of the Investment Advisory Committee within the economics ministry, Mr. Fratzscher operates like a kind of chief economist of Germany’s vice chancellor, Sigmar Gabriel. He has now published his first book, which could be described as his manifesto. The title: “The Germany Illusion – Why We Overestimate Our Economy and Need Europe.”

It is a courageous book, if for no other reason than it presents a clear alternative plan to the economic consensus in Germany. Mr. Fratzscher himself wants the book to be understood as a contribution in the battle over the relevance of the euro zone debt crisis.

Mr. Fratzscher, 43, spent 20 years living abroad, in the United States, Indonesia and England. He has worked for international organizations such as the European Central Bank and advised the government in Jakarta during the Asian financial crisis. He has a different view of Germany and Europe, as he himself admits.

As chairman of the Investment Advisory Committee within the economics ministry, Mr. Fratzscher operates like a kind of chief economist of the vice chancellor.

“Germany is subject to three illusions,” Fratzscher wrote in the book. First, Europe’s largest economy greatly overestimates its own power. Mr. Fratzscher called it a “fallacy” that Germany’s future “is secured because the economic policies were and are so outstanding.” He argues that fundamental weaknesses in the German national economy are being ignored, although he admits the good labor market data and solid national finances speak for a strong national economy.

Fratzscher takes issues with the “employment miracle,” which he claims isn’t one. Although the unemployment rate has fallen sharply, the “working hours of all employees taken together have hardly risen since 2000,” he wrote. The reason for this discrepancy, he argues, is that part-time work has increased dramatically: “The number of temporary employees has more than doubled since 1996, from 1.3 million then to 2.7 million today,” he wrote.

Mr. Fratzscher has other surprising statistics that question Germany’s economic power. The average German household, he notes, has almost 3 percent less income today than it did in 2000. Put another way, average wages at purchasing power parities in Germany today are only marginally above those from 2000.

Mr. Fratzscher cites an entire list of uncomfortable truths. He even calls into question the soundness of national finances if only because the government’s policies “re-orders the the redistribution of existing wealth, instead of augmenting it” – which is a dig at the most recent decisions of Germany’s right-left ruling coalition to expand pension payments to mothers or to lower the retirement age for some workers to 63.

The cause of most of these negative developments is the immense under-investment in Germany over the past 20 years, Mr. Fratzscher maintains. At the beginning of the 1990s, the public and private sectors invested in Germany at a level of 23 percent of the gross domestic product. Today, that rate is only 17 percent – clearly under the average of industrial nations.

Overall, Mr. Fratzscher’s verdict on the crisis management of the Europeans is devastating.

According to DIW calculations, between 1999 and 2012 there was a lack of investment each year of about 3 percent of economic output. Mr. Fratzscher values the annual investment gap at up to €100 billion. These are enormous amounts, and they appear even larger because Mr. Fratzscher gives no realistic option for how they can be raised, either by the public or private sectors.

And even though the level of the investment gap is heavily disputed among economists, there is no doubt that Mr. Fratzscher has really hit a nerve on this issue, because the lack of investments is a clear sign of weakness, and this shortage reduces the chances for economic growth in the future.

The second illusion that Mr. Fratzscher wants to expose with this book involves the relationship of Germany with Europe and the role the euro plays in this relationship. According to the DIW president, Europe’s largest economy is clearly the greatest “beneficiary” of the single currency. He cites as proof, among other things, the sharp rise in trade after the introduction of the euro. Its European neighbors will remain “our most important partner in the long-term,” he writes. The claim that the economic future lies outside of Europe is false, according to Mr. Fratzscher. His conclusion is that “Germany needs Europe,” both politically and economically.

That may be true. However, it is bold to draw the conclusion that there was more or less no alternative to the euro project launched in the late 1990s. Critics of the euro emphasize, not without good reason, that the way it is designed does more to divide than unite the continent. The strongest chapter of the book is the third. In it, Mr. Fratzscher refutes the oft-voiced assertion in Germany that the country is the “paymaster” of the continent, and that all other countries only want Germany’s money.

The Germans like to see themselves in the role of a victim, Mr. Fratzscher writes. But Germany is not a victim, he says, if only because the German federal government has “shaped all important decisions since 2010 on the European level.” And, he adds, Germany is not only the “most important architect of European crisis policies,” but also “one of the greatest beneficiaries of these policies.”

The rescue packages, aid programs and measures taken by the European Central Bank to keep the euro zone together, all of which have been controversial in Germany, have reduced the risks overall. “It was and is more than anything the German banks, German companies and German individuals whose interests and investments were protected through the rescue policies,” he writes.

Overall, Mr. Fratzscher’s verdict on the crisis management of the Europeans is devastating: “A look at the catastrophic collapse of the national economies and societies of the countries affected by the crisis, but also at the disappointing progress in all of Europe and Germany, leaves little doubt that the European policies on the whole have to be declared as being failed.” He criticizes the German federal government above all for its “minimalist” policies. “Many steps were too small, or came too late,” he writes.

The author is an editor for Handelsblatt based in Düsseldorf. He leads economic and monetary policy coverage. To contact the author: muenchrath@handelsblatt.com

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