Tags: Germany | Merkel | economy | Evans-Pritchard

Evans-Pritchard: Merkel's Victory Masks Germany's Economic Problems

By Michael Kling   |   Monday, 23 Sep 2013 02:19 PM

Despite Germany's apparent strength, many experts fear the country is approaching an economic descent. That could be bad news for the entire eurozone.

Germans overwhelmingly re-elected Angela Merkel as chancellor Sunday, in large part due to the county's low unemployment rate and strong economy.

Yet economists suspect that strength is just a temporary facade covering deep structural problems. The country remains plagued by rigid labor regulations that discourage hiring and new business, lack of investment in its aging infrastructure and educational system and high energy costs due to a commitment to renewable resources, according to Ambrose Evans-Pritchard, international business editor for The Telegraph in the United Kingdom.

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"Germany is in a fantastic position but we’re squandering our competitive advantage: all the main parties want to roll back reforms,” said Christian Schulz from Berenberg Bank, according to Evans-Pritchard.

Productivity costs per worker increased only 0.6 percent from 2000 to 2010, compared with 1.4 percent for other developed nations, the paper notes. The World Bank ranks Germany 106th on its index for ease of doing business.

Germany is commonly credited with becoming more competitive by reforming its labor market.

Some economists, however, say its gains are due more to lowering wages and an export boom to China's construction binge, a boom that may soon disappear.

"Real disposable income per capita in Germany has been growing at half the rate in France since the launch of the euro. They have been ripping off their own people to build up pointless trade surpluses," says Charles Dumas from Lombard Street Research.

"If Germany's economic model is the future of Europe, we should all be quite troubled. But that is where we seem to be going," Adam Posen of the Peterson Institute for International Economics, writes in an op-ed for the Financial Times.

Germany's model calls for increasing exports by cutting labor costs, Posen explains. Its unemployment rate has fallen over the past decade because of new low-wage and part-time jobs lacking benefits of earlier jobs. That's not how a wealthy country should create economic growth, he argues. Ideally, they should remain competitive by investing in research and development and educating their work force.

Germany hasn't done either, he notes, adding that its total gross fixed investment has declined from 24 percent of GDP in 1991 to 18 percent and that it has failed to invest in its public universities.

"The export obsession has distracted policymakers from recapitalizing its banks, deregulating its service sector and incentivizing the reallocation of capital away from old industries," Posen says.

"Wage compression will not be a successful growth strategy for Germany's or Europe's future."

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