All Is Not Well in Germany But Merkel’s Coalition Slow to Act

To sustain its competitiveness, Germany needs to invest.

When Marcel Fratzscher published Die Deutschland Illusion last month, it set off quite a bit of self-reflection in Europe’s largest economy. But whether its central message — that although Germany is now outperforming its peers, its future growth prospects could be dim — will be taken to heart by Chancellor Angela Merkel’s government is unclear.

Fratzscher, a former European Central Bank analyst and head of the German Institute for Economic Research, warned against “euphoria” which he believes has made the Germans “overbearing, blind and dull.”

The country may have low unemployment but that is largely because labor reforms enacted by Merkel’s predecessor, Gerhard Schröder, created many “precarious” part-time jobs. He points out that the total hours worked has barely risen in recent years. Trade is strong but that’s not only because German factories put out quality products other countries want; it is also because Germany simply kept down wages, cutting into domestic demand.

The political class in Berlin was quick to embrace some of Fratzscher’s views. Merkel immediately recognized that growth only happens “when people really invest.”

Gross government investment as a share of economic output is low at 1.6 percent. The Netherlands and Sweden invest twice as much in everything from electricity grids to roads.

Borrowing little, Germany can afford to do the same, writes Holger Steltzner in the Frankfurter Allgemeine business daily. “The federal government has unfortunately not used the financial space it has to enact forward looking growth policies,” he laments. “It could invest in education, infrastructure and digitization.”

Instead, it is relying on decade-old labor reforms and a famously strong Mittelstand to produce decent growth rates.

Even there, there are problems. While Germany’s system of vocational training is the envy of the Western world — with small- and medium-sized firms taking on apprentices to prepare them for the jobs market — only five of its sixteen states recognize foreign technical qualifications. In many industries, like construction, there are requirements to hold a master craftsman’s certificate to run a business. Entrepreneurs and professionals with otherwise comparable skills are kept out.

Like Merkel, Sigmar Gabriel, the economy minister and leader of the Social Democratic Party, welcomed Fratzscher’s analysis, calling it “required reading” and drafting Fratzscher himself into an expert commission. But his party isn’t helping.

As part of their coalition deal with Merkel’s conservatives, the Social Democrats are limiting temporary work contracts to eighteen months and introducing an hourly minimum wage of €8.50. They are also making pensions more generous. Workers will be allowed to retire after 45 years on the job even when they’re only 63 years old, four years below the statutory retirement age. That doesn’t seem wise when Germany has one of the oldest populations in Europe. Over the next ten years, its workforce is projected to shrink by some 6.5 million, the equivalent of all the workers in Bavaria.

Many conservatives, meanwhile, are more concerned about fiscal discipline and reducing the national debt than they are about freeing up government funds for investments that should pay off in the future.

Between the two ruling parties, it might prove difficult to find the consensus needed to implement many of Fratzscher’s recommendations.