Germany accounts for nearly 30% of a monetary union consisting of 19 European economies. That’s how dangerous it is to see the world’s fourth-largest economy stuck in a virtually stagnant quarterly pace during the 12 months to March.
And here’s more: Measured at annual rates, the German economy at the beginning of this year was moving along at less than half the capacity of its potential and non-inflationary growth rate – a monumental waste of the country’s human and physical capital.
The German business community is blaming the government for high corporate taxes (31% compared with a European average of 22%), high energy costs, inadequate digital infrastructure, lack of high-speed fiber optic connections in most of the country’s industrial parks, unclear economic and political orientations, and more.
At their meeting earlier this month, the members of a powerful Federation of German Industries (Bundesverband der Deutschen Industrie – BDI) voiced their declining confidence in government policies at a time when they were facing increasing pressures from Chinese and American competitors. That’s what they told an uneasy audience of 1,500 people, headed by German Chancellor Angela Merkel and her economic and finance ministers.
German businesses wanted no “national champions” and bureaucratic meddling. They asked for effective economic and financial policies to support small- and medium-sized companies – the country’s celebrated Mittelstand – that represent 99% of German companies, generate about three-quarters of all jobs, and account for more than half of the nation’s GDP.
They probably knew they were asking far too much of a moribund governing coalition, trashed in recent European parliamentary elections and facing a certain demise if the wishes of 52% of German voters were met for new national elections.
That should be an urgent consultation because, according to the latest opinion polls, Germany has a minority government with the center-right parties – Merkel’s Christian Democratic Union (CDU) and its sister party, Christian Social Union (CSU) – polling 24%. The junior coalition partner, Social Democrats, polled 13%.
That was a gloomy business meeting in Berlin. But suddenly, and very curiously, people cheered up to give a standing ovation to the French Economy and Finance Minister, Bruno Le Maire.
Speaking in German, the French official apparently struck a chord by pleading for a European response to American and Chinese challenges. France and Germany, he said, should act together in the spirit of “complementarity” rather than “rivalry” to stay ahead in emerging new areas of top technologies.
The French were also pleased with a call for revival of a wobbly French-German partnership. After two years of constant prodding, Germany relented last Friday to approve the French project of a euro area budget. But instead of calling it a budget and agreeing to hundreds of billions of euros demanded by the French, Paris had to settle for the new “budgetary instrument for competitiveness and convergence” with only 17 billion euros ($19.08 billion) over a period of seven years.
A Pyrrhic victory of sorts, because that will get new votes for the eurosceptic Marine Le Pen’s National Rally (RN) to see Paris acting as Berlin’s junior partner subservient to German interests.
Yes, President Emmanuel Macron and Le Maire have nothing to cheer about watching the German confusion and disarray that will end up exacting a large cost in terms of French jobs and incomes.
France and the rest of Europe – and, incidentally, the U.S., too – should have expected Germany to rev up its economy and buy more goods and services from its main trade partners. With a budget surplus of 1.7% of GDP, public debt of 60.9% of GDP, and a trade surplus on goods and services of 8% of GDP, Germany was supposed to lead the European (and global) economic recovery by stimulating its domestic spending and opening up its markets.
But that won’t happen. As always, France, the rest of Europe and the U.S. will foot the bill of German economic revival as German companies step up their sales on external markets to survive. That’s called Germany’s export offensive – big time.
Countries like France and the U.S., with a typically low political tolerance for weak economic growth, will suffer the most from the onslaught of German companies’ export sales. Washington can still do something to scare them off, but there is nothing that France can do in a perfectly functioning customs union with its neighbors across the Rhine river.
Here is an example of how that goes. In the last two quarters, the beleaguered French government boosted public spending and wage growth to calm an ongoing public unrest. As a result, the rate of French economic growth during that period was double that in Germany. Predictably, German exports to France picked up at an annual rate of 3% in the six months to April, after virtually no growth during 2018.
No wonder German business leaders gave a standing ovation to the French finance minister. That could have sounded like an encouragement to keep up the good work by spending the money he did not have, and messing up the French public finances in the process.
Germany will call him out on that later this year.
Berlin, and its Brussels sidekicks, are just too busy now setting up Italy for penalties and disciplinary procedures for its excessive public debt and an intolerably high budget deficit of 2.4% of GDP – unless U.S. President Donald Trump tweets to save the day for his Roman friends. Bravely looking at a budget deficit increase of 77% in the first four months of the current fiscal year, Trump could probably scare the Germans with a tweet to lay off the struggling Italians.
The European Central Bank President Mario Draghi should not worry about central and eastern Europeans being vulnerable to ongoing global trade disputes. Those people know all about hardship and sacrifice. Instead, Draghi should call out Germany’s destabilizing mercantilism.
Incidentally, Draghi could also say a thing or two about French fiscal policies. That would calm down France’s newfound ardor to lecture about the fictional European sovereignty and Rome’s public finances, even though Italy’s headline and primary budget balances look much better than those in France.
Germany is Europe’s big economic problem, but nobody, except Washington, dares say so.
The German DAX equity index is down 10.5% in dollar terms over the last 12 months. By comparison, the 4% gain on the Dow Jones Industrial Average looks like a stellar performance.
Maybe, at some point, somebody in Germany will care about that and heed the call for help from a deeply worried German business community.
Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.