Germany is strong, but not nearly strong enough

By Tony Barber

If Germany were to collect one euro for every piece of advice it receives on how it should act in the European economic crisis, its current account surplus would be even bigger than it is. From far and wide, the recommendations flow towards Berlin: float eurozone bonds, forgive Greek debt, devise a Marshall Plan for the Mediterranean, set up a banking union, let domestic wages rise, launch a fiscal stimulus instead of droning on about balanced budgets. Some of these suggestions are on the right lines, and some are wrong. But all overlook the point that one of Germany’s most useful contributions would be to reform and modernise its own economy.

Germany is conventionally depicted as Europe’s economic giant and Berlin as the go-to capital for Americans and Asians anxious to see decisive action to overcome the crisis. Nonetheless Europeans and non-Europeans alike view Germany as a reticent giant, a nation whose reluctance to lead reflects the burden of historical crimes as well as the deep-seated provincialism of its political culture. What is less well understood is that Germany, despite being the eurozone’s anchor, faces a cluster of long-term challenges which, if not addressed, will sap its ability to set any kind of course for Europe.

In “Looking to 2060”, a report on the world’s growth prospects, the OECD forecast last year that Germany would achieve average annual growth of 1.1 per cent from 2011 to 2060. This put Germany, next to Luxembourg, at the bottom of the OECD’s 42-nation survey. The International Monetary Fund estimates that Germany’s potential growth rate is 1.25 per cent. Nations such as Greece, whose economy has shrunk by a calamitous 25 per cent during the crisis, or Italy, whose economy has contracted for eight consecutive quarters, would happily swap their slumps for Germany’s meagre growth. But to eke out 50 years of almost invisible economic expansion will not give Germany strength and confidence to lead Europe from the front.

A related problem is population decline, or what in German is termed Schrumpfnation Deutschland – “shrinking Germany”. With more than 81m people, Germany is the largest of the European Union’s 28 member states. According to EU demographers, however, the German population will drop by 2060 to about 71m. There will be more people both in the UK – assuming Scotland does not secede – and in France.

The causes of the decline include a very low birth rate and modest levels of net immigration. At 1.36 births per woman, Germany has one of the lowest rates in Europe. More important is that, for the past 30 years, fertility rates have been below the level of 2.1 children per woman needed to maintain a population’s size. For many years to come, there will be fewer potential German mothers. The government is taking steps to encourage parenthood, such as a recent law that guarantees a place at a day care facility for every child over 12 months old. But state-sponsored pronatalism is a delicate matter in a country with unpleasant memories of Nazi schemes to promote motherhood.

That leaves immigration. It emerged from the UK government archives this month that Helmut Kohl, the former German chancellor, had told Margaret Thatcher, the late premier, in 1982 that he planned to halve Germany’s then 1.5m-strong population of Turkish immigrants within four years because they did not integrate well. The plan never materialised, and German political debate, citizenship laws and social attitudes have all moved on a long way since those days. Net immigration went up to 369,000 last year. But Germany’s immigration system remains too restrictive: non-EU residents tend to be kept out unless they are skilled applicants for well-paid jobs. It is a woefully inadequate way of tackling Germany’s chronic shortages of engineers, information technology specialists, pharmacists, social workers and other professionals.

Germany’s demographic pressures make it essential for Angela Merkel, or whoever is chancellor after next month’s parliamentary elections, to introduce reforms across a broad front. Although domestic demand has gone up in recent years, thanks largely to low unemployment, the economy is famously reliant on exports of manufactured goods to generate growth. Exporting success needs to be complemented by more open product markets and a more competitive services sector, parts of which – such as the retail industry – are conspicuously inefficient by the standards of advanced economies.

Three other areas crying out for improvement are infrastructure, education and research and development. Germany spends less than any large EU country on upgrading roads, railways and waterways. Ageing infrastructure, like that of the rust belt of north-western Germany, drags down economic performance. As a percentage of economic output, Germany spends less on education and R&D than Austria, Belgium, Finland, France and the Netherlands.

Growth-enhancing reforms are essential because German economic success is the ultimate guarantee that the eurozone will survive and flourish. Germany is Europe’s most powerful economy. But it is not powerful enough.

Copyright The Financial Times Limited 2013.