Can the German economy spur Europe?

Germany expects a record year in employmentGermany factory workers

Only a German consortium the size of Volkswagen can boast an annual turnover similar to the GDP of a country like Finland. Last year, VW revenue totalled €200 billion euros. The German car manufacturer, in presenting record data, is just one example of the amazing evolution of the German economy. The results are even better than expected.

The German economy is growing faster than expected. And unemployment is falling even faster. Another carmaker, BMW, has announced it will hire 8,000 new skilled workers-particularly computer engineers- as it expands its research centre in Munich.

And the German economy is looking for global opportunities to expand even further.In addition, potential weak points in the economy are identified and addressed accordingly. The reason for such success is the high demand for German products internationally. Both the data and the attitude are enviable, particularly given the stagnation taking place in southern Europe.

Hence the question: Does Germany grow at the expense of other Eurozone countries? The truth may be sought in the German doctrine that views the economy as a locomotive that pulls along lagging countries- such as Spain.

According to Germans, without Germany, Europe would be much worse. But how much should Germany put up with? Countries such as Spain need a high positive trade balance for many years to get out of the current position of financial weakness, with net debt of almost 100% of GDP. And what of Greece? The prestigious German economist Clemens Fuest, possible successor to Hans Werner Sinn at the head of the Ifo Institute, believes that one can hardly impose reforms in Greece against the will of the Greeks. And without reform there will be no changes. Should German taxpayers pay to help Greece if Greeks are not willing to help themselves?

This debate is currently raging in the German press and perhaps emphasises the current limits of the European idea. German Finance Minister Wolfgang Schäuble has warned that the capital flight which is severely affecting Greece would not be such a concern- and the welfare of the country’s citizens would improve- if they could just adhere to some simple, fiscal discipline.

Germany may be the best student in the class of the global economy, but the country knows that it will ultimately be graded against worldwide standards, and so is constantly wondering how to improve and, above all, how it can retain leadership in all fields.

Volkswagen is a case in point. Even with such an envious balance sheet, last autumn, CEO Martin Winterkorn announced a programme to enhance efficiency that would save the company €5 billion. The response of the head of the company’s works council? The submission of a 400 page report which ensured that the company could save even more than the amount proposed by Winterkorn. Something similar has happened at BMW. It is a clear strategy of governance through maximum discipline which saves capital and keeps costs at a minimum, while at the same time creating thousands of jobs.

So how do we analyse the overall approach of the Germans? A philosophy of not resting on laurels and always being attentive to the latest market movements are obviously key hallmarks of Teutonic success. The country is always questioning how it will meet the demands of the future. What are the most innovative companies in Silicon Valley doing? The repsonse of the German automotive industry to technology development has been to invest heavily in computer engineering, a process that will allow companies to develop lightweight electric and remote control cars. Apple has been recruiting swathes of mechanical engineers to combat the threat from the German automotive giants. Thus, they are embarking on a strategy aimed at minimising the damage that can be done from what they clearly see as current and future competitors.

But is Germany hoarding cash from the rest of Europe? The Germans are criticised for not investing nor consuming enough. But the falling price of oil is favourable both to German industry and consumers, who have more money in their pockets, allowing for a boost to the economy through increased spending.

The German state is undoubtedly benefiting from the strong performance of the economy. The current account is showing the highest surplus since 2000. Many experts are demanding that Germany take advantage of this situation to reduce its public debt-still above 70% of GDP-  to the 60% stipulated in the European Stability Pact.

In 2015, the German government will fulfil its pledge to run a balanced budget, something not seen since 1969. The government are committed to sticking to the terms of the Stability Pact as much as possible, and have forcefully clashed with those who champion expansionary policies to exit the crisis in southern Europe.

Berlin will not accrue new debt until 2018. This was a decision reached between the Social and Christian Democrats in the formation of a large coalition government. That decision undoubtedly has the backing of experts and the public. President of the ZEW think-thank, Fuest Clements, put it succinctly: Germany does need more investment. But it does not need more debt. If an increase in spending is required to foster competitiveness, expenses should be reduced elsewhere to cover the costs.

Growth in Germany stood at 1.6% for 2014. In total, German municipalities earned €18 billion more than they spent. Süddeutsche Zeitung has spoken of historical data. “The German economy remains stable despite geopolitical uncertainties,” according to Ifo President, Hans-Werner Sinn.

The oil price is certainly a factor. Germany imports around €90 billion worth of oil every year. The current weakness of the euro is another factor assisting the economy, as manufacturers enjoy the consequent boost in exports. Currently, Germany has 43 million people at work, which is also bolstering the state coffers.

Domestic demand is growing. Consumers are spending at levels not seen for the past fifteen years, according to the GFK consumer institute. Companies are investing. The construction industry is performing well. And researchers are even predicting that growth will stabilise in 2015, reaching 2%.

In January, the State recouped a total of €43 billion, a figure which was 4% higher than last year. The forecasts for 2015 and 2016 are excellent. According to Thomas Amend of HSBC, low inflation and excellent labour market conditions will continue to drive domestic demand. “This in turn will boost the growth of the German economy in 2015,” confirms Amend.

However, it remains to be seen if the positive results will have a spillover effect to the rest of Europe. The German daily Handelsblatt have argued that German demand cannot make up for the lack of competitiveness in the industrial structures of the south. “Spain remains a concern despite many reforms. There are concerns about poverty and financial weakness, particularly its high levels of external debt. To overcome this situation the country needs a high trade surplus for many years. And that would mean moving from the strategy of cost reduction of the current government to a policy that turned Spain into an economy which generated competitive goods and services for global consumption. ”

“Europe is better than the euro,” according to Roman Pletter, a commentator for the weekly Die Zeit. To Pletter, the time is right for a political force to break the Europe-euro bond and get back to the idea of ​​Europe as a community at peace, one that shares more than a monetary union, but rather an important history.

According Pletter, it cannot be the case that “if the euro fails, Europe fails,” as Angela Merkel remarked in a government statement. The wishes and interests of the peoples of Europe are too divergent. So too are their economic realities. The only solution to this conflict can only be political: “More power and democracy at European level, with common taxes and adherence by all countries to budgetary rules. Those who do not wish to participate should be able to leave the euro without that meaning the breaking apart of Europe as a political community. “

About the Author

Lidia Conde
She studied journalism at the Autonomous University of Barcelona. Since 1991, Lidia lives and works in Germany as a correspondent for several Spanish newspapers, in which she has covered the fall of the Berlin Wall and the German reunification. Seeking an answer to how Europe could become competitive and fair, too.

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