Germany’s ascendancy over Europe will prove short-lived

Although the article has a point and the population is truly in decline, Germany should not be counted out. Germans have the know-how, a very modern infrastructure, are still the most industrious and forward thinking people with a vision that no other on the European continent has or can be compared to. It didn’t literally give its manufacturing base to the Chinese.

Germany has peaked. Its hegemony in Europe is a “power illusion”, a confluence of fleeting advantages soon to be overwhelmed by the delayed effect of error and the crush of historic forces.

If demography is destiny, it may be clear within five years that ageing Germany is going the way of Japan. Within 20 years it may equally be clear France and Britain are regaining their 19th century role as the two dominant powers of Europe, albeit a diminished prize.

The European Commission’s 2012 Ageing Report says Germany’s population will shrink from 82m to 66m over the next half century due to social structures that cause low fertility, while France jumps to 74m and Britain to 79m. This is out of date already since the German census revealed in May that the country has 1.5m fewer inhabitants than thought. They miscounted foreigners going home. The total is down to 80.2m.

“Germany is at the high point of its economic output. It will not get any stronger,” said Germany’s EU commissioner, Guenther Oettinger. He accuses his nation of turning flabby, obsessed with “welfare benefits, female quotas, the minimum wage and ‘no’ to shale fracking”.

Jorg Asmussen, Germany’s man at the European Central Bank, made much the same lament recently, warning that the country risks becoming “the sick man of Europe again in five to 10 years” if it does not get a grip on infrastructure and education. Germany’s top university – Munich Technical – ranks 53 in the world. All of the top 19 are Anglo-Saxon.

We have come to believe the narrative that Germany was transformed into a Teutonic Tiger by the Hartz IV reforms of Gerhard Schroder in the country’s Thatcherite blast a decade ago. As always with such stories, it is half true.

The reforms did make it easier for Volkswagen to secure longer hours for no extra pay at German plants by threatening to decamp to Eastern Europe. It is why unit labour costs fell 4.4pc across German manufacturing in the single year of 2005, gaining a spectacular edge over Club Med rivals struggling with ECB-induced credit bubbles. The side-effect for Germany has been the fastest rise in income inequality between rich and poor of any rich country. Life expectancy is falling for poor Germans.

What Germany has is a superb engineering base and an all-conquering car industry, selling the premium brands so much in vogue in China and the Gulf. All effort goes into exports.

This trading miracle is married to sclerotic services and swathes of inefficiency at home, again like Japan. Annual productivity per worker grew by just 0.6pc from 2000 to 2010, compared with 1.4pc for the OECD bloc, lagging so badly that the OECD said Berlin should take lessons from the Australian Productivity Commission.

Germany ranks 20 in the World Bank’s ease of doing business index, falling to 106 for starting a business. The World Economic Forum ranks Germany higher at 6 for competitiveness (the UK is 8), excelling in capacity for innovation (3), product sophistication (3) and local supplier quality (4).

But weaknesses abound, too: mobile broadband (31), availability of venture capital (34), access to loans (44), soundness of banks (75), hiring and firing (127) and flexibility of wages (139).

A current account surplus of 7pc of GDP is deemed a success when it is really a function of crushed internal demand. The surplus must be recycled as capital, so the country is a prisoner of its own imbalances.

It is easy to see what can go wrong. Japan has just devalued the yen by 35pc against the euro, stealing a march in Chinese and US markets where it competes head on with Germany’s champions.

The US shale bonanza is already bringing matters to a head. “The price of gas in America today is just a quarter of the price in Europe. That is a dramatic competitive shift,” said Harald Schwager from the chemicals giant BASF. His firm is building its new plant in Louisiana.

Germany’s leaders seem sure once again that they have solved the euro crisis: once again I beg to differ. The internal devaluation strategies in the South are self-defeating. Falls in nominal GDP are causing debt dynamics to spin out of control, while youth job wastage is degrading skills.

There will be rupture in the end: either EMU-exit by victim states seeking liberation; or defaults within EMU. Either way, Germany will take it on the chin. Hans Werner Sinn, from the IFO Institute, fears Germans may wake up to find that much of the money put aside for the nation’s old age has gone up in smoke.

Full article: Germany’s ascendancy over Europe will prove short-lived (The Telegraph)

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