Germany's New Wirtschaftswunder Does Euro Crisis Threaten Berlin's Economic Miracle?
Part 2: 'Radiant Prospects'
The reasons for Germany's new economic miracle are many. The country is only now enjoying the fruit of its reform efforts over the past decade. Before the crisis hit, national finances had been half-way rehabilitated, and the federal government had been in the black. The country's Hartz reforms (the name is inspired by Peter Hartz, a former Volkswagen executive who advised Schröder on the original labor market and welfare reforms) in benefits for the long-term unemployed had injected some flexibility into the labor market. And since German salaries have hardly seen any increase in years, the competitiveness of German companies has increased.
Furthermore, Germany has also steered clear of undesirable developments seen in Anglo-Saxon countries and states on the edges of the euro zone. For example, it isn't paying the price of bursted real-estate bubbles, and it doesn't have to slim down a bloated finance sector. Experience has shown that both of these result in years of difficulty for the affected countries.
A Economics Ministry paper attributes the surprisingly quick development of the current upswing to "growth in the world economy (which) provided impetus to German exports and strengthened the buoyancy effect of the domestic economy." What's more, there has been a pickup in investments and consumer spending since the spring, which the Economics Ministry experts credit with "determining the pace of expansion along with sustained impetus from exports."
Germany's economy has also benefited from the low interest rates set by the European Central Bank (ECB). Still, considering developments in the German economy, the rates remain too low. If Germany's central bank were still responsible for setting the country's monetary policy, key interest rates would have been raised a long time ago. But, as things stand, the ECB set rates after weighing the average situation in the euro zone's 16 member countries, most of which are far from being able to boast about strong economic upswings.
"The situation is the mirror opposite of what it was 10 years back," says Joachim Scheide, a leading economist at the Kiel Institute for the World Economy (ifw). "At that time, while the countries surrounding the Mediterranean were booming, Germany was suffering from the effects of high interest rates. Today, it's the other way around."
The Optimists and Their 'Fat Years' Predictions
Economic researchers are unanimous in their belief that pursuing a policy of low interest rates will continue to fuel growth in the German economy. But the one thing they do not agree on is how things will develop going forward. The optimistic camp, led by Ifo chief Hans-Werner Sinn, predicts that the boom will be long-lasting. Indeed, Sinn has described Germany's economic situation as a "winter fairy tale" and says its economy has "radiant prospects." And Kiel Economics, a private research center and spin-off of the prestigious ifw, has auspiciously labeled what it believes to be the likeliest scenario as "the fat years."
Both of the institutes predict that the growth -- and all of its beneficial effects -- will last for some time. For example, they predict that matters will ease in the labor market. Indeed, Kiel Economics even goes so far as to predict that the number of unemployed in Germany will drop below the 2-million mark. That would translate into an unemployment rate of under 5 percent, the point that economics equate with full employment.
The institutes' economists are also expecting to see rapid improvements in government finances. As Kiel Economics sees it, by 2015, finance ministers at both the federal and state levels, as well as municipal financial departments, will be able to enjoy surpluses totaling over 80 billion ($105 billion). What's more, it believes they would actually have enough in surplus funds to both pay off their debts and lower taxes.
Today, it's already possible to see the positive effects that higher growth and employment are having on state coffers. For example, in 2010, German Finance Minister Wolfgang Schäuble will probably only generate less than 50 billion in new debts rather than the 80 billion initially forecasted.
Shortfalls at the federal, state and municipal levels will also be much lower in 2010 than had been previously estimated. Finance Ministry experts currently calculate that the deficit will run at around 3.5 percent of gross domestic product. Furthermore, they believe that the acceleration in growth will lift next year's deficit considerably below the 3 percent ceiling.
Euro Crisis Casts Shadow on Optimism
Still, there are also more pessimistic voices. For example, Gustav Adolf Horn, the head of the union-affiliated Macroeconomic Policy Institute (IMK), sees three potential sources of danger to continued economic growth. First, the global economy might once again weaken if emerging economies -- and China, in particular -- put the brakes on growth. Second, there is a potential danger coming from Germany's immediate neighbors, since many of their governments have managed to pass harsh auserity measures. And, finally, there is the yet-to-be-resolved euro crisis, which could potentially lead to a serious reversal. "For 2012," Horn warns, "you can't completely discount the possibility of an economic downturn or even a recession."
And Horn isn't alone. Scheide, the ifw expert, even believes that 2011 could witness a contraction if one of the euro-zone countries were to slide into insolvency. "That would have consequences even more painful that those from the Lehman bankruptcy," Scheide says. If that were to happen, Scheide predicts that 2011 economic growth in Germany would plummet to below 1 percent. And he puts the odds that this scenario will play out at 20 percent.
In her annual New Year's address, German Chancellor Angela Merkel, also struck reserved notes and avoided any traces of triumphalism, stating that "Europe is currently in the midst of a major test." The chancellor expressed her pleasure over the fact that the crisis appears to have been overcome and that there are once again increases in growth, employment and prosperity. But she is still a long way from declaring any golden age.
- Part 1: Does Euro Crisis Threaten Berlin's Economic Miracle?
- Part 2: 'Radiant Prospects'