Germany's lessons in thrift
By
Associate Editor
David Stevenson May 15, 2009
Print this article
Germany's economy is in trouble, but so far it is refusing to follow Britain and the US by ramping up government spending. Will this approach work? David Stevenson reports.
Is Germany in trouble?
Yes, its exports have fallen off a cliff. Unlike America and Britain, Germany doesn't do consumer booms; overseas orders make the economy's wheels go round, accounting for half the country's GDP. That makes it the world's top exporter, ahead of China and the US.
But with overseas consumers cutting back, it's been hit hard. Industrial production fell 24% in the year to March, with a 12% plunge in 2009's first quarter alone. This year GDP could shrink by at least 6%, making even battered Britain's likely 4%-plus drop look almost acceptable.
Chancellor Angela Merkel said two months ago that the German economy was in a worse state than at any time since the end of World War II.
How is Angela Merkel handling it?
She's refusing to get sucked into a government spending war with America and Britain, who are running up huge public deficits trying to kick-start their ailing economies. Sure, Merkel's government is pumping some public cash into the economy, meaning likely borrowing of €80bn this year, which will lift the German budget deficit to 3.7% of GDP for 2009 and 5.5% for 2010, say the country's leading economic research institutes.
But that's well below the 13% and 12% of GDP expected from the US and UK respectively. And although the German Finance Ministry has just announced an asset-swap scheme to help the nation's banks with their toxic loans, unlike the British and American plans, shareholders, not taxpayers, are set to pick up the tab.
Has Germany's Chancellor learnt from history?
After the Berlin Wall came down 20 years ago, the old East Germany was showered with money. Some $2trn has been pumped in – equivalent to 4% of Germany's GDP each year. Yet while the purpose was as much political as economic, Germany learned that "big spending packages don't work if the economic policies underlying them are miscued", says Peter Gumbel in Time. "Spending so much money in such a short time is bound to be wasteful."
Today, East Germany has "superfluous airports, oversized water-treatment plants and a collection of heavily subsidised industrial white elephants", all built at taxpayers' expense. In every district you find projects that "make you shake your head", including "floodlit sheep meadows", says Reiner Holznagel of the German Federation of Taxpayers. "The danger is always that money is spent neither appropriately nor efficiently."
Is Merkel right?
Some argue that Germany should be doing more to boost consumer spending. But despite its relative thriftiness, Germany has been seeing at least as many 'green shoots' as more profligate nations. Industrial production flattened out in March while exports rose 0.7%, "providing tentative support for our view that the still-competitive German economy should be among the first to benefit from a modest improvement in global demand", says Capital Economics.
That could now be happening. April business confidence hit a five-month high, while the European Central Bank's president, Jean-Claude Trichet, reckons the global downturn has bottomed out. "In all cases we see a slowing down of the GDP decrease, in certain cases you see already a picking-up."
But while "the major quake in production now lies behind us", says Kai Carstensen at Munich University's Institute for Economic Research, "we must still face the aftershocks". These include lengthening dole queues – Germany's jobless rate has hit 8.3% and will be even higher next year.
So the Chancellor could still have to shell out more?
Maybe. Soaring job losses could put her spending restraint under pressure, particularly with elections in September. Next up is GM Opel, which Merkel's coalition is battling to save, along with 25,000 German jobs, in the face of US parent group General Motors' 1 June deadline to reorganise or file for bankruptcy.
If the latter happens, Germany "may offer loan guarantees to help GM sell Opel", says Bloomberg. But while "we want to protect as many jobs and plants as possible", says Germany's economy minister, Karl-Theodor zu Guttenberg, "we have a duty to handle taxpayers' money responsibly".
But there may be bigger tests on the horizon – those banking woes. BaFin, the German financial regulator, "warns of $1.1 trn of toxic assets on German bank books", says The Daily Telegraph's Ambrose Evans-Pritchard. The IMF says "eurozone banks have so far written down a fifth of likely losses compared to half for US banks".
If the IMF and BaFin are right, Europe hasn't yet had its crisis." If calls for an uber-bank bail-out escalate, Merkel's tough stance will really be tested.
Is Merkel Germany's Thatcher?
There are some striking similarities. Both came from steady middle-class stock. Lady Thatcher graduated as a chemist who then studied crystallography – the arrangement of atoms in crystals – while Merkel trained as a physicist who later wrote a thesis on quantum chemistry.
Both took on their country's top job when they were in their early 50s. And Merkel has occasionally "started to sound like the UK's first female leader", says Greg Hands MP. "She has implicitly criticised countries like the UK, which are trying to borrow their way out of trouble".
But while Thatcher was always the truest of blues, Merkel has 'crossed the floor' from the socialism of her youth. This may explain her periodic blaming of "Anglo-Saxon" capitalism for the crisis. There's no way staunch free-marketeer Lady Thatcher would see eye-to-eye with that.
Published in
Economics
| More
articles
by
David Stevenson
Related articles
-
By Matthew Lynn, May 25, 2012
-
By Bill Bonner, May 24, 2012
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.