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AB 2000 studies

Alain Boublil Blog

 

The three headaches of the German economy

As serious the Volkswagen affair is, it must not conceal the structural weaknesses of the German economy. Through a well known writer trick, to avoid repetition, the country is systematically qualified as the “first economic power in Europe” in comments but never the “country in Europe with the oldest population”. The size of the German economy is an indisputable statistical fact, but it is not the result of its economic achievements. It is the mechanical consequence of the German unification which 25th birthday we are celebrating this year. And this historical change has not facilitated economic growth since, to absorb East Germany, which suffered an enormous backwardness compared to the West, major sacrifices had to be accepted, which generated, during more than fifteen years, a growth rate inferior to the French one. At that time, Germany was “the sick man of Europe”.

But German economy learnt to adapt itself in reforming its industrial and social model. In return, it did not reverse its “ageing curve”. This phenomenon, in every developed country, results from the increase of life expectancy. But it is corrected, or not, by the demographic vitality. Births high level may, as in France, offset, at least partly, the consequences of the increase of life expectation on age pyramid. It is not the case for Germany where, on the opposite, the increase of life duration is accompanied with a fall of births, which generates both disequilibrium in age pyramid and a diminution of the population. The first consequence is, of course, the reduction of unemployment since the arrival on the labor market of young generations is, by far, inferior to the retiring of old generations, which makes a difference with the French situation. It explains, also, the attractiveness of immigration but that cannot be more than a transitory cure. This situation generates a diminution of public expenditures first in education but also in housing and in legal administrations since aged people are not those who use the most jurisdictions or put in danger public security. German public debt ratios are, for these reasons, among the best in Europe, and, in France, we frequently give Germany as an example, but not for good reasons.

The second consequence of the ageing of the population, and it is very worrying, is it kills growth. Consumption declines with age and if the younger generations are not numerous enough to compensate this phenomenon, internal demand weakens as durable goods are not replaced and expenditures related to housing and mobility slow, with consequences on investments related to these activities. Japan entered before our neighbor, in this ageing process, and saw its dynamism broken twenty years ago for that reason. Germany, and it is an inexorable phenomenon, will have, during the coming years, a depressive impact on its economic partners. And it is not the end of the story.

German pension system, which will be heavily in demand, is not based, as in France, on redistribution, which is classified, at least partly, as public expenditures and has a significant impact on the economic ratios, where France appears as a bad pupil, but on an accumulation mechanism. Pensioners receive a defined benefit. Resources collected before being distributed to retired persons, are invested mostly in sovereign bonds and the level of their pensions is defined from hypothesis based on the return of these investments, essentially on the level of long term interest rates. But the depressive impact on the eurozone of German stagnation caused by its ageing population, will generate economic policies based, it is already the current situation, on very low interest rates, too low to guarantee the equilibrium of German pension system. Concerns, it’s an euphemism, of the German government regarding ECB policy are largely motivated by this dilemma: low interest rates are putting in danger the equilibrium of pension system but a rate rise would be worse since it should kill any rebound of European economies and consequently German exports which are the only engine at their disposal.

It is in this context that the Volkswagen scandal occurred. This is definitely not the first time a company is convicted of cheating. Huge penalties BP is paying after the Mexico Gulf disaster or those pronounced against the Japanese utility which did not respect safety standards for its nuclear plants at Fukushima are there to remind us that reality, needless to say those imposed to American and European banks after the financial crisis. But the new point is that affects what became, without being noticed, the first contributor to the German trade surplus. There are not anymore the famous small and medium size companies which constitute the “Mittelstand” and produce the machine tools the world is envious about, which occupy the first position, but now the car industry. The sector became the leading exporter in 2014 with 195 billions euros, including 26 billions sold in the U.S. and its contribution to the trade balance is even more essential with a surplus of 116 billions representing more than 60% of the entire trade surplus which reached last year 215 billions.

This is the result of the strategy put in place by the car manufacturers after the fall of the Soviet Union and central Europe nations joining the European Union. Instead of transferring abroad the entire production because costs were too high in Germany, the kind of argument we hear frequently in France and which generated here trade deficit, German car manufacturers kept in the country planning and design departments along with final assembly lines which guarantees  a top quality for their products. But they organized for some parts supply chains relying on production units located in central Europe, which contributed to reduce their costs. A look at the traffic on Saxe and Brandenburg highways gives an idea of the intensity of these exchanges. So, political satellites of former Soviet Union became economic satellites of the German industry, with the car manufacturers at the center of this new division of labor.

That shows how much Germany will be affected by the Volkswagen affair which will have, at least for a short period of time, consequences on car sales and production. The importance of the car industry does not have anything to do with the insistence of German authorities, with Chancellor Merkel on the front line, to slow in Brussels decisions regarding emissions, CO2 as all the throwing out of vehicles which pollute atmosphere. An inquiry to know the truth about that is inescapable. And German car manufacturers will be the first to be hurt by a tightening of the rules and will have a lot to lose.

With an ageing population, a potential and deep pension crisis and tomorrow a weakening of its car industry, German economy is not safe from turbulences in the coming years. In France,  we should not be delighted about this situation since our economies are very much imbedded and that will also affect our growth.

 

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