Germany is sick, and it's taking Europe down

It was not primarily Greece that wrecked the Eurozone. It was Germany. The country is the real sick man of Europe, and the disease may be terminal

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Not a happy face...
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Robin Mitchinson
On 18 October 2014 09:32

Germany the ‘sick man of Europe? This may be difficult to take-in, but it’s true. Following the introduction of Europe’s funny-money, Germany has lived high on the schwein with a Euro that is under-valued relative to the German economy.

It led to boom-times as Germany lent cheap money to the Club Med, where it is not cheap at all, so that the Italians, Greeks et al can buy Mercs, Beemers, and lots of white goods on tick. Not anymore. Germany is in the poo big time.

A key part of Merkel’s economic policy is to suppress earnings to subsidise exports, reducing domestic demand. There are zombie banks. There is low infrastructure investment resulting in Germany falling apart, with roads and bridges crumbling away.

Even the Kiel Canal, which survived the best efforts of the RAF in WW2, has been closed for repairs because a key lock has failed. And yet Germany is awash with money that it does not invest, as if saving was an end in itself.

Growth is almost non-existent; average GDP increase is only 1.1%, lower than both Britain and the US, placing it 156th out of 166 countries.

The demographics are startling. It is estimated that  within our lifetimes the population will decline by 17 million. A third of the population will be over retiring-age. The current reproduction rate is only about 1.4 when at least 2.1 is the replacement rate.

And yet the retirement age has been reduced from 65 to 63 for some workers despite the certainty of a smaller work-force having to support an increasing number of retirees, the very opposite of what should have been done.

In 15 years’ time Germany is likely to have more than 6 million fewer workers – even fewer if immigration falls below the current average annual rate of 200,000.

The education system is deteriorating. There are far fewer young graduates than in Britain (29% against 45%). Whereas the UK has 3 universities in the world top-five, Germany’s highest is a miserable 49th.

And there are serious ‘governance’ problems.

Strict labour laws make it nigh impossible to fire a permanent worker, even harder than in France. When ranked for ‘ease of  business start-ups’ Germany ranks 111th. 

Red tape forces low productivity on the services sector. Regulation of professional services is one of the most obtrusive in the Western world. For example, only a qualified pharmacist is allowed to open a chemist shop (and not more than four, so there are no chains like Boots) even if only non-prescription medicines are sold.

The Government has no enthusiasm for reforms to encourage growth in productivity, which is lower even than in Portugal.

Wages have fallen in real terms over the last 15 years. The result is domestic demand stagnates, forcing over-reliance on exports. The crunch in the Club Med has now stifled demand from that quarter, leaving Germany very reliant on its huge exports to China where the economy is already slowing-down.

Its share of global exports is now at a record low. Weak domestic demand is also a key factor in reducing demand for Club Med exports (and British).

Its banks were totally reckless in financing property bubbles, the root cause of the crashes in Spain and Ireland, and funding the consumption splurge that did for Greece and Portugal. They are unlikely to get back their money,

It was not primarily Greece that wrecked the Eurozone. It was Germany.

Robin Mitchinson is a Contributing Editor to The Commentator. A former barrister, living in the Isle of Man, he is an international public management specialist with almost two decades of experience in institutional development, decentralisation and democratisation processes. He has advised governments and major international institutions across the world

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