German Economic Success at Risk

EghtesadOnline: Germany’s economic success risks being undermined by the country’s unwillingness to adapt, according to the head of the ZEW Center for European Economic Research.

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03 October 2016

“We are becoming complacent to some degree,” Achim Wambach, who has been the president of the Mannheim, Germany-based ZEW since April, said in an interview on Thursday. “From politics we have pension reforms, but they are not shifting the economy,” he said. “And now we have the election coming up next year, so I don’t think much will be done until then,” Bloomberg reported.

Europe’s largest economy has been outperforming its peers with record-low unemployment and a booming current-account surplus. Still, with a slowdown in services activity, cracks are beginning to show, and Wambach is concerned that politicians may be looking the other way.

Germany is facing multiple challenges, from a refugee crisis that brought one million migrants into the country in 2015 to the woes of some of its corporate giants like Volkswagen AG and Deutsche Bank AG. Unease linked to the UK’s vote to leave the European Union and the rise of populist parties across the continent has led companies to put their investment projects on hold.

High Uncertainty

“There’s a high uncertainty, I hear a lot ‘we are postponing’ and ‘we wait and see’,” he said. “If companies can postpone their investments, it makes sense not to make fundamental decisions at this stage.”

Germany is well placed to withstand these headwinds, according to Wambach. The concern is whether, amid low inflation and sluggish productivity increases, it will be able to continue on an expansion path that politicians may be taking for granted.

“We are expecting a great end of the year: Germany’s economy is working, unemployment is low, Germany itself is doing great,” Wambach told Bloomberg TV’s Guy Collins in a separate interview. “We have to work more on our productivity increase.”

The troubles of Germany’s largest lender is one of the areas in which Chancellor Angela Merkel could find herself forced to act, Wambach said.

Deutsche Bank is “surely a systemic bank, and at some point if it gets worse and worse the government has to step in,” Wambach said. “We are distant from that point. As an initial step we would definitely need that these banks become more transparent.”

Refugee Crisis

While the government is investing heavily in the education of new immigrants, the results could be underwhelming, the ZEW president also warned. Moreover, some of Merkel’s own policies—such as the €8.50 ($9.6) minimum wage introduced last year—could undercut the project as they make refugees’ integration in the workforce more difficult. The government has recruited 8,500 teachers to teach German to 196,000 child refugees.

“I’m somewhat skeptical how productive they are going to be when they enter the job market: If you have a look at the data you can see they are on average not—yet—very well educated,” he said. “For refugees, minimum wages are really a barrier to enter the labor market and that’s why many economists argue we should treat refugees like long-term unemployed people.”

Consumer Morale Falls

The mood among German consumers worsened slightly heading into October but remains at one of the highest levels in more than a decade, a survey showed recently.

This suggested that private consumption is likely to compensate for weakening exports in the German economy.

The consumer sentiment indicator, published by the Nuremberg-based GfK institute and based on a survey of around 2,000 Germans, fell to 10 going into October. A Reuters poll had expected unchanged at 10.2.

Record-high employment, rising real wages and ultra-low borrowing costs are boosting the spending power of Germans, according to Financial Tribune.

GfK said the slight fall was linked to a prevailing sense of uncertainty linked to the threat of possible attacks in Germany and the economic consequences of Britain’s vote in June to leave the European Union.

“The consequences of Brexit for the European and, above all, German economy are still completely unclear,” GfK researcher Rolf Buerkl said.