By Michael Nienaber
BERLIN (Reuters) – In 2010, France’s then Finance Minister Christine Lagarde urged Germany to boost economic demand at home and help weaker euro zone states recover from the global crisis. Six years on, it is delivering – up to a point and as much by accident as by design.
Those who say Germany is gradually rebalancing its economy, after decades of relying mainly on its exporters for growth, point to forecasts that domestic demand will account for all of this year’s expansion.
Others, however, doubt whether the shift towards greater spending by private citizens, industry and the state marks a lasting, structural change in the economy. Germany’s trade and broader current account surpluses remain high, they say.
A third group warns that if Germany gets too keen on consuming, rather than producing the high quality goods it has long sold to the world, it may not bounce back from future downturns in the way it did from the global crisis of 2007-09.
One thing is certain: Germans are sucking in more imports from other euro zone countries, helping to encourage growth and employment among the neighbours.
One such is 35-year-old house husband Augustin Tougas whose wife works as a teacher in Berlin and has just got a pay rise of more than four percent, well above inflation which hit a record-low of 0.1 percent last year.
They’ve just spent 300 euros ($ 340) on an Italian espresso machine. After disturbed nights caring for their two small children, a stiff coffee is what they need to prepare for the day. “It’s a belated Christmas present for ourselves. We just felt we should give ourselves a treat,” Tougas told Reuters.
The International Monetary Fund (IMF), which Lagarde now heads, cautiously welcomes the trend towards greater consumption. “Domestic demand is increasingly playing more of a role as growth driver in Germany, which should contribute to rebalancing both inside and outside the euro area,” said an IMF official, speaking to Reuters on condition of anonymity.
The year Lagarde made her plea, net foreign trade accounted for almost a third of growth in the German economy, which was then recovering from the financial crisis much more rapidly than other major euro zone countries.
By last year, this contribution had shrunk sharply with domestic demand instead accounting for the lion’s share: 1.5 percentage points of the 1.7 percent growth rate.
This year, Berlin expects growth to be entirely domestically-driven. Net foreign trade will only hinder the expansion, with overall exports hurt by waning demand for ‘Made in Germany’ goods from emerging markets such as China, where the economy is slowing, and Russia which is in recession.
GRAPHICS: German trade with euro area:
http://reut.rs/1W6pGpN
Contributions to GDP growth:
http://reut.rs/1Wbg4u1
REFUGEE FACTOR
The rebalancing that has been achieved so far is due both to factors over which Berlin has no control, and government policy decisions – some made over a decade ago.
Chancellor Angela Merkel can claim some of the credit in at least one respect. Her public welcome for refugees from wars in Syria and elsewhere helped to encourage more than one million people to seek asylum in Germany last year.
The conservative chancellor has decided to spend not only a large part of her political capital on the migrant crisis, but also last year’s entire budget surplus of 12 billion euros on accommodating and integrating the record influx of refugees.
While Merkel’s refugee policy is politically controversial, it is undoubtedly an economic game-changer for Germany’s ageing society. The DIW economic institute estimates that the state will spend over 30 billion euros on refugees in 2016 and 2017, adding about 0.3 percentage points to annual growth.
Other factors lie beyond her influence. Record low interest rates set by the European Central Bank are encouraging Germans to borrow and spend, while the slump in global oil prices has helped to push down inflation, raising their purchasing power.
With Germans’ appetite for foreign goods rising, imports from other euro zone countries climbed to 350.5 billion euros in 2014 from 302.2 billion in 2010, data from the Federal Statistic Office show. This helped to reduce Germany’s trade surplus with the rest of the euro zone to 63.2 billion euros in 2014 from 88.6 billion euros in 2010.
In 2015, imports from other euro zone countries further rose by nearly four percent, preliminary data showed on Tuesday.
Germany, however, can’t shake off its habits that easily. The trade surplus with the world jumped to 247.8 billion euros last year from 213.6 billion in 2014, the data showed.
The wider current account surplus also hit a record 249.1 billion euros in 2015. This reflects how Germans also remain a nation of savers, with pension funds investing this money in the likes of French and Italian government debt, and returning interest payments boosting the surplus.
Holger Schmieding, chief economist at Berenberg private bank, says the collapse in oil prices is masking the underlying trend of imports rising faster than exports. “Over time, Germany’s external surplus will decline,” he said. “But as Germany can now import its energy much more cheaply, the current account surplus may not yet shrink in 2016.”
Others are less confident. “Germany’s trade and current account surpluses are still big. When the surpluses start declining, then I will be confident that a lasting rebalancing has taken place,” said Professor Paul De Grauwe of the London School of Economics.
Economics commentator Philippe Legrain sees no sign that the current account surplus – which he called the “biggest economic imbalance in the euro zone and indeed the world” – is shrinking. “A genuine rebalancing requires much higher wages commensurate with workers’ increased productivity over the past two decades and increased domestic investment, both public and private.”
Credit for the increased productivity largely goes to Merkel’s Social Democrat predecessor Gerhard Schroeder, who reformed the labour market more than a decade ago.
Highly unpopular at the time, the reforms – which cut industry’s labour costs and boosted its competitiveness – cost Schroeder the 2005 election. But they transformed Germany from “the sick man of Europe” into one of the continent’s most dynamic economies.
Now Germans are enjoying the pay-off in the form of record-high employment while the buoyant economy allowed companies and unions to agree last year on the highest real wage increase in more than 20 years.
On top of this, the introduction of a national minimum wage of 8.50 euros per hour last year has raised the purchasing power of low-income households. Here again, Merkel cannot necessarily claim the credit – the Social Democrats made this a condition for joining a coalition with her centre-right bloc in 2013.
However, Finance Minister Wolfgang Schaeuble has signalled the government may also do its part beyond the spending on refugees, despite its policy of balancing the budget. Schaeuble has eased his hardline stance on austerity, saying the cherished goal of a zero budget deficit should not be a dogma.
Under the German budget law, the “Schuldenbremse” or debt brake allows the federal government to borrow new debt up to a the equivalent of 0.35 percent of annual gross domestic product.
The big question is how sustainable the shift to a consumption-driven upswing will be as weaker foreign demand may prompt export-oriented firms to cut costs and hold down wages.
“Beneath the glamorous surface, the competitiveness of the German economy has started to erode,” said Commerzbank chief economist Joerg Kraemer. “After the next big recession, Germany will not rise like a phoenix from the ashes.”
($ 1 = 0.8868 euros)
(Additional reporting by David Lawder in Washington; editing by David Stamp)
