Germany should look at itself in the mirror

It has been argued for some years that one of the important consequences of Germany’s obsession with fiscal surpluses in recent years, articulated by Chancellor Merkel and Finance Minister Schäuble as the “Schwarze Null” austerity policy, is that Germany has been under-investing in its physical infrastructure. But it has taken the recent industrial unrest to bring that to the fore into the public debate. Even the IMF is now getting on the bandwagon. In its in-house journal (Finance and Development, Vol.52, No.2, June 2015) there was an article – Capital Idea – which says that “By increasing spending on infrastructure, Germany will help not only itself, but the entire euro area”. At present, Germany is trying to take the high moral ground in the Greece negotiations, but its motivations are obvious – it doesn’t want the generosity that the rest of the world has shown to it in the past (debt forgiveness) to be given to Greece now because that would allow the Greek government to stimulate growth and demonstrate that the austerity path is destructive and myopic. It doesn’t suit Germany’s own vision of itself (as articulated by its own crazy government) for an anti-austerity stance to be given any oxygen. But if it looks at itself in the mirror it would see an economy that is barely capable of economic growth itself, most recently has zero employment growth, has decaying physical infrastructure such that bridges are roads are becoming dangerous, has generated no meaningful real wages growth in years, and as a consequence, has a workforce that is now showing signs of open revolt. Some moral high ground.

Eurostat published the latest employment data yesterday (June 16, 2015) – Employment up by 0.1% in euro area and by 0.3% in the EU28.

The result is abysmal and a reflection of the failed policy structures in place in Europe at present.

Total employment in the Eurozone is still around 3 per cent below the peak before the crisis – that is, it has still not recovered the level it attained – 7 years ago.

In the last four-quarters, Germany has recorded employment growth rates of 0.3 per cent (2014Q2), 0.1 per cent (2014Q3), 0.2 per cent (2014Q4), and now 0.0 per cent (2015Q1).

As you can see from the graph, Germany (DE) is now the third worst performing economy in the European Union. And if you believed all the hype last year about Greece finally turning the corner as a result of the austerity policies check out its employment growth in the first-quarter of 2015 – minus 0.8 per cent.

The austerity straitjacket has led the three largest economies in the Eurozone (Germany, France and Italy) to record zero employment growth in the first-quarter 2015.

It is little wonder that industrial action (strikes etc) have rather dramatically increased in Germany in recent years.

Earlier in May 2015, the German press carried the headline – Willkommen, Streikrepublik Deutschland – which I am sure doesn’t need translating.

It was reporting a six-day strike at the German railways (Deutsche Bahn) as the – Gewerkschaft Deutscher Lokomotivführer (GDL) – the German train drivers’ union (the or GDL) increased the intensity of its wages and conditions campaign that started in the Autumn of 2014. The strike in May was the 8th that the GDL has organised over that period.

Industrial unrest is, however, not confined to the railways in Germany. The UK Guardian article (May 22, 2015) – The strikes sweeping Germany are here to stay – noted that Germany:

… is on course to set a new record for industrial action with everyone from train drivers, kindergarten and nursery teachers and post office workers staging walkouts recently. The strike wave is more than a conjunctural blip: it is another facet of the inexorable disintegration of what used to be the ‘German model’.

Germany’s international broadcaster Deutsche Welle noted in the report (May 14, 2015) – Germany to mark record year for strikes – that “German workers have already been on strike for twice as many days this year as they were in the whole of 2014″.

The damaging Hartz reforms which have increased precarious employment and stifled real wages growth combined with privatisations and attacks on unions have led in the opinion of the UK Guardian author to a “a broad erosion of formal and informal wage norms that for several decades kept the peace in German capitalism”.

Income differentials have been further strained by the “enormous, Anglo-American-style increases in top management salaries, especially, but by no means exclusively, in finance”.

The UK Guardian article notes that:

Skyrocketing managerial pay is out of joint with the experience of the vast majority of households, who suffer not only from stagnant or declining wages and deteriorating employment conditions, but also from cuts in public services and benefits. This makes appeals to workers for wage restraint for the benefit of the public and the economy sound hypocritical to many.

Overlaying and driving all of this malaise is the fiscal austerity (the ‘Schwarze Null’ policy) of the Government. So as it lectures Greece on how it should act, its own handling of the German economy is leading to a breakdown in the stability of its own society.

Who the cap fits!

The Jacobin magazine article (June 15, 2015) – The Upsurge in Germany – notes that:

The government’s goal of avoiding debt at all costs has been achieved at a huge expense. German cities and municipalities have been bled dry, schools are falling apart, and bridges are near collapse.

There are two implications of this.

The industrial unrest is directly challenging the austerity model because the local governments are under pressure to increase wages and improve services at a time when the federal government is squeezing the public sector generally.

The decline in infrastucture is also demonstrating the poverty of the austerity model.

This decline has been on the radar for a while now. Last year (September 18, 2014), the German magazine Der Spiegel published an article – Germany’s Ailing Infrastructure: A Nation Slowly Crumbles – which said that “Despite its shiny façade, the German economy is crumbling at its core.”

The article cites the new Director of the German Institute for Economic Research (DIW) who has recently published a book – “Die Deutschland Illusion” – the title is self-explanatory.

We learn that:

Hardly any other industrialized nation is so negligent and tight-fisted about its future. While the government and the economy were investing 25 percent of total economic output in new roads, telephone lines, university buildings and factories in the early 1990s, the number declined to only 19.7 percent in 2013 … the investment shortfall between 1999 and 2012 amounted to about 3 percent of gross domestic product, the largest “investment gap” of any European country. If one looks only at the years from 2010 to 2012, the gap, at 3.7 percent, is even bigger. Just to maintain the status quo and achieve reasonable growth, the government and business world would have to spend €103 billion ($133 billion) more each year than they do today.

That ratio did not improve in 2014.

The following graph (using AMECO data) shows the Gross Investment as a percent of GDP for 31 nations as at 1990 (blue columns) and 2014 (red triangles). It is ranked in terms of the 2014 ratios.

There are not too many Eurozone nations in the above-average group (over 21 per cent).

It is clear that German companies are cashed up and “no longer investing in Germany”. The article lists alternative locations where the German capital is heading (US, China, etc).

So while the autobahns crumble and the electricity transmission system approaches collapse, Germany is also underinvesting in its human skill development.

The article notes that Germany is lagging behind other OECD nations in its spending on “daycare centers, schoools and unversities … The level of early-childhood education in Germany is ‘in the poor-to-moderate range'”

The upshot is that Germany needs to:

… renovate its factories, transportation arteries and data networks, educate its young people more effectively and devise new ways to use the vast savings capital of its citizens in economically meaningful ways.

But it cannot do that if it maintains the balanced (or surplus) fiscal strategy.

And now the IMF is finally waking up to this disaster.

In its article (cited above), we learn that “even the strongest economy” in the Eurozone, “Germany, seems to have lost some momentum in recent years. Moreover, estimates of German growth potential are low—and could go lower because of a rapidly aging population.”

The IMF article argues that:

But there is a way to mitigate growth problems in Germany and, by extension, throughout the euro area. Increased German public investment in infrastructure, such as highways and bridges, would not only stimulate near-term domestic demand, but would also increase productivity and raise domestic output over the longer run and generate beneficial spillovers across the rest of the euro area.

Which is a refreshing change from the “growth-friendly austerity” that the IMF has been pumping out during the crisis to justify their role in the Troika, which has all but killed off Greek prosperity.

Here we have a recognition that spending equals income and that government spending not only directly stimulates domestic demand but also leads to multipliers which will benefit the other nations in the Eurozone.

The IMF also now recognises that “Germany’s public investment in infrastructure is in the bottom quarter of the 34 advanced and emerging market economies of the” OECD.

The reality is that “public investment has been negligible since 2003″ and it is only so long that bridges and roads can tolerate virtually zero maintenance.

An increase in public infrastructure spending not only stimulates demand now but also increases potential real GDP (future growth) and future productivity growth, which provides an increased capacity for employment growth and real wages growth.

It all feeds on itself in a virtuous cycle.

The same strategy should be advocated for Greece. It cannot meet the fiscal targets imposed by the Troika without growth and the conditions imposed as part of the bailout prevent growth. They are caught up in a vicious cycle.

The solution is the same as it is for Germany – more public spending.

It isn’t rocket science.

Conclusion

If Germany could look at itself in a mirror it would see an ugly nation – failing in many respects to provide for the well-being of its people.

In turn, its social model is starting to break down.

Things have to change.

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.