The German economy under the reign of Angela Merkel
BERLIN – The Germans are doing better than ever. In many ways, the economy has broken records under the reign of outgoing Chancellor Angela Merkel: household financial assets have peaked; the number of jobs reached an all-time high before the pandemic struck in early 2020; GDP – the sum of all goods and services produced in a period – has also reached an all-time high.
And yet, while the economic record of Merkel’s 16 years is exceptional at face value, on closer inspection, one thing is obvious: against a backdrop of globalization, Europe’s largest economy no longer has the power. weight it had at the turn of the century. Germany has fallen behind in key sectors that will shape the future of the world, and even the competitiveness of its manufacturing industries is showing clear signs of fatigue.
In 2004, a year before Merkel was first elected Chancellor, the British magazine The Economist called Germany “sick from Europe”. Ironically, the previous government, a coalition of center-left and green parties, had already laid the groundwork for a recovery with some reforms. Faced with the threat of a high unemployment rate, the unions had withheld their wage demands.
“Until the Covid-19 crisis, Germany had experienced strong economic growth with both high and low unemployment rates,” said Michael Holstein, chief economist at DZ Bank. However, he never made any important decisions for his future.
Another economist, Jens Südekum of the Heinrich Heine University in Düsseldorf, offers a different point of view: “Angela Merkel benefited greatly from the preparatory work of her predecessor. This is particularly true of the extreme wage moderation practiced in Germany in the early 2000s.
Above all, Germany was aided in the first half of the Merkel era by global economic upheavals. Between the turn of the millennium and the debt crisis of 2011-2012, emerging countries, led by China, experienced unprecedented growth. With many German companies specializing in the manufacture of industrial machines and systems, the rise of rapidly industrializing countries has been a boon to the country’s economy.
Germany has dismissed Google as an over-publicized tech company.
Digital competitiveness, on the other hand, wasn’t a big deal in 2005 when Merkel became Chancellor. Google went public the year before, but was dismissed as an over-publicized tech company in Germany. Apple’s iPhone was only due to hit the market in 2007, then quickly achieved cult status and ushered in a new phase of the global economy.
Germany has struggled with the digital economy, in part due to the slow expansion of internet infrastructure in the country. Regulation, lengthy start-up processes and, in some cases, high taxes have all contributed to the marginalization of the former economic wonderland in some of the most innovative industries of the 21st century.
Volkswagen press plant in Zwickau, Germany – Image: Jan Woitas / dpa / ZUMA
“When it comes to digitization today, Germany has a long way to go with relevant infrastructure, such as the expansion of fiber optics, but also with digital administration,” says Stefan Kooths, director of Center for Economic Research and Growth at the Kiel Institute for the World Economy (IfW Kiel).
The country has long failed to make any adjustments to its retirement system to deal with the looming demographic challenges caused by an increasingly aging population. “The social security system is not the test of time,” Kooths says. The most recent changes have come at the expense of future generations and taxpayers, according to the economist.
Low euro exchange rates boost German exports
Nonetheless, things seemed to be going well for the German economy at the start of the Merkel era. This can be partly explained by the economic slowdown caused by the euro debt crisis in 2011-2012. Unlike the previous decade, the weak euro exchange rate favored German exports and put money into German coffers. And since the then President of the European Central Bank, Mario Draghi, decided to save the euro “whatever the cost” in 2012, that money has become less and less expensive.
In the long run, these factors inflated the prices of real estate and other sectors, but did not contribute to the future viability of the country. “With the financial crisis and the ensuing national debt crisis, economic policy entered crisis mode, and it never came out of it again,” said chief economist at DZ Holstein. The policy, he explains, was aimed at countering crises and maintaining the status quo. “The goal of remaining competitive has taken a back seat, as have questions about the future.”
In traditional manufacturing, the situation has deteriorated considerably. The Institut der Deutschen Wirtschaft (IW), which regularly measures and compares the competitiveness of industries in different countries, recently concluded that German companies have lost many of the advantages they had gained. The high level of productivity, which was one of the country’s strengths, faltered in the years leading up to the pandemic.
Kooths, of IfW Kiel, points out that private investment in the German economy has declined in recent years, while the “government quota” in the economy, which describes the amount of government spending relative to GDP, has dramatically increased. increased during Merkel’s tenure from 43.5% in 2005 to 46.5% in 2019. Kooths concludes that: “Overall, the influence of the state on economic activity has increased significantly.
Another very crucial aspect of competitiveness, at least from the point of view of skilled workers and businesses, has been neglected by German policy for years: taxes and social contributions. The country has one of the highest income taxes in Europe, and corporate taxes are also barely as high as in Germany anywhere in the industrialized world. “In the long run, high tax rates always come at the expense of economic dynamism and can even prevent new businesses from being created,” Kooths warns.
Startups can renew an economy and lay the foundation for future prosperity. Between the year 2000 and the Covid-19 crisis, fewer and fewer new businesses were created each year. Economists from left to right are unanimous: Angela Merkel is leaving behind a country in dire need of reform.
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