Saint turns sinner: Germany’s dubious crusade

Published in Business Spectator (Melbourne), 23 January 2014

The European debt and growth crisis has seemingly divided the continent into saints and sinners. On the one hand, there are the profligate, lazy, unproductive countries of the European periphery, unflatteringly abbreviated as the PIIGS. On the other hand, there are the supposedly healthier, prudent and more efficient countries of the Euro core, led by Germany. Thanks to their economic strength, the core countries would be able to support the periphery. In return, they demand austerity and budgetary discipline from the others, based on their own shining example.

As popular as this narrative has become, it is not entirely accurate. Germany in particular is not nearly as saintly as it likes to see itself. Disappointing growth figures show that it cannot claim to be the economic growth machine of Europe any longer. Nor does Germany practise what it preaches when it comes to prudent fiscal policy. Its own government does the very opposite of what it recommends to its European neighbours. It is just a matter of time until Germany’s blatant hypocrisy will be called out.

For the self-styled growth locomotive, the preliminary data announced by the German statistical office last week was disappointing. In 2013 the economy only managed to expand by 0.4 percent. Of course, there were many excuses for this poor showing, not least the persistent economic weakness of its neighbours. However, there is no way to deny that this was the worst performance since 2008 and the second weakest growth rate in a decade.

The government quickly tried to put a positive spin on the disappointing result by comparing Germany’s results to the rest of Europe. If France and Greece are the benchmarks, then Germany is indeed performing exceedingly well.

A few days later, economics minister Sigmar Gabriel then also tried to stir even more growth optimism by predicting steady annual growth rates of 1.5 percent from this year until 2018. In most countries outside Europe, this would be seen as mediocre; in Europe this now passes as a veritable boom.

To be clear, Germany is not in economic trouble or in a recession. Even 0.4 percent growth is still growth – albeit very modest growth. But it adds question marks to the narrative of Germany as the safe and healthy core of the eurozone. It is not nearly as strong as everybody believes, especially the self-righteous Germans themselves.

Far more troubling than these weak economic figures are the policies the new ‘grand coalition’ government is about to introduce. While Berlin is preaching water to other European countries, it is about to open the champagne at home.

One of the most costly undertakings of the coalition of Christian and Social Democrats are reforms of the state pension system. You might assume that given its demographic profile as one of the oldest and fastest ageing countries in the world, Germany might consider tightening eligibility criteria for pensioners. Unfortunately, the very opposite is the case.

New labour minister Andrea Nahles has just presented a package of changes to the state pension system that reads like a wish-list of traditional social democrats. These changes include topping up pensions for mothers and, perhaps most damagingly, changes to the pension age. Though the pension age is still meant to increase to 67 in theory, it will now be possible to retire after 45 working years under certain conditions. This means that for those who started their working lives with an apprenticeship and managed to stay employed afterwards, state pensions will be available from 63.

Although these changes may not sound dramatic at first, they will be enormously expensive. The federal labour ministry, which drafted the legislation, estimates that until 2030 the new pensions policy will cost €160 billion ($A246.4 billion). This will be financed through a combination of using the reserves of the pension system, keeping the contributions rate to the system high (when it was actually supposed to be cut this year) and paying more taxes into the public pension system in the future.

The economic merits of the German economy are dubious at best. A case could be made for taking parenting times into account when it comes to financing the country’s pay-as-you-go pension system, in which the current working generation pays for their parents’ generation. Under such a scheme, children with families effectively subsidise childless pensioners.

However, the changes to the pension age can only be called economic vandalism. Germany’s median age already stands at 44 years and will be above 50 by the middle of the century. Given these prospects, economists and demographers agree that increasing the retirement age is crucial for keeping the public pension system solvent in the future. Introducing exceptions to the already agreed increases to age of eligibility are making an already complicated situation worse.

The domestic issues are bad enough but the international credibility issues are even more damaging. At the same time that Germany is trying to beat the rest of Europe into submission on economic reforms and austerity, it is pursuing diametrically opposed policies at home. At the next eurozone talks, how will finance minister Wolfgang Schäuble credibly call for the Greeks, the Italians or the Portuguese to work longer when his own government is leading the Germans towards a wave of early retirement? It does not make much sense.

The illusions of Germany’s alleged role as a strong, prudent and efficient anchor of the eurozone will be harder to maintain in the future. The country is no economic superman, and there are numerous economic problems boiling under the surface. Germany’s social security systems are not prepared for an ageing society; its public infrastructure is visibly deteriorating; its poor domestic investment record is the flipside of its impressive capital exports.

The new coalition government is unlikely to achieve improvements on any of these fronts, but it is about to make matters a lot worse.

In a Europe of saints and sinners, Germany may slowly be moving to the dark side.

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