The myth of the strong German economy

Germany is blighted by low productivity and low wages. Recession is around the corner.

Alexander Horn

Topics Politics World

The German economy – strong as an ox! This image has taken hold among many sections of German society since the financial crisis. It has been bolstered by politicians and economists alike.

Even though a recession is on its way, economists insist that everything is fine. Marcel Fratzscher, president of the German Institute for Economic Research (DIW), in an interview with Focus magazine, claims Germany is well-positioned economically and ‘there is no reason to panic’. ‘The labour market is still solid, companies are highly competitive and the public purse has solid surpluses’, he argues.

According to Fratzscher, the greatest threat to the German economy is psychological. In other words, when the public fears there will be a downturn, people consume less and companies cut investment. ‘This is how we create a crisis for ourselves’, he concludes.

When politicians and economists are not blaming the recession on psychology, they tend to focus on external causes. The US-instigated trade war is currently the main cause of German angst. Customs duties could hit German car companies particularly hard – the US is one of Germany’s biggest export markets for cars. The second main risk is the uncertainty surrounding Brexit and the possibility of No Deal.

Some of these worries are legitimate. The German economy is far more tightly bound up with world trade than any other major economy, and is therefore much more vulnerable. However, the focus on external economic threats obscures the homemade problems that have plagued the German economy for at least the past decade.

Although German companies are very successful on the world markets, this is only partly the result of their own strength. The German economy, like other developed economies, is full of zombie companies. The economy has been on life support since the 2008 financial crisis. Monetary policy and financialisation have pushed the value of asset prices beyond their value in the real economy. The resulting asset bubbles have created new wealth, resulting in more consumption. This ensures rising demand and stabilises growth.

Low interest rates also help to prop up the zombie economy. Even companies that, in normal times, would be economically too weak to invest in productivity-enhancing innovations can survive. In some cases, these companies can even make profits because loans are so cheap. Their survival is made easier by the fact that genuinely profitable companies are investing very little, and so these firms are not becoming more productive, either. This means that profitable firms are not driving weak competitors out of the market.

While around 1.5 per cent of German companies went bankrupt each year before the financial crisis, this fell to 0.5 per cent of firms per year after the crisis. In other words, defective businesses, which would have had to give up under different economic conditions, are being kept afloat. In an OECD working paper, researchers concluded that more than 12 per cent of the capital stock in Germany was tied up in these zombie companies in 2013. Last year, a study by credit-reference agency Creditreform concluded that 15.4 per cent of German companies could be classified as zombie firms. A significant amount of capital, which could be put to much better use, is tied up in unproductive firms.

And it isn’t just monetary policy that is propping up Germany’s zombie economy. The euro is also providing a strong stimulus. Since the financial crisis, growth in most Eurozone countries has been extremely weak. Italy and Greece are still in an economic depression. This poor performance has lowered the value of the euro compared to other major currencies. Between the euro’s peak at the beginning of 2008 and 2017, it depreciated significantly – by about 30 per cent against the US dollar. Since then, it has recovered only marginally from this level. German companies have benefitted strongly from the depressed euro and have increased their exports to countries outside the Eurozone considerably. Almost two-thirds of German exports now go to countries outside the Eurozone.

But despite all the stimulus from both monetary policy and the exchange rate over the past decade, there was no major boost to growth. The German economy has grown by just 1.3 per cent per annum since 2001. This is primarily due to low levels of corporate investment, particularly since the financial crisis. Investment at current levels is not even sufficient to offset depreciation on outdated assets.

Meanwhile, as part of the process of financialisation, companies outside of the financial sector have been generating financing surpluses since the early 2000s. This means that they do not have to raise any net capital, but are instead making funds available to the capital market. This is a complete reversal of normal economic practice, in which corporations rely on capital markets and banks to finance their growth. These financing surpluses are growing each year. In 2017, they amounted to a whopping three per cent of GDP.

With a few exceptions, the declining level of investment means that the vast majority of companies are unable to enhance their productivity. Between 1995 and 2005, the German economy achieved an average annual growth in labour productivity – GDP per hour worked, per person – of just 1.9 per cent. Between 2005 and 2014, productivity growth halved to just 0.8 per cent and then fell further.

This poses a problem not only for the long-term survival of companies and the jobs that depend on them, but also for real wage levels. When productivity growth is low, so is wage growth, and Germany’s wage growth has been weak for a long time. Large sections of the population gained little or nothing in terms of real wages from recent upturns. Since the mid-1990s, real wages in Germany have risen by an average of just half a per cent each year.

The situation for the poorest workers is particularly dire. In 2015, the real hourly wages for the lowest third of earners was even lower than it was 20 years earlier. It is only in recent years that real wages have risen moderately for this lower third. Though this is thanks largely to a shortage of workers – a situation bemoaned by economists.

Since the financial crisis, huge imbalances have also arisen in real estate. Property prices have risen much faster than real wages, which means buying a house has become an unrealistic prospect for the next generation. Rises in real-estate prices are also driving up rents, leading to real wage losses for many workers.

Germany’s looming recession and its other economic problems are homemade. Of course, economic crises are intrinsic to capitalism and cannot be avoided. And despite all the problems they entail in the short term, one benefit of these crises is that they clear out the least productive and least innovative companies. When these weaker, zombie companies fail, it can free up capital for new investment and productivity gains in more productive companies.

The problem for the working population has been that recent upturns haven’t ushered in the necessary increases in productivity. And while the mass of the working population has gone virtually empty-handed over the past few years, the impending recession is now threatening even those small gains in prosperity.

German politicians need to abandon the myth of the German economy’s strength. It is not Trump and Brexit that threaten prosperity – Germany’s problems begin at home.

Alexander Horn works as a business consultant. He is managing director of the German political magazine Novo and writes on economic issues.

Picture by: Getty.

The myth of the strong German economy

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Winston Stanley

14th August 2019 at 10:33 pm

If capitalism is now reliant for its maintenance on monetary and financial policies that in turn hinder the growth of productivity and per capita wealth, by sustaining zombie companies and by removing the incentive to invest in productivity growth in order for companies to survive, then it raises the question of whether capitalism remains an economically progressive system. Moreover, if capitalism now functions only because of the sustained application of what are emergency measures, then it raises the question of whether capitalism will survive the next crisis, with no further emergency measures left to implement, and of whether capitalism is now a sustainable economic system even in its no longer progressive stage.

The old post-Berlin Wall certainties, of the “end of history” and of the permanence of capitalism as an economically progressive and sustainable economic system, no longer look quite so certain. If capitalism eventually hits its limits as a progressive and sustainable economic system then we may be forced by material necessity to give socialism a try as the next stage of economic development, a stage made possible by the material development under capitalism, and made necessary by the limits to that material development found real within capitalism, just as feudal material development and limits made capitalism both possible and necessary as the next stage of economic development. Only time will tell.

michael savell

14th August 2019 at 3:58 pm

All banks are broke and german ones are probably the worst hit.Over bond selling at negative interest rates ensure that we will be in a very bad recession shortly.The lenders will soon have to pay people to take out loans.I hope the UK can weather it but,lets face it,Germany ,hit with the same thing in1930’s came up with Hitler so we all have to watch them.Hyperinflation is not funny.

Philip Humphrey

14th August 2019 at 3:38 pm

Once German cars used to come pretty near the top of every reliability and customer satisfaction survey. Nowadays they mostly languish in the bottom half and some are at the bottom. Not to mention cheating the emissions tests in order to illicitly improve the performance of their cars. In the old days of West Germany they succeeded in exporting and building a reputation for quality and value despite a high Deutschmark. Nowadays their performance is mediocre in spite of an artificially low Euro. It’s difficult to avoid the conclusion that Germany is in comparative decline and that the EU isn’t the right environment for a dynamic world leading economy. Britain’s better off out.

Jim Lawrie

14th August 2019 at 1:43 pm

“While around 1.5 per cent of German companies went bankrupt each year before the financial crisis, this fell to 0.5 per cent of firms per year after the crisis. In other words, defective businesses, … ” A total non sequitur, because you missed out bit in between, the recession, when all the weak companies went to the wall, leaving the lean, fit and able.

Jim Lawrie

14th August 2019 at 1:40 pm

“Since the financial crisis, huge imbalances have also arisen in real estate” Not imbalances, just market forces. Declaring an emergency and suspending German law, the Government welcomed a massive influx of illegal immigrants, creating huge demand for rented accommodation in the successful towns and cities. Rather than leave it to the market, the Government stepped in and paid these ever higher rents, and so the price of property soared. Not unique to Germany. Corresponding drops in property prices can be seen all over Eastern Europe, Spain and Greece, and increases in Sweden, The UK and anywhere else where the Government assumes the role of market maker.

Hana Jinks

14th August 2019 at 1:02 pm

German taxpayers have had a far greater burden placed on their economy by the diversity-communists than any other European nation. These lunatics have caused irreparable damage to our societies and cultures.

Paul Robson

14th August 2019 at 12:20 pm

You’ve forgotten the fun bit. All those exports to places like Italy and Spain ? The EU has very kindly recycled that money back to them ; they’re buying their cars and so on with your money. Currently the pair of them owe you about £1tn. Good luck getting it back.

Jim Lawrie

14th August 2019 at 1:47 pm

Huge cuts in public spending and tax increases mean the Germans are being repaid and making a fortune from Greece. On top of that individual Germans and companies are hoovering up Greek businesses and properties for knock down prices.
Most of the debt is interest and charges.

Hana Jinks

14th August 2019 at 2:55 pm

People look at me funny when l tell them WW3 started 38yrs ago.

Amelia Cantor

14th August 2019 at 12:16 pm

This is further vindication of Angela Merkel’s decision to open the borders. Germany’s economy and future depend on an influx of fresh blood, fresh ideas and youthful vibrancy. Just what migrants are already beginning to supply to the sclerotic and ageing white German state!

Jim Lawrie

14th August 2019 at 1:39 pm

Why do you racialise this?

The incomers to Germany contribute nothing because they are on the same IQ plain as you.

Hana Jinks

14th August 2019 at 1:47 pm


Because the levt is built on a foundation of diabolical lies, they aren’t really able to troll the right, so they just troll themselves.

gershwin gentile

14th August 2019 at 2:43 pm

“Germany’s economy and future depend on an influx of fresh blood, fresh ideas and youthful vibrancy”

Provided by people mostly from a religion that for the past 500 years has been going back in time? I assume youthful vibrancy in your book means “Sexually assaulting passers-by”, and probably under aged passers-by, yer real names not Ian, is it?

Neil Mcalester

14th August 2019 at 7:01 pm

Oh I get it now, you’re Spiked’s version of Titania McGrath aren’t you.

Bri -an

14th August 2019 at 9:09 am

Surely the purpose of the EU is to maintain the German economy as the model for the future of the EU?
Thus the overriding need to ensure its ‘success’.

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