Is the storm approaching Germany?

Many researchers have stated that without doubt Germany’s is the strongest economy in the EU and probably what keeps it afloat. In the group of 28, Germany’s economy constitutes 25 percent of the union outputs. The employment rate is at a record highest with only a 5.4% of unemployment (the second lowest in the EU).

In 2012 the overall budget balance edged into surplus and last year government debt fell below 80% of GDP for the first time since 2009.

These economic and fiscal successes continue to make Germany a bastion of strength in the fragile euro zone. Nevertheless, Germany has generally taken pride in their imposing current-account surplus, this can also be interpreted as a sign of weakness. Total investment has fallen from 21.5% of GDP in 2000 to 17.2% in 2013.

The government is investing to little in new infrastructure such as roads, buildings, broadband, etc, as well as in energy power. Germany has currently dropped the use of Nuclear plants and favored Solar and Wind energy which comes at a price 3 times higher as the price of energy in the USA. 

The shortfall in capital is human as well as physical. In Berlin, as elsewhere in Germany, employers report skills shortages in many industries. Spending on education is lower than it is in other rich countries, with only part of that gap warranted by the dwindling number of children. An OECD survey of working-age adults in rich countries found that Germans were a little more numerate than the average but a bit less literate—a surprisingly poor result. The share of young people getting a tertiary qualification (such as a university degree) is less than a third, below the average for advanced countries.

Higher productivity growth will require a better performance on the part of the services sector, which makes up 69% of the economy. It lacks the dynamism of Germany’s manufacturers despite an encouraging surge in internet startups in Berlin. Reforms to enhance competition, especially among professional services, worth 10% of GDP, would help to gin up productivity more generally. The OECD advocates an array of reforms such as loosening the grip of notaries over commercial registration and the removal of regulated prices for the services of architects and building engineers—a restrictive arrangement unique to Germany within the EU.

But with things going so well, there is little appetite for a new wave of reforms. According to a recent poll by Eurobarometer, 84% of Germans are satisfied with the state of their economy, the highest share in the euro zone.

The resilience of the German economy should not be underestimated. But for the euro zone’s good and its own, Germany cannot afford to become complacent.

Adapted from:

The Economist ‘Clouds ahead the German Economy’ on June 07^th 2014

http://www.economist.com/news/finance-and-economics/21603439-recent-vigour-hides-underlying-weaknesses-europes-leading-economy-clouds-ahead?zid=295&ah=0bca374e65f2354d553956ea65f756e0