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Germany is celebrating the 25th anniversary of the fall of the Berlin Wall on November 9th this year. Since its reunification in 1990, Germany has gone from being the sick man of Europe to the powerhouse economy of the eurozone – a group which it dominates:
Recent economic news from Germany has been disappointing – so the question is: has the eurozone’s engine of growth broken down? I would argue that it has major strengths but that its economic model is in need of an overhaul – it is beginning to splutter. This has been compounded by the Ukraine crisis and weakness in France and Italy which impact on German exports and business confidence.
Source: Euromonitor International from Eurostat/national statistics/OECD
Germany’s major strengths are its scale, its export sector, its low unemployment rate and its healthy government finances. On the other hand, some of its strength has come at the expense of average incomes. For instance, wage growth is weak – since 2000 average wages have increased by just 5.0% in real terms, compared to 8.8% across the eurozone. In turn, this suppresses growth in consumer expenditure – which has grown at one of the slowest rates in the world since 2000 – at 6.7% in real terms – higher than just nine of the 176 economies which Euromonitor tracks.
Source: Euromonitor International from national statistics/Eurostat/UN/OECD
An ageing population will also put pressure on Germany’s government finances and high welfare spending. Germany has the oldest population in the eurozone – at 45.3 years in 2013 – and by 2030 27.3% will be aged over 65. Low productivity is also an issue, particularly in the service sector which lacks investment and is in need of liberalisation.
A Europe without a strong unified Germany is today unimaginable. However, reform is needed to avoid a return to the economic doldrums. Germany’s drivers of growth – education, investment, productivity – all need to be re-energised if sustainable growth is to be ensured in the medium and long term.