Germany: 25 Years on from the Fall of the Berlin Wall

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:

  • Germany is home to 24.2% of the eurozone’s population and 29.7% of its households with an annual disposable income over US$300,000;
  • German exports accounted for 32% of the eurozone’s total in 2013;
  • Germany accounts for more than one quarter of eurozone GDP, and notwithstanding its slowdown, is expected to account for 53.6% of its growth this year;
  • At 5.3% in 2013, Germany’s unemployment rate is less than half the eurozone average.

Has Germany run out of steam?

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.

Real GDP Growth in Germany: Q1 2001 – Q2 2014

Real GDP Growth in Germany: Q1 2001 – Q2 2014

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.

Real Growth in Consumer Expenditure in Major Advanced Economies: 2000-2013

Real Growth in Consumer Expenditure in Major Advanced Economies: 2000-2013

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.

At the heart of Europe

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.