As election looms, Germany’s economy on upswing

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Give German Chancellor Angela Merkel full credit for brilliant timing.

Had national elections been held a year ago, when the economy was going nowhere, her political opponents would have lambasted her for economic mismanagement.

Germany is bouncing back, allowing her to claim that her management record is strong. "We can ensure the economy continues to move upwards," she said the other day as Germany moved closer to its Sept. 22 election. "Naturally, the job isn't over. Naturally there are many worries and problems, but we have demonstrated that we can cope in a difficult period."

Germany appears to be on a roll as the euro zone crisis recedes. In the second quarter, gross domestic product expanded by 0.7 per cent. It may not sound like much, but after zero growth in the previous quarter and a 0.5-per-cent contraction before that, it was an impressive figure.

Germany's jobless rate, at 6.8 per cent, is near a two-decade low and the envy of big economies, like Italy and France, whose unemployment figure has reached double digits.

But missing from the debate are questions about the long-term health of the Germany economy, which may not be as strong as it appears. Germany is slowly deindustrializing. Investment in R&D and infrastructure is surprisingly low by European standards and Germany has one of the continent's highest proportions of low-income earners, the result of years of wage restraint that helped to make the country competitive but has reduced the living standards of millions of its citizens.

With the economy going in her favour, and generally positive views of her handling of the euro zone crisis, Ms. Merkel, who is 59 and campaigning for her third term, is comfortably ahead in the polls. They suggest that her Christian Democratic Union (CDU) and its Bavarian sister party will capture 38 per cent to 42 per cent of the vote. The main opposition party, the Social Democrats (SPD), led by Peer Steinbrueck, is well behind at 24 per cent to 27 per cent, with the Green party coming in third, at about 15 per cent.

"Many people will vote for Angela because she maneuvered through the crisis fairly well," said Georg Thilenius, the owner of Stuttgart investment firm Dr. Thilenius Management. "In this sense, there is really no big issue in this election."

Germany is rightfully lauded as Europe's industrial success story, a country that, unlike Britain, kept its manufacturing base largely intact, all the better to export everything from BMWs and machine tools to chemicals and steel to China and other high-growth regions. What is rarely highlighted is that the industrial base is eroding, though certainly not at the pace of France's or Italy's. According to the National Account Statistics, the number of German industrial jobs, including mining and utilities, fell by about a million, to 7.8-million, between 1995 and 2012.

Some of the fall in industrial employment is probably due to Germany's notoriously low productivity gains, which have been about 25 per cent below the average of the Organization for Economic Development and Co-operation countries since the mid-1990s. With weak productivity gains, German employers have been moving production outside of the country; eastern Europe, where wages are comparatively low, has been a favourite destination.

High energy costs also seem to be triggering the industrial jobs exodus. European Council president Herman Van Rompuy recently said that real energy prices in Europe increased by 27 per cent between 2005 and 2012, outpacing the increases in most industrialized countries.

German consumers already pay the highest electricity costs in Europe, and they will keep rising because of Ms. Merkel's green energy campaign. After the 2011 Fukushima nuclear disaster in Japan, she decided to phase out nuclear power and ramp up solar and wind power. But since clean energy is expensive, and heavily subsidized by the taxpayer, more price increases are certain. Germany's industrial giants are voting with their feet by quietly building up production outside of the country. The United States is bound to become a favourite destination as the shale gas revolution brings down energy costs.

The Free Democratic Party, the pro-business junior coalition partner in Ms. Merkel's government, thinks her energy policies are a mistake. An election analysis prepared by CNC Communications, a German strategic consulting firm, said the FDP criticizes "the high costs of the 'energy turnaround' and seek to reform the energy laws in order to reduce energy prices for companies, particularly energy-intensive industries."

Making Germany's long-term competitive situation worse are its relatively low rates of R&D and capital investment. Writing in The Financial Times, Adam Posen, president of the Peterson Institute for International Economics, said that total gross fixed investment in Germany has fallen to 18 per cent of gross domestic product from 24 per cent since 1991. The OECD says that Germany investment has been below the Group of Seven's rate since 2001.

For Ms. Merkel, of course, the economy is moving again and that has been enough to deflect most criticism about her economic stewardship. Mr. Thilenius said that only a few voters realize that she is "kicking the can down the road" on many crucial economic policies.