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Merkel’s Era of Stagnation

German chancellor Angela Merkel in 2016 (Kacper Pempel/Reuters)

Back in November, I wrote an essay for NRDT comparing German chancellor Angela Merkel with the former Soviet leader, Leonid Brezhnev, not (I hasten to add) because she is a Communist but because, primarily, of the way she has combined ideological rigidity, disastrous decision-making, and a quite remarkable complacency — with consequences that are unlikely to be pretty.

Within a short time of taking power, Mikhail Gorbachev was referring to Brezhnev’s long rule as an era of intellectual, political ,and economic “stagnation,” a description that also works well for Merkel’s long period in office, including, paradoxical as it might seem, with respect to Germany’s economy:

[T]he German economy is booming, rich, and the envy of most of the world. Nevertheless, it’s worth remembering that in the 1990s Germany was, by its standards, struggling. Quite what changed is fiercely debated. Explanations include labor-market reforms and tax cuts (the latter, tellingly, opposed by Angela Merkel, then the CDU’s new leader) introduced by the Social Democrats under Chancellor Gerhard Schröder in the early 2000s; the boost to Germany’s crucial export sector from a concealed devaluation (the switch from the deutsche mark to the euro); the easing of some of the strains associated with German unification; and, since the 1990s, the manner in which more-decentralized wage-bargaining has increased flexibility (and, with it, restraint) over pay. This turnaround gave Merkel the latitude to coast…

And worse.

Like Brezhnev (whose regime threw away the opportunity represented by surging oil prices), Merkel squandered an economic windfall, a topic explored in some depth in today’s Daily Telegraph by Ambrose Evans-Pritchard:

Germany’s Council of Economic Experts rebukes Angela Merkel’s coalition for failing to fix the roof while the sun is shining. The political class is “resting on its laurels”, lulled into a false sense of security by the prop of a cheap exchange rate and a temporary remission in the eurozone crisis.

Evans-Pritchard then turns his attention to “Die Deutschland Illusion” by Marcel Fratzscher, head of the German Economic Institute (DIW):

There is no miracle in [Fratzscher’s] view. Germany’s growth since 2000 has been dismal by its own past standards. The country has suffered a loss of dynamism compared to East Asia, the Anglo-Saxon countries, and Scandinavia.

German industry may have perfected the proverbial spark plug but it has been left behind by the information and data revolution. Less than 1.8pc of broadband connections in the country use high-speed fibre that is 20 times faster. Lower than Turkey and Mexico, and the lowest in the OECD club.  The system still relies on copper wire.

The government refused to exploit the lowest borrowing costs in history – below zero for seven years even today – to upgrade its outdated infrastructure. Net public investment has been negative for most of the last fifteen years. Finance minister Wolfgang Schauble has pursued his Holy Grail of a balanced budget, disregarding all else. This is now written into the constitution.

Historians may one day deem this to be a strategic blunder. Germany is overly-reliant on an engineering model in a world where digital technology and artificial intelligence are changing everything. Cars are becoming computers on wheels. The advantage is shifting from Wolfsburg to Silicon Valley.

The big German car-makers have deep pockets and superb technicians. They will fight back hard with their own range of electric vehicles (EVs) after wasting several years deriding the ‘Tesla’ threat. But as Daimler chief Dieter Zetsche said last week, profits on EVs may be half what the company makes on the internal combustion engine. Since EVs have far fewer moving parts and last much longer, they will not for long support an automotive sector that today makes up 14pc of German GDP…

Then there’s Germany’s dependency on China.

Germany is not headed for some sort of implosion and Evans-Pritchard is not claiming that it is:

As Adam Smith famously wrote, there is much ruin in a great nation. These are slow, corrosive effects. Britain knows them well from past episodes of complacency. But they are also powerful and hard to reverse.

Historians, he concludes, “will judge the economic reign of Queen Angela in a harsher light than today’s media.”

Indeed they will. Read the whole thing.

I would add only the comment that Merkel’s failures are not confined to the economic sphere.

She will not be remembered well.

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