Throughout the euro crisis, Germany has been the area’s growth engine and enforcer of fiscal rectitude. Now economists and policymakers are warning that Germany may be reverting to some old bad habits. Jörg Asmussen, a European Central Bank board member nominated by Chancellor Angela Merkel, has even predicted that Germany may return to its status as the “sick man of Europe” should its symptoms go unaddressed.
Without the willingness of Merkel and most German voters to support more than €300 billion ($393 billion) in bailouts and guarantees, Europe’s debt crisis might have led to the breakup of the euro currency bloc. Yet the drive to rescue Europe has distracted Merkel from the situation at home, where labor costs are rising at their fastest pace in a decade. Those costs are erasing most of the economic progress made under her predecessor Gerhard Schröder, who cut taxes, unemployment benefits, and health-care services in what was seen as the biggest change to Germany’s welfare system since World War II. The reforms cost Schröder his job.
Until recently, Merkel, chancellor since 2005, hasn’t had to worry much about the economy. Germany’s jobless rate has sunk to its lowest since East and West were reunited in 1990, as companies from BMW (BMW:GR) to Siemens (SI) maintain the country’s place as the world’s No. 2 exporter after China.
Merkel faces her third general election this fall, with the economy projected by the Deutsche Bundesbank to grow by as little as 0.4 percent over the course of the year. “Merkel has been able to profit from the inheritance of her predecessor,” says Jürgen Michels, chief euro-area economist at Citigroup (C) in London. “But now something really has to happen.” Labor costs have risen more than 3 percent since 2009, compared with an almost 7 percent decline in Spain over the same period, according to Eurostat.
While there are currently four people of working age in Germany for every pensioner, within 20 years there could be as few as two, says Eurostat. At about 1 percent per year, the long-term forecast for economic growth is the lowest for any member of the Organisation for Economic Co-operation and Development. A shrinking workforce might be eased by encouraging those who can work but don’t get a job, by lowering the cost of hiring and firing, and by making it easier for companies and workers to agree on wages. Then there’s the skills issue. European Central Bank board member Asmussen took the performance of German universities to task in a speech on Dec. 6 in Frankfurt. “Germany is seriously lagging behind in science and mathematics education,” he said.
With unemployment near a 20-year low and locally made high-technology machinery and automobiles achieving record sales across the globe, Germany doesn’t look like a country on the verge of decline. Four out of five Germans think Merkel is performing well, according to the ZDF Politbarometer. Merkel’s buoyancy in the polls might also stem from her government’s claim that wages rose an average 2.6 percent last year as unions brokered deals boosting pay by as much as 6.5 percent. But productivity isn’t keeping pace with those wage deals. “The worry that German competitiveness will be endangered over the long term if reform efforts aren’t begun is completely justified,” says Christoph Kind, head of asset allocation at Frankfurt Trust. “Since Merkel has been in power, there hasn’t been any reformat all.”