Story Of The Week

STUBBORN GERMANY?

“The Kaiser Wilhelm Canal in Kiel is crumbling. Last year, the authorities had to close the 60-mile shortcut from the Baltic to the North Sea for two weeks, something that had never happened through two world wars. Large ships were forced to go around the Skagerrak, imposing emergency surcharges. The canal was shut again last month because sluice gates were not working, damaged by the constant thrust of propeller blades. It has been a running saga of problems, the result of slashing investment to the bone.

This is an odd way to treat the busiest waterway in the world, letting through 35,000 ships a year, so vital to the Port of Hamburg”.

Such is becoming the state of German economy.

While several euro zone governments are hamstrung by excessive debt and fiscal deficits, the IMF, the United States and other G20 members have repeatedly called on Germany to ramp up spending and shore up sagging growth.

German exports surplus plunged in a decline to 17.5 bn euros from 22.2 bn euros in July that intensified fears that Eurozone’s largest economy may be slipping into recession. It marks the latest sign of slowdown in the economy. Germany’s economy shrank at a 0.8 percent annual pace in the second quarter. Its exports and industrial production just fell 5.8 and 4 percent respectively; the most either has since the financial crisis in January 2009. And, after accounting for wear and tear, its net government investment in the economy has been negative the past 12 years. The figures raise a concern that Germany might now fall into recession.

Germany, in other words, needs more spending and needs new infrastructure.

The solution is as obvious as it sounds. Germany’s leading economic institutes too are urging the government to respond with pro-growth policies call for a boost in domestic investment, which have been weak. They recommended reducing taxes to encourage corporate investment and selected, growth-boosting public investment, spending more on roads and bridges and schools instead of obsessing about its short-term deficit. Investors have actually been paying Germany to borrow over two years (hence the negative interest rate) even before inflation.

But their calls fall far short of the demands for a general fiscal boost which have recently come from France, Italy and other stagnation-hit Eurozone partners.  But out of some misplaced sense of fiscal self-righteousness, Germany would rather let its critical infrastructure fall into disrepair than take this free money. And in the long run, it would be free. That’s because, as the IMF argues, better infrastructure could boost the economy so much in the short-and-long-runs that it would almost pay for itself as long as borrowing costs are so low.

But Germany is stubbornly sticking with spending cuts instead, and it’s making the rest of Europe do the same.

It’s a suicide pact, and Germany doesn’t even want the ECB to cushion the blow. It turns out, though, that forcing your customers into a worse depression than 1990’s isn’t good for you, either. It’s left Germany, which despite its image as an economic powerhouse has only grown 1.1 percent a year the past decade, teetering on the edge of its own slump — with Russian sanctions maybe enough to push it over.

It doesn’t seem like it, but Germany may again become the sick man of Europe. It’s just that everybody else is terminally ill now. The problem, of course, is that Germany won’t let any of them, itself included, take the economic medicine it needs. It would rather pat itself on the back for following self-imposed budgetary rules than maintain its roads and canals.

German economic policy is soaked in the respect for law that defines modern German public life. It rests upon a concept of good housekeeping that brought West Germany riches and foreign admiration after 1945. The Eurozone may be in deep trouble, but it seems anyone who expects these two foundations of German behaviour to change will be waiting a long time.

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