Germany a beacon of stability has “never had it so good”

Angela Merkel, the German chancellor, in November set out on her bid for a fourth term as chancellor, saying Germany had “never had it so good” and promising to support openness and free trade while resisting the type of populism advocated by the likes of Donald Trump.

Weeks later a fanatic from Tunisia attacked a Berlin Christmas market in the most serious act of terrorism in Germany since the 1972 Olympics. The extreme right has been emboldened while on the left, the Greens who have political influence in the Bundesrat (the Upper House of parliament which represents Germany's 16 federal states), argue that Tunisia, Algeria, and Morocco, are not safe enough to deport rejected asylum seekers to, without a lengthy process.

Nevertheless despite the security threats, Germany remains the "indispensable nation" in Europe — a term used by Radoslaw Sikorski, then Polish foreign minister, in a speech in Berlin in 2011.

"I will probably be the first Polish foreign minister in history to say this, but here it is: I fear German power less than I am beginning to fear its inactivity," Sikorski said. "You have become Europe’s indispensable nation. You may not fail to lead: not dominate, but to lead in reform."

The biggest 3 economies in the Euro Area are Germany France and Italy, accounting for about two-thirds of economic output. With the UK on an exit path, they will also be the biggest economies in the future European Union (EU27).

Germany stands apart from both France and Italy as a beacon of political and economic stability. It's economic performance also contrasts with what Mark Carney, Bank of England governor, called in early December, Britain's first lost decade since the 1860s.

The European Central Bank said in a 2015 article that "While there has been real convergence in the European Union (EU) as a whole since 1999 owing to the catching up of central and eastern European (CEE) economies, there has been no process of real convergence among the 12 countries that adopted the euro in 1999 and 2001."

This month, France's Banque de France cut its economic growth forecasts while Germany's Bundesbank raised its forecasts.

Eurostat data for GDP per capita adjusted for pricing differences (PPP's) and using the latest national accounts framework, show that in 2015 Germany was ahead of France by 17% and Italy by 29% compared with 8% and 9% in 2007 and in 1999 — the year of the launch of the euro — Germany was ahead of Italy by 4.1% and France by 9%.

Actual Individual consumption data which are based on consumption per capita (AIC) comprising public and private goods and services (adjusted for pricing differences) are a proxy for average standard of living and the margins with Germany are much closer, reflecting public policies (demographics are also a factor).

In 2015 the margin for Germany was 9% with France and 24% with Italy. In both 1999 and 2007 there was no significant differences between the 3 countries.

Also in 2015, Italy's AIC was ahead of Ireland's — in effect there was a huge gulf between Irish GDP per capita and the typical standard of living in Ireland.    

Key economic indicators

In October the German harmonised rate of unemployment based on the International Labour Organisation (ILO) standard was 4.1% — the lowest since February 1981 and second lowest in the month behind the Czech Republic's rate at 3.8%. The EU average was 8.3% with Italy at 11.6% and France at 9.7%.

German employment grew by 3.1% in the 12 months to October.

According to Deutsche Bank this month, since the fourth quarter of 2007 the employment rate in Germany has risen by 4.8 percentage points, the highest increase among all the industrialised countries and a much stronger improvement than in Japan (3.1%) and the OECD as a whole (up by 0.2 %, US down by 2.4 %-points).

The youth employment rate at 6.9% was the lowest in the EU in the month and the lowest in Germany for 24 years. The youth employment ratio at 3.5% in 2015 was also the lowest in the EU — see here and here as youth jobless data are often misinterpreted.

The jobless rate in Germany averaged 5.64% from 1949 until 2016 according to Trading Economics, reaching an all time high of 11.50% in April of 1950 and a record low of 0.40% in March of 1966.

The jobless rate in France averaged 9.26% from 1996 until 2016, reaching an all time high of 10.70% in the first quarter of 1997 and a record low of 7.20% in the first quarter of 2008.

The unemployment rate in Italy decreased to 11.6% in October of 2016 from 11.7% in the previous month. However, the economy shed 30,000 jobs and 82,000 more people left the labour force. The jobless rate in Italy averaged 9.36% from 1983 until 2016, reaching an all time high of 13.10% in November of 2014 and a record low of 5.70% in April of 2007.

OECD data show that Germany's average jobless rate in 1983-2015 was 7.5%. There is no comparable French and Italian data for this period.

The UK unemployment rate declined to 4.8% in the three months to October 2016 and it was the lowest jobless rate since July to September 2005, as the number of unemployed went down while the number of people in work was little changed. The jobless rate in the United Kingdom averaged 7.14% from 1971 until 2016, reaching an all time high of 12.00% in February of 1984 and a record low of 3.40% in November of 1973.

The jobless rate in Ireland averaged 10.87% from 1983 until 2016, reaching an all time high of 17.30% in December of 1985 and a record low of 3.70% in December of 2000.

Net real wages in Germany fell between 2004 and 2008 but rose 14% in the period 2007-2015 while earnings in the UK and Greece plunged 10%.

Data on average real earnings from the Organisation of Economic Cooperation and Development (OECD) show that there was almost stagnation in Italy in 2000-2015; in pound sterling terms, there was stagnation in the UK in 2002-2015; German earnings rose 9% in 2002-2015 while inflation-adjusted French earnings gained 14% in the same period.

In mid-December, the Ifo Institute upwardly revised its German economic forecast for 2017 slightly. It now expects economic output to grow by 1.5%. "All of the signs indicate that the fourth quarter of 2016 will be stronger than previously anticipated, and that this dynamic will continue into the New Year,” said Prof Clemens Fuest, Ifo president. The institute confirmed a forecast of 1.9% growth for 2016. “The change in pace from 2016 to 2017 is merely due to a lower number of working days,” added Fuest. The Ifo Institute also upwardly revised its forecast for 2018 somewhat from 1.6 to 1.7%.

The number of persons in employment in Germany will continue to rise from 43.5m this year to 43.8m next year, and 44.2m in 2018. The number of unemployed will remain stable in all three years at 2.7m, despite the influx of refugees into the labour market. The unemployment rate will remain constant at 6.1% as per the definition of the Federal Employment Agency - Bundesagentur für Arbeit.

Since 2000, Germany has had had budget surpluses in 2000 and 2007 and continuously since 2014; the UK has reported deficits every year since 2002; France ever year since 1974 and Italy every year since 1945.

The IMF says Germany's net public debt will be 44% of gross domestic product in 2017; 90% in France; 114% in Italy and 82% in US.

The Ifo Institute says the current account surplus (trade + net international transfers) will continue to exceed a stunning 8% of GDP annually.

Enduring growth and stability

In March 1838, Benjamin Disraeli (1804-1881), a future British prime minister, said in a speech to the House of Commons:

The Continent will [not] suffer England to be the workshop of the world.

According to the BBC "When Queen Victoria opened the Great Exhibition on 1 May 1851, her country was the world's leading industrial power, producing more than half its iron, coal and cotton cloth."

Less than four decades later the UK required foreign manufactures to include the name of the place of origin and the "Made in Germany" label would in time become synonymous with quality. By 1913 Germany produced 17.6m tons of raw steel compared with Britain's 7.8m.

Germany has reported a goods trade surplus every year since 1952 despite movements in currency values.

According to World Bank data, Germany has achieved a combined goods and services surplus every year since 1992; the UK has reported a trade deficit every year since 1997 and a current account deficit every year since the mid-1980s while France has posted a trade deficit every year since 2002 and a current account deficit since 2004. The United States has been running consistent trade deficits since 1976.

German universities — technical and otherwise — account for 24 of the Reuters' 2016 rankings of the 100 most innovative universities in Europe, more than any other country. The UK comes in second with 17 institutions on the list, including the two oldest universities in the English-speaking world: The University of Cambridge, ranked 3r, and the University of Oxford, ranked 8th.

A tertiary education in Germany hasn't the same level of priority as it has in other advanced countries because of the dual model of vocational education to sustain a highly trained workforce — OECD data for 2015 show that 30% of German 25-34 year olds had a tertiary education compared with 25% in Italy; 49% in the UK; 52% in Ireland; 60% in Japan and 69% in South Korea.

According to a Brookings Institution/ JPMorgan Chase paper, 'Skills and Innovation Strategies to Strengthen U.S. Manufacturing Lessons from Germany':

The most common pathway to a job is the dual system, through which students obtain field-specific workplace skills in one of 349 occupations (as of 2013) that cover all aspects of the economy. Training occurs mainly through a two- to three-year apprenticeship at a firm, where students train three or four days a week. Students spend the remaining one or two days per week at a part-time vocational school (Berufsschule) where they receive more theoretical training.

The paper noted that manufacturing generates 22% of total German GDP and 82% of German goods exports. In stark contrast to the United States’ $667bn manufactured goods trade deficit, Germany’s trade surplus in manufacturing is about $425bn while the average compensation for a manufacturing worker in Germany is $46 per hour, 28% more than in the United States.

German firms are also better than American counterparts in converting inventions to commercial innovation.

In 2011, Germany produced 53 patents per 1,000 researchers, compared to 39 patents per 1,000 researchers in the United States. Germany also has a bigger base of graduates in STEM (science, technology, engineering, and mathematics) fields. In a ranking of 36 OECD countries on their share of graduates in STEM fields, Germany ranked third, well ahead of the United States at 33rd.

Germany also has Fraunhofer-Gesellschaft, the leading organization for applied research in Europe. Its research activities are conducted by 67 institutes and research units at locations throughout Germany. The Fraunhofer-Gesellschaft employs a staff of 24,000, who work with an annual research budget totaling more than €2.1bn. Of this sum, more than €1.8bn is generated through contract research. More than 70% of the Fraunhofer-Gesellschaft’s contract research revenue is derived from contracts with industry and from publicly financed research projects.

This month Deutsche Bank published a report 'Beacon of stability: The foundations of Germany’s success'

In contrast with Italy's 65 governments since 1945, from the first postwar German federal election in 1949, early elections have been called just 3 times in Germany while the country has been ruled by only eight chancellors who have served for an average of more than eight years.

The DB report says that according to the Centre for European Economic Research around 1,500 mittelstand (small and medium-size) companies are market leaders in a niche area — a hugely impressive figure. "Many of them are ‘hidden champions’ that are not widely known by the general public. — The second defining feature of German enterprise is the high proportion of large companies with more than 250 employees. Around 2% of all companies in Germany meet this criterion, whereas in other countries it is commonly the case that less than 1% of firms fall into this category."

Germany has a relatively low stock market capitalisation to GDP ratio of only around 50%, barely half the equivalent figure for the US, UK and Japan — German firms can invest for the long-term rather than try to satisfy shareholders in the short-term.

In terms of numbers alone, Germany only has around 800 publicly traded companies in addition to the 30 listed on the DAX. Clearly many German companies remain independent from the capital markets when it comes to their financing structure...a high proportion of the value in manufacturing is still created domestically. This can be attributed to a strong culture of innovation among German firms. The importance of industry has also remained stable over the past 20 years which is in stark contrast to most other developed economies.

Germany has about 340,000 export firms compared with France's 120,000 and Germany not only has more big firms (250+ employees) exporting — according to the OECD typically more than two-thirds of exports are accounted for by large firms — it also has innovative smaller mittelstand firms which we highlighted above.

Germany also has an advantage because its dominance in capital goods sectors that are not sensitive to short-term price/ currency movements.

Risks and the euro

Of course there are economic risks and like Japan, Germany is also ageing despite the recent rise in immigrant numbers. However, unlike Japan, the economic record of recent decades has been one of economic strength and stability.

The euro is the biggest risk.

Italy has hardly grown in the past 20 years and faces another lost decade while France, which had used the unexpected collapsed of the communist system in East Germany to win German support for an early decision on the adoption of the single currency in return for its support for reunification, has seen a divergence in its economic fortunes since the single currency was launched in 1999.

François Mitterrand, French president, is said to have warned Germany of the need for cooperation as it risked being stranded in Europe as high and dry “as in 1913."

Besides France's annual budget deficit since 1974, it has had a current account deficit every year since 2004 while only once in 20 years has the jobless rate fallen below 8% when it fell 7.20% in the first quarter of 2008.

According to the European Commission between 2005 and 2010 France’s share of world exports shrank by almost 20%, a fall exceeded within the Euro Area only by Greece.

In 2014, France spent about 11 percentage points of GDP more than the European average. At about 13 ppts, the gap was wider for Germany and the UK.

Some economists would argue that Germany and the UK should be spending more but still in the long-run, unbalanced economic arithmetic inevitably becomes unsustainable.