SPECIAL REPORT GERMANY June 15th 2013

Europe’s reluctant hegemon

20130615_SRGermany.indd 1 03/06/2013 17:43 SPECIAL REPORT GERMANY

Europe’s reluctant hegemon

Germany, now the dominant country in Europe, needs to rethink the way it sees itself and the world, says Zanny Minton Beddoes IT IS NOT often that a single country dominates the †nal of Europe’s Champions League, but on May 25th more than 360m people around the world watched Bayern Munich score in the 89th minute to beat Borussia Dortmund by two goals to one at London’s Wembley Stadium. The sym• bolism was powerful. For the †rst time in its 58•year history, the †nal of Europe’s most important football contest was a wholly German a air. From the football pitch to politics to the economy, Germany has be• come Europe’s most powerful country. Described by this news• paper as the sick man of Europe in 1999, Germany now appears to have the continent’s strongest as well as its biggest economy. It ac• counts for a †fth of the European Union’s output and a quarter of its exports. From Volkswagen to SAP, Germany’s big companies CONTENTS are world•renowned. Many smaller German †rms are global 3 Election brie†ng champions in niche markets such Colours of the rainbow as tunnel•boring machines and 4 Germany and Europe industrial cleaners. The Merkel plan Germany’s jobless rate, at 5.4% (using standardised OECD 6 The economy statistics), is less than half Eu• Dissecting the miracle rope’s average. Youth unemploy• 9 Energy ment, a scourge throughout Tilting at windmills much of the rest of the continent, is at a 20•year low in Germany. 11 Labour The country’s budget is balanced, Erasmus generation government debt is falling and 13 German leadership long•term bond yields are the Overcoming the demons lowest in Europe. It is the largest creditor country in the euro zone, and as chief paymaster it has the A CKNOWLEDGMENTS biggest clout in determining the single currency’s future. This special report bene†ted from The weakness of other heavyweights has added to Germany’s heft. help and insights from many people, Britain, outside the euro and distracted by a domestic debate about its EU not all of whom are mentioned in membership, has lost in‡uence. The Franco•German tandem at the core the text. The author would like to of post•war European integration has become lopsided. Relations be• acknowledge in particular Katinka Barysch, Michael Burda, Daniel tween Berlin and Paris are unusually poor, with some French politicians Cohn•Bendit, Ulrike Guérot, Manfred decrying the Œsel†sh intransigence in the euro crisis of Germany’s chan• Güllner, Daniel Hamilton, Klaus• cellor, Angela Merkel. The economic gap between Germany and France Peter Hansen, Claudia Kemfert, is wider than it has ever been. France’s economy is stagnant, statist and Markus Kerber, Claus König, Hans• Helmut König, Norma Köser•Voitz, uncompetitive and urgently needs reform. Alexander Graf Lambsdor , Kurt As a result, power within Europe has shifted sharply towards Ber• Lauk, Johannes Ludewig, Christo• lin. Mrs Merkel is widely seen as the continent’s most important politi• pher Mallaby, Frank Mattern, Boris cian. In Beijing or Washington, DC, the question: ŒWhere is Europe go• Palmer, Volker Perthes, Jean Pisani•Ferry, Adam Posen, Alex ing? has become synonymous with: ŒWhat do the Germans want? Privitera, Gary Smith, Gabor Bureaucrats in Brussels talk ruefully about Berlin becoming the cap• A list of sources is at Steingart, Constanze Stelzenmüller, ital of Europe. ŒWhen the German position changes on an issue, the ka• Economist.com/specialreports Stephen Szabo, Jan Techau, Murat leidoscope shifts as other countries line up behind them, says one oˆ• Topal, Beatrice Weder Di Mauro, EU An audio interview with Shahin Vallée, Dieter Wemmer, cial. ŒThat’s unprecedented in the history of the . the author is at Guntram Wol and Robert Zoellick. German predominance is not all•encompassing. In foreign a airs Economist.com/audiovideo/ and military matters, for instance, France and Britain still play a much 1 specialreports

The Economist June 15th 2013 1 SPECIAL REPORT GERMANY

DENMARK Germany Britain nant power. In the language of political l t i c scientists, it lacks the capacity to act as Eu• B a S e a France United States rope’s hegemon‹a leading country that N o r t h Unemployment rate takes responsibility for the stability of an S e a SCHLESWIG- % HOLSTEIN international system as a whole, as Amer• 150 km MECKLENBURG- 12 ica does for the world. William Paterson Hamburg WEST POMERANIA 10 of Aston University in Birmingham has BREMEN

P

S called Germany a Œreluctant hegemon.

O D HAMBURG BERLIN L 8 Within Germany this debate is al• N A

A LOWER SAXONY e N b most wholly absent. Germans are deeply L l E 6 Berlin D R ambivalent about their growing role in E BRANDENBURG H 4 Europe, and generally uncomfortable T NORTH RHINE- SAXONY-ANHALT E R h N WESTPHALIA talking about leadership. The mere vo• in 2 e Dortmund cabulary is fraught with historical echoes. Düsseldorf 0 The German world for leader is Führer, GERMANY SAXONY 2003 05 07 09 11 12* Cologne the title adopted by Adolf Hitler. Mention HESSE THURINGIA the word Œhegemon, and German politi• BELG. Current-account balance cians ‡inch. Mrs Merkel recently de• RHINELAND- Frankfurt Former boundary % of GDP PALATINATE between East and scribed the concept as Œtotally foreign to C Z E C H 10 LUX. West Germany R EPUBLIC me. Strategic thinking is strikingly ab• N sent anywhere in government. Joschka Fi• SAARLAND e BAVARIA c k a 5 scher, a former foreign minister, laments

Karlsruhe r be Danu + that: ŒGermans have never had a serious Stuttgart Tübingen conversation about the destiny of a re• FRANCE 0 BADEN- united Germany in Europe. WÜRTTEMBERG – Munich This is unlikely to change soon, so it 5 is not easy to assess where a German• A U S T R I A SW ITZERLAND dominated Europe may be heading. This 10 special report will try to provide some an• Manufacturing industry as % of GDP, 2012 <15 15-19 20-24 >25 2003 05 07 09 11 12* swers by looking at the forces that will af• fect German priorities. GDP Budget balance The most obvious short•term in‡u• % change on previous year % of GDP ence is the general election due on Sep• 6 5 tember 22nd. Mrs Merkel is widely ex• + 4 pected to win a third term as chancellor. 0 She is personally popular and her party, 2 – + the Christian Democratic Union (CDU), 0 5 together with its Bavarian wing, the – Christian Social Union (CSU), is far ahead 2 10 in the polls (see box, next page). But it is 4 not strong enough to govern alone, and support for its current coalition partner, 6 15 the Free Democratic Party (FDP), has 200304 05 06 07 0809 1011 12* 2003 05 07 09 11 12* slumped. Mrs Merkel might end up go• Sources: European Commission; Eurostat; German national statistics; IMF *Estimate verning in a grand coalition with the main opposition party, the Social Demo• cratic Party (SPD). And given Germany’s 2 bigger role. But across a large swathe of European policy, Ger• complicated system of proportional representation, it is not in• many has become much more than a †rst among equals. And conceivable that Mrs Merkel will be defeated by a coalition of judging by France’s weakness, Britain’s ambivalence and south• the SPD and the Green party. ern Europe’s debt problems, for the next few years Europe’s fu• Election politics has plainly in‡uenced Germany’s recent ture will continue to be disproportionately ŒMade in Germany. reactions to the euro crisis. The country’s tough stance on bank• Outside Germany this dominance has become the subject rupt Cyprus, for instance, re‡ected the need to neutralise objec• of lively debate. The ŒGerman question‹about the role of a tions by opposition parties to bailing out a place that had grown country too big for Europe and too small for the world, as Henry fat on laundered Russian money. But whatever its outcome, the Kissinger famously put it‹is back on the agenda. Many fret that election is unlikely to prompt a sudden shift in Germany’s policy Germany is becoming too bossy. Newspaper cartoons in south• towards the euro or the EU: German attitudes to Europe and to ern Europe show Mrs Merkel with a Hitler moustache. Southern leadership run deeper than party politics. European politicians say Germany is sel†shly wielding its clout to impose austerity policies that will wreck their part of Europe Where the past is ever•present in order to protect German taxpayers. The most important place to look for explanations is his• Others are worried that Germany is being too passive. Ra• tory. The shadows of the past weigh on Germany more heavily, dek Sikorski, Poland’s foreign minister, fears German inaction and in more complicated ways, than on any other big country. more than German power. On this view, Germany does not Those shadows can be divided into three broad groups. want, and cannot exercise, the leadership required of a predomi• First, Germany has no historical experience of successful 1

2 The Economist June 15th 2013 SPECIAL REPORT GERMANY

2 international leadership. For centuries the German•speaking mans are loth to see their government take the lead. Germany’s people lived in a collection of small, semi•independent states. preferred self•image is as a bigger version of Switzerland: eco• The country’s two attempts at projecting power since its uni†ca• nomically successful but politically modest. tion in 1871, by imperial Germany under the Kaiser and by the Germany’s second inheritance from history is a deep•seat• Third Reich, were disastrous. Germany’s economic miracle after ed, if inchoate, belief in European integration. After the second the second world war, the Wirtschaftswunder, happened when it world war Europe o ered West Germany a route to reconcilia• was divided in two and its old capital, Berlin, was occupied by tion and redemption as well as prosperity. In the preamble to its foreign armies. The former West Germany was a semi•sovereign constitution it is described as an Œequal partner in a united Eu• political pygmy, protected by America’s military might and with rope. In the decentralised domestic political structure imposed barely any foreign policy of its own. As a result, the country has on Germany by the Allies, power is divided between local, state no machinery or tradition of strategic thinking, and most Ger• and federal government. Germans are used to federalism. 1

Colours of the rainbow

A guide to Germany’s federal elections LIKE MUCH OF Germany’s democratic ma• chinery, its voting system is designed to No longer a two-horse race 1 avoid past mistakes. A combination of pro• Support for political parties, % polled

portional representation and †rst•past•the• ELECTION ELECTION ELECTION post majority voting fosters stable coalitions 60 and discourages small fringe parties. CDU/CSU When Germans go to the polls on 50 September 22nd, they will elect the mem• 40 bers of the Bundestag, or lower house of Parliament. Whichever coalition of parties 30 can muster a majority of members will form SPD the federal government. (Members of the 20 Bundesrat, the upper chamber, are dele• Greens 10 gates of Germany’s 16 states, or Länder). FDP Germans have two votes. One is for a 0 candidate to represent the local electoral 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 district (of which there are 299), chosen by Source: Forsa simple plurality of votes. The second vote is for a party. Any party receiving 5% or more Bundestag on its own. In the past one or the 2006, but has lost momentum and now gets of the total is entitled to seats in the Bun• other of them has formed a coalition with only about 3% in polls. The newest start•up destag, whether any of its candidates have one or more of the smaller parties, or with is Alternative für Deutschland (ŒAlternative won a district or not. If a party gets more the other big one. The CDU/CSU currently for Germany, AfD), a Eurosceptic party seats through direct election than its share governs in coalition with the liberal, free• formed in April this year. The latest opinion of the overall vote merits, it can keep some market Free Democratic Party (FDP), but polls give it 3% of the vote, but it is gaining of these Œoverhang seats. Thanks to a support for that has been slipping and it ground and could reach the 5% threshold. recent change in the electoral law, the other might not reach the 5% needed to be repre• Since its support seems to be drawn mainly parties then get Œcompensatory seats to sented in the lower house. from CDU and FDP voters, that would make a restore the balance among the parties. The fourth party in the Bundestag is victory for the left more likely. These provisions mean the precise number of Die Linke (ŒThe Left), formed from the rump All this leaves the post•election politi• Bundestag members will not be known until of East Germany’s communist party and cal line•up uncertain. If the FDP performs after the election, but it could reach 700. joined by defectors from the SPD. In Ger• well enough, the chances are that Mrs Merkel Germany’s biggest party is the ruling many’s most recent federal election in 2009 will continue in government with the present conservative Christian Democratic Union Die Linke got 12% of the vote. The SPD has ŒBlack•Yellow coalition of the CDU/CSU with (CDU), led by Angela Merkel, together with ruled it out as a coalition partner. the FDP. If both current coalition partners do its sister party in Bavaria, the Christian Germany’s †fth party, in terms of seats poorly, Mr Steinbrück may try to put togeth• Social Union (CSU). The overall group is in the current Bundestag, are the Greens. er a centre•left ŒRed•Green grouping of his known as the CDU/CSU. The group’s support They started life as an environmental party SPD with the Greens. If there is insuˆcient has risen in recent years and is currently in the early 1980s and now form part of support for that too, the two big parties may around 40% in opinion polls (see chart 1). coalition governments in several of Ger• join in a ŒBlack•Red grand coalition, as they The second•biggest is the centre•left Social many’s Länder. Polls suggest they could win did in Mrs Merkel’s †rst term of oˆce. This is Democratic Party (SPD), support for which about 14% of the vote. widely seen as the most likely outcome. Last has fallen in recent years and is now about Two other small parties have been time the voters did not seem keen on it, 27%. Its candidate for chancellor is Peer formed in recent years. The Piraten (ŒPi• punishing the SPD in the subsequent elec• Steinbrück. Neither of these two parties is rates), dedicated to internet freedom, tion. But this time the polls suggest some big enough to win a majority of seats in the caused a splash when it †rst appeared in enthusiasm for the idea.

The Economist June 15th 2013 3 SPECIAL REPORT GERMANY

2 History’s third legacy is a craving for stability, not least be• Germany and Europe cause Germans have not had much of it. The 68 years since the end of the second world war have been the longest continuous period of peace in their patch of Europe since the 16th century. In The Merkel plan the past 100 years Germans have been through hyperin‡ation and several periods of economic collapse. The national obses• sion with price stability has become a stereotype, but it is true nonetheless. A recent study showed that Germans are more Germany’s vision for Europe is all about making the worried about in‡ation than about contracting a life•threatening disease such as cancer. They attach huge importance to rules and continent more competitive institutions that promote stability and keep politicians in check. ANGELA MERKEL DOES not often muse publicly about the A uniquely German branch of economics that emphasises rules, European project. A physicist by training, she prefers solv• called Ordnungspolitik, sets the intellectual tone. Guardians of ing concrete problems to holding forth about abstract ideas. A stability, from the Constitutional Court to the central bank, wield sunny morning in late April this year was a rare exception. At an great in‡uence. event to mark the publication of a new book on her foreign poli• The euro crisis is problematic for German politicians be• cy by Stefan Kornelius, a journalist at a German daily, the Süd• cause it brings these powerful historical forces‹reluctance to deutsche Zeitung, Mrs Merkel debated the future of Europe with lead, desire for European integration and fear of instability‹into Donald Tusk, Poland’s prime minister. con‡ict. Germans are instinctively pro•European. According to a Mr Tusk began with soaring rhetoric. Europe, he said, was recent Pew poll, 60% of them have a favourable view of the EU, about freedom, about ensuring that the horrors of history would far more than in Britain, France or Spain. Germany has no big never be repeated. Mrs Merkel concurred that freedom was an Eurosceptic political movement. (A recently formed party, Alter• essential part of Europe’s values, but argued that on its own it native für Deutschland, does advocate a euro break•up, but sup• was not enough. The European project was to secure the conti• port for it is in the low single digits.) Another new poll suggests nent’s prosperity in the 21st century, when emerging economies that almost seven out of ten Germans support the single curren• were rising fast. Having seen one system collapse in her lifetime, cy, and the share is rising rather than falling. The government added the chancellor (who grew up in East Germany), she did might therefore be expected to act boldly to secure the single cur• not want to go through it again. rency’s future. But German europhilia is balanced by fears of in• If Mrs Merkel’s vision is pragmatic, so too is her plan for im• stability. Mrs Merkel’s handling of the crisis gets high marks at plementing it. It can be boiled down to three statistics, a few home because she is seen as having Œprotected her countrymen charts and some facts on an A4 sheet of paper. The three †gures from the mess elsewhere. are 7%, 25% and 50%. Mrs Merkel never tires of saying that Europe has 7% of the world’s population, 25% of its GDP and 50% of its Count us out social spending. If the region is to prosper in competition with Germany’s confused attitude is compounded by its reluc• emerging countries, it cannot continue to be so generous. tance to lead. German politicians in general, and Mrs Merkel in Mrs Merkel’s charts show various measures of competi• particular, have pandered to Germans’ small•country mentality tiveness, an obsession of hers. She produces graphs of unit la• and their belief that responsibility for †xing the euro lies else• bour costs (see chart 2) at EU meetings in much the same way where. The one country with the capacity to lay out a strategic vi• that the late Margaret Thatcher used to pull passages from Fried• sion for the single currency’s future is unwilling to do so. rich Hayek’s ŒRoad to Serfdom from her handbag. Many Germans will say that Mrs Merkel does have a vision The A4 sheet of paper maps the political route Europe must for Europe’s economic revival, which revolves around increased take to become more competitive. In his book Mr Kornelius de• competitiveness; and that Germany is capable of acting boldly. scribes how in 2011 Nikolaus Meyer•Landrut, the chancellor’s As an example, they might point to its Energiewende, a dramatic powerful adviser on Europe, plotted European policy along two switch to sustainable energy and a commitment to turning o its axes‹the bits that worked and those that didn’t, those where nuclear reactors by 2022. power was devolved to Brussels and where it remained with na• This special report will argue that, in both cases, German tional governments. He found that all the problems that had led 1 leadership is wanting. On the euro, Germany’s competitiveness agenda is insuˆcient, and based on a distorted reading of the country’s own history. And Germany’s energy policy is less an example of bold leadership than of an ill•planned unilateralism Miracle workers 2 that illustrates the country’s deep reluctance to think strategical• Unit labour costs, 2000=100 ly about international challenges. But the report will also show 140 Britain that for all its obsession with rules, Germany is capable of prag• 135 matism when needed. It was Germany, along with France, 130 which †rst ‡outed the EU’s Maastricht de†cit rules in 2003. Spain Even more important, Germany is changing fast. Its popula• 125 tion is the oldest in Europe, and the number of people of work• 120 United States ing age is about to shrink sharply. A widespread shortage of 115 workers will drive Germany to welcome more immigrants and Italy France 110 encourage women to spend more time on paid work, which will 105 profoundly a ect its economy and its society. In time, it will also Germany have a big impact on the way it conducts itself in the European 100 Union. The new Europe will be ŒMade in Germany not only be• 95 cause of the changes Germany wants others to adopt, but also 2000 01 02 03 04 05 06 07 08 09 10 11 12* because it will need to remake itself. 7 Source: OECD *Estimate

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The chief introduction of the euro itself. The chief aim of Helmut Kohl, the chancellor who presided over German uni†cation and the cre• aim of ation of the single currency, had been to draw a line under Eu• Helmut rope’s fractured history politically, with economics playing a much lesser role. Kohl had Mrs Merkel works hard on her European politics: no other been to EU leader spends as much time cultivating relations with col• leagues across the continent. But her approach is practical rather draw a line than emotional. For instance, she wants Poland to join the euro under because it is a successful, competitive economy and a useful counterweight to statist France. Her attitude is not as utilitarian Europe’s as Britain’s, where the argument for European integration boils fractured down to weighing up economic costs and bene†ts. But like Da• vid Cameron, Britain’s prime minister, Mrs Merkel is concerned history mainly with winning in the global economic race, which is one reason why Germany wants to keep Britain in the EU. Mrs Merkel’s pragmatic approach is often attributed to her background. As post•war Germany’s †rst chancellor hailing 2 to the euro crisis (such as lack of budget discipline and extrava• from the east, she is said to lack the attachment to the EU felt by gant welfare states) had arisen in areas where control remained west Germans. There may be something to that. But an upset in at national level, so either these policies had to be federalised by September’s elections will not send Germany on a radically dif• creating a European Œsuperstate, or Europe would have to ac• ferent European course, for the broad strokes of her economic quire a parallel architecture of rules to bind nation states. analysis are widely shared. And in truth few German politicians Mrs Merkel went for the second option. At Germany’s be• (except those in the European Parliament) put a high priority on a hest, the EU treaties were amended in March 2012 to introduce push for European federalism. new †scal rules for euro members, known as the Œ†scal com• Oˆcially, all German parties, including Mrs Merkel’s CDU/ pact. Among other things, this required all euro members to CSU, are still committed to greater political union. The †nance amend their constitutions to install a Œdebt brake, as Germany minister, Wolfgang Schäuble, is a long•standing advocate of a did in 2009, prohibiting them from running structural budget federal Europe. The parties’ election manifestos all include feder• de†cits. The chancellor wants to introduce more such rules to alist pledges, but they seem increasingly formulaic. force Europe’s economies to become more competitive. Mrs Merkel is quite willing to change Europe’s treaties, as Do as we do was necessary for the †scal compact, but for the sake of greater With the exception of the Alternative für Deutschland, the competitiveness rather than for political integration in its own new fringe party, all the parties agree that the euro must be pre• right. Her instinct is that agreements between governments will served, but that Germany’s liabilities within the club must be be more e ective than federalism in achieving the changes Eu• limited and uncompetitive economies need to be cajoled to• rope needs. But unlike the French, who have always preferred a wards reform. If there are di erences between the Merkel gov• Europe steered by national governments, she wants such agree• ernment and other mainstream politicians, they are about the ments to limit individual countries’ scope for discretion. pace of moving towards a banking union and the balance be• 1 ŒSolidarity (ie, German cash) does play a role, but mainly as a means of buy• ing time and encouraging reform. That is the idea behind the existing euro rescue funds, which lend money to cash• strapped governments in exchange for commitments to cut their budget de†cits and pursue structural reforms. Germany has proposed Œcontracts under which countries in southern Europe get help in exchange for speci†c reforms, say, to tackle youth unemployment. In recent weeks it has o ered bilateral help. Germany’s state development bank, for instance, may help †nance Spanish †rms. But Mrs Merkel has no truck with Keynesian de†cit spending, and her government stands †rm against Eurobonds or any other explicit mutuali• sation of debts. Though oˆcially commit• ted to a banking union, it is sceptical of el• ements, such as common deposit insurance, that imply mutual guarantees. This vision of Europe is quite di er• ent from the emotional European fealty that dominated much of post•war Ger• man politics, reaching its zenith with the Merkel lays down the law

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2 tween Œadjustment in southern Europe and Œsolidarity from Germany and other creditors. The SPD and the Greens might be less hesitant than Mrs Merkel to create a common resolution scheme for European banks. Peer Steinbrück, the SPD’s candi• date for chancellor, frets about the Œdangerous spiral of auster• ity and says Germany needs to spend more money on Europe, though he does not say how much or how. If the crisis intensi†es, the SPD might be more willing to consider a Œdebt redemption fund. First proposed in 2011by the German Council of Economic Advisers, such a fund would re• duce borrowing costs in southern Europe by replacing all euro• zone government debts above 60% of GDP with new bonds car• rying a joint guarantee, along with strict rules to ensure this ex• cess debt would be paid o over the next two decades. Mrs Merkel’s government immediately shot down the idea, arguing that it was too similar to Eurobonds and would create unlimited German liabilities. The SPD and Greens sounded more positive, and the SPD says in its election manifesto that such a fund should be considered. But with †nancial markets now calmer, thanks to the European Central Bank, no one talks about it much. Whoever wins the election will face the same constraints: the German public is †rmly opposed to large cash transfers to southern Europe. Germany is hemmed in by its own rules. In particular, because of the constitutional debt brake more money spent on rescue funds necessarily means higher taxes or less spending at home. Perhaps most important, the Constitutional Court is strongly opposed to anything that might oblige German taxpayers to assume unlimited liability for other countries’ debts. The red•robed judges in Karlsruhe have become assertive protectors of German sovereignty. All mainstream German politicians share Mrs Merkel’s broad strategy because they interpret recent German history in much the same way that she does. As they see it, the key to eco• nomic success is export prowess, achieved by keeping budgets tight and wages competitive. In short, the rest of Europe needs to become more like Germany. Some politicians have said this in so many words. Volker Kauder, a prominent CDU politician, caused a fuss when he said that ŒEurope now speaks German. Others The economy are more subtle, pointing to the virtues of Germany’s †scal prob• ity, praising the country’s tough labour•market reforms and la• menting southern Europe’s lack of manufacturing clout. Dissecting the miracle A plan that does not add up To Mrs Merkel and much of Germany’s elite, making Eu• rope more prosperous by promoting competitiveness is strategy The ingredients of German economic success are more enough. But putting all the onus on Europe’s debtors does not make sense. The more that wages and prices in southern Europe complex than they seem are squeezed, the less people and businesses there will be able to THE NECKAR VALLEY, not far from Stuttgart, is the epitome pay back their debts, including those owed to Germany. The euro of provincial Germany. A string of picturesque towns with zone will recover faster and more easily if Germany spends quaint Swabian names‹Tübingen (home to a famous universi• more at home. Otherwise it will have to provide corresponding• ty), Reutlingen, Nürtingen, Wendlingen, Metzingen‹stretch ly more †nancial help to keep the euro together. along the river, separated by orchards and family farms and Many German economists acknowledge these trade•o s, ‡anked by the hills of the Swabian Alb. But the small•town idyll but Germany’s euro policy is driven by lawyers and rules, not is deceptive. The Neckar valley is also home to scores of Ger• economists. German politicians tend not to think broadly about many’s small and medium•sized companies known as the Mit• Germany’s role in the euro in relation to other countries, but telstand, a highly successful component of the global economy. only about its own successful policies, which they insist others Storopack, tucked inconspicuously down a side street in must adopt. That is quite di erent from formulating a strategy Metzingen, is a world leader in protective packaging. The †rm is which can work for the region as a whole. Paradoxically, the family•owned‹the current patriarch still lives next door‹but country that abhors nationalism is oddly national in its focus. thoroughly global, with 52 factories in 13 countries. The †rst Chi• But Germany’s recipe for economic success falls short even nese facility opened in 2000. Now there are ten. in its own terms because it is based on a selective analysis of the Rösch, a third•generation family textile †rm in Tübingen country’s recent history. Germany has indeed become much known for upmarket nightwear, has also become one of Eu• more competitive over the past decade, but not solely because of rope’s biggest makers of specialist fabrics for the car industry. Its tough reforms and tight budgets, as the next section will show. 7 unassuming buildings, down a small road by the river, contain 1

6 The Economist June 15th 2013 SPECIAL REPORT GERMANY

2 vast computer•aided processing and dyeing machines that pro• also exerted a downward pull on overall productivity. duce the synthetic materials for lining car roofs. The reforms had big knock•on e ects. In conjunction with a These small•town champions, along with industrial giants move east by many German †rms, they persuaded Germany’s such as Siemens, Bosch and BMW, help to maintain Germany’s unions to accept years of tight wage restraint. Between 2001 and manufacturing and export prowess. Manufacturing’s share of 2010 German wages rose by an average of just 1.1% a year in nom• GDP in Germany is bigger than in other rich countries and Ger• inal terms, leaving them ‡at in real terms. Unit labour costs fell man exports, particularly to fast•growing emerging economies, sharply relative to those in other countries. are stronger. Half of Germany’s growth over the past decade has The belt•tightening was impressive, but German †rms come from exports. The external surplus, at ¤188 billion ($243 bil• were also lucky to be making the right stu at the right time. Ger• lion), or 7% of GDP, is the world’s biggest in absolute terms, one man manufacturers have traditionally been strong in three big of the biggest relative to the size of the economy, and rising. areas: machine tools, chemicals and cars. That proved a perfect combination in a decade when emerging economies were The working parts booming and China, especially, went on an investment binge. In German eyes, strong exports and a big trade surplus are Almost half of German exports, and 72% of its exports to China, symbols of economic virility. But foreigners are more impressed are machinery or transport goods. with Germany’s recent employment record. A decade ago Ger• The 2008 †nancial crisis temporarily sent exports into a many had one of the worst jobless rates in the rich world. Today tailspin, and in the past three years demand from the euro zone’s its unemployment rate of 5.4% (using OECD †gures) is one of the periphery has collapsed. But Germany’s manufacturers have lowest in Europe. Youth unemployment, below 8%, is half that in been more than compensated by the weak euro, which allowed America and a third of the European average. It is also the lowest its export machine to whirr on. Germany has seen for 20 years. Fiscal pragmatism lent a helping hand. The year when Ger• This is not the result of booming growth. Over the past de• many pushed through its ŒAgenda 2010 reforms, 2003, was also cade Germany’s economy has on average grown more slowly the year when it ignored the ŒMaastricht criterion of a 3% cap on than America’s and Britain’s and barely faster than that of the its budget de†cit, letting its borrowing rise rather than trying to euro zone as a whole. But Germany managed to avoid a surge of bring it below the 3% limit. The Schröder government gave prior• lay•o s after the †nancial crisis and has done far better than oth• ity to structural reforms over †scal consolidation, which today’s ers at getting the young and the hard•to•employ into work. Merkel government regards as an egregious mistake. But Frank• How did it manage that? Most explanations heap praise on Walter Steinmeier, an SPD leader who was Mr Schröder’s chief the Mittelstand model and the system of vocational training. of sta , says he would do it again: ŒIf we had dogmatically stuck Firms such as Storopack or Rösch take on apprentices, mixing to the Maastricht rules, we wouldn’t have had an Agenda and practical training with classroom tuition. The German govern• we would be in the lower rung of Europe’s economies. ment also points out that the country Œdid its homework, intro• The †nancial crisis prompted a more obvious whi of Key• ducing tough labour reforms from 2003 (known as ŒAgenda nesian policies. As demand for exports collapsed, the German 2010) that freed up the job market. And the system of Mitbestim• government came up with several schemes to stem unemploy• mung (which gives trade unions seats on company boards) en• ment, in particular Kurzarbeit, topping up the earnings of work• couraged wage restraint. ers on shorter hours or paying for them to go on courses. As glo• All these things helped, and the Agenda 2010 reforms, in bal car sales collapsed, Rösch, the Mittelstand company in particular, made a big di erence. But they are not the whole Tübingen, sent a number of story. A cheap currency, some dumb luck and a fair amount of its workers for training at tax• †scal pragmatism also played a part. payers’ expense. It survived a Germany had begun the 21st century in bad shape. Wages Dearly beloved 3 20% slump in sales without had soared after uni†cation in 1990; the budget was burdened Opinions on the EU and euro lay•o s, and the workers with big transfers to the former East Germany; excessive regula• % in agreement, polled spring 2013 came back more productive. tion was sti‡ing the economy. To get away from all this, German Do you have a favourable opinion If German success has †rms, including many from the Mittelstand, shifted production to of the EU? more fathers than many Ger• cheaper places in eastern Europe. 0 10 20 30 40 50 60 mans like to admit, it has also Shocked by high joblessness and the hollowing out of Ger• Germany come at a price that few ac• man industry, the SPD government under Gerhard Schröder in• Italy knowledge. Most Germans’ troduced a set of sweeping tax, regulatory and labour reforms in living standards have stagnat• Spain 2003. The most important part of this package were the so•called ed, wealth is highly skewed Hartz reforms (after Peter Hartz, who headed the commission Britain and national saving, embod• that drew them up), which brought fundamental changes to the Greece ied in the country’s vast cur• low end of the German job market. They eliminated payroll tax• France rent•account surpluses, has es on earnings of less than ¤400 a month (recently raised to been spectacularly badly in• ¤450), thus encouraging the creation of part•time Œmini•jobs. A Do you think your national economy vested. From American sub• has been strengthened by European ‡at•rate bene†t nudged the long•term jobless back into work. economic integration? prime securities to Spanish These and other reforms cost Mr Schröder the 2005 election, but 0 10 20 30 40 50 60 property loans, German they gave employers an incentive to create low•skilled and tem• Germany banks recycled the country’s porary jobs and the jobless a reason to take them. Spain savings surpluses into all They also made Germany more Anglo•Saxon. Some 20% of manner of junk. A new study Germans now work in Œlow•wage jobs, about the same share as Britain by Marcel Fratzscher of the in Britain, not much lower than in America and almost twice as France DIW economic research insti• much as in France. Germany’s employment boom had less to do Italy tute in Berlin suggests that with the Mittelstand than with this overhaul at the bottom, Greece Germany has lost the equiva• which pulled a lot of low•skilled people into work‹though it Source: Pew Research Centre lent of 20% of GDP on the val• 1

The Economist June 15th 2013 7 SPECIAL REPORT GERMANY

2 uation of its foreign portfolio investments since 2006. omy from 50% to 68% of GDP. Despite such losses, Germany as a country is rich, but a re• Asset-poor 4 If McKinsey is even half cent study from the European Central Bank suggests that the typ• Median net wealth per household right, German exporters have ical German household is not. Astonishingly, the median house• ¤’000, 2010 or latest available year a rosy future. But it will be a hold’s net assets, at ¤51,400, are less than those of the typical future focused outside Eu• 0 50 100 150 200 Italian, Spanish or even Greek household (see chart 4). These †g• rope. The euro zone now ac• ures need careful interpretation. Households in Germany are Spain counts for 37% of German ex• smaller than in those countries, and their average is dragged Italy ports, down from 46% in down by the east, where 20 years ago no one had any assets to 2000. By 2025, reckons speak of. Moreover, the †gures do not include pension promises. France McKinsey, the euro zone’s But the main reason for the poor showing is that far fewer people Greece share of German exports is than in other European countries own their homes. Most house• Austria likely to be down to around holds rent, and the housing stock is owned by a relatively small 30%. That diminishing role number of people, so Germany ends up with the most unequal Germany will surely a ect the attitude distribution of household wealth in the euro zone. Moreover, a Source: European Central Bank of German business. Sharing growing share of its wealth sits on corporate balance•sheets, par• a currency with weaklings ticularly the family•owned Mittelstand †rms, which makes the will be a †llip in global mar• overall wealth distribution more unequal still. For a country that kets, but for business the euro zone will matter ever less. John likes to think of itself as middle•class and egalitarian, Germany’s Kornblum, a former American ambassador to Berlin, argues that wealth disparities are huge. Œpsychologically, German industry has already left the EU. All this helps explain Germans’ attitudes towards the euro Yet becoming more indi erent to Europe is not in Ger• crisis. German voters are sceptical of transfers to southern Eu• many’s interest. The country is better o with the single curren• rope not just because of their fear of in‡ation or their experience cy than without; and the economic rebalancing that would help with pouring money into former East Germany, but also because the rest of the euro zone is also what the German economy itself the typical German worker feels that he is no better o than the badly needs. Spaniards he sees driving Audis when he holidays on the Costa Brava. After a decade of scant real wage growth, and given the Spend, spend, spend unusually skewed wealth distribution, that perception is not al• With a culture of thrift and, now, a fast•ageing society, Ger• together wrong. many naturally saves more than it spends. (Barring a few years What happens next? Outsiders, particularly Anglo•Saxons, after uni†cation, it has run an almost uninterrupted surplus have long argued that the German economy is dangerously dis• since 1952.) But its current•account surplus, at 7% of GDP, is now torted: too reliant on a few traditional manufacturing sectors, more than three times higher than it was a decade ago, largely and with too little domestic demand. On this logic, if China’s thanks to an arti†cially cheap currency and squeezed wages. It is economy stumbles, or indeed as it produces ever more of its own unhealthy, both for Germans (who forgo higher living standards high•end investment goods, Germany will be in trouble. It needs to pile up savings that are poorly invested abroad) and for others more innovation, more services and a better balance. in the euro zone and beyond. At †rst sight German industry does seem stolid. Its main German economists recognise that this has to change. Hans•Werner Sinn of Munich’s IFO eco• nomic research institute says the country Most Germans’ living standards have stagnated, is Œtoo cheap. But how best to rebalance the economy: through less saving or more wealth is highly skewed and national saving has been investment? As a share of GDP German spectacularly badly invested investment has fallen sharply, from 22% in 2000 to 17% in 2012. Public investment has been squeezed, †rms have been cautious components‹cars, chemicals, machine tools‹have been the about capital spending and in the absence of a property boom same for decades. Although Berlin has become a bit of a Euro• there has been little investment in construction. pean digital hub, and Germany’s SAP is the world’s third•largest Property is now beginning to look up. Ultra•low interest software company, the country has no Apple, Facebook or any rates are pushing up house prices and spurring building. After a other household name of the new economy. decade of stagnation, German property prices rose by 5% (in Look more closely, though, and German †rms dominate nominal terms) in both 2011 and 2012. Cities like Berlin and Mu• some less obvious but crucial arteries of globalisation. From nich have seen much bigger jumps. Taxi drivers o er tips on the DHL to Kuehne & Nagel, the world’s biggest logistics †rms are best place to buy a ‡at. But there is a long way to go. Relative to German. And even in manufacturing, making things is increas• income, German property prices are still 20% undervalued. ingly bundled with a clutch of high•end services. Storopack’s Wages have also started to pick up. In 2012 IG Metall, the growth, for instance, depends ever more on the technicians who biggest union, won a pay deal worth 4.3% over 13 months, the big• dream up whizzy solutions for speci†c packaging problems. gest jump in 20 years. Across the economy, wages increased by A new report from the German arm of McKinsey, a consul• 2.7% last year, about 0.6% above the rate of in‡ation. Judging by tancy, predicts another decade of strong, export•led growth the †rst agreements, this year’s crop of wage deals will be slightly based on Germany’s traditional sectors. It argues that industrial• more generous. isation in emerging economies will keep up demand for mach• Faster wage growth and a minor construction boom have ine tools, chemicals and the like, and that German †rms are inno• yet to dent Germany’s huge surplus, which increased further last vating fast enough to maintain their dominance in premium year, but they have already fuelled German fears about asset niche markets. The report forecasts that between now and 2025 bubbles and a loss of stability. The Bundesbank has given public German exports will rise by 80%, pushing their share in the econ• warning about frothiness in the housing market. German politi• 1

8 The Economist June 15th 2013 SPECIAL REPORT GERMANY

2 cians were furious at recent suggestions from France that higher German wages might be part of the solution to the euro crisis. The constant refrain is that Œmaking Germany less competitive cannot help Europe become more competitive. This gets to heart of the problem with Germany and Eu• rope. The German government wants others to become more like them, but sees no reason for its own model to change. The Merkel government has done strikingly little to encourage an economic rebalancing towards more investment and consump• tion in Germany. The debt ceiling constrains public investment, but the government also brags about how fast it is reducing its de†cit. Leaving aside minor measures, such as the deregulation of long•distance buses, there has been little in the way of struc• tural reforms to encourage †rms to invest. Mrs Merkel’s 2009 election pledges to simplify the tax system and encourage entre• preneurship have gone nowhere. According to the Cologne Insti• tute for Economic Research, the momentum for domestic reform in Mrs Merkel’s second term has been much weaker than in her †rst. The OECD says that since 2007 Germany has brought in fewer pro•growth reforms than has any other of its members. But it is not just a question of missed opportunities. Instead of making the right choices, Germany may be about to introduce counterproductive measures. Opposition parties are campaign• ing for increasing taxes sharply and rolling back some of the Hartz rules. The SPD and the Greens, for instance, want to raise the top rate of income tax to 49% (from 42%) and reintroduce a wealth tax. They also want to toughen the rules for employers creating mini•jobs and reduce the work requirements that bene• †t recipients must meet. So if the election were to result in a Red• Great in theory, messy in practice Green coalition, German business would †nd itself in a less fa• vourable tax environment. Even a grand coalition could bring some tax rises at the top‹enough to deter investment and harm vert Europe’s biggest industrial economy so that it runs largely the economy. As one political insider quipped, ŒIt’s a good thing on renewable energy. This includes ambitious conservation and foreigners don’t read German. eˆciency goals, but above all it involves changing the power But all this is small beer compared with what Germany is supply. By 2022 all nuclear power plants, which now produce doing as part of its Energiewende, or change in energy policy. The 16% of the country’s electricity, are to be switched o . And by country’s wholesale move to renewable energy betrays an ill• 2050 about 80% of electricity is to come from renewable sources, planned unilateralism. 7 compared with 22% now. In principle, this bold plan brings huge opportunities for Germany, not only to help save the planet but to become a global Energy leader in tomorrow’s energy•eˆcient and green technologies. The reality has been messier, marked by price distortions, politi• cal U•turns, surging costs and inadequate infrastructure. Tilting at windmills Businessmen say the Energiewende will kill German indus• try. Power experts worry about blackouts. Voters are furious about ever higher fuel bills. The chaos undermines Germany’s claim to eˆciency, threatens its vaunted competitiveness and Germany’s Energiewende bodes ill for the country’s unnecessarily burdens households. It also demonstrates Ger• many’s curious refusal to think about Europe strategically. European leadership Germans have long had a greener streak than other Euro• OSTERATH’S 12,000 citizens are angry. Their quiet backwa• peans and a greater fear of nuclear power. Some put this down to ter in the Ruhr, close to Düsseldorf, is the proposed site for cultural romanticism, but more probably the worries stem from the biggest converter station in Europe. This vast installation will living in a country with a dense population and few natural re• transform high•voltage direct current to alternating current. It sources, and a culture that values earnest e orts to do good. will be an important link in Germany’s new Œpower highway, a Whatever their origin, the environmental convictions run deep. network of transmission lines that will send electricity generat• The Greens, an environmentalist party founded only three de• ed by wind farms in the north of the country, and o shore in the cades ago, are now a powerful political force. They won more North and Baltic Seas, to the manufacturing belt in the south. than 10% of the national vote in the 2009 federal elections and Osterath’s residents reckon it will be a monstrous eyesore, and do a lot better still in many urban areas. intend to stop it. A bill to determine the outlines of the new pow• The Energiewende’s formal targets were set in the early er highway is making its way through the federal parliament. Of 2000s, when the Greens were the junior partner in a coalition 3,300 objections from the public, 2,300 are from Osterath. with the SPD under Gerhard Schröder. A renewable•energy law This kind of nimbyism is only one of many problems fac• passed in 2000 promised 20 years of guaranteed prices and pri• ing Germany’s Energiewende. The literal translation is energy ority access to the power grid for anyone who installed wind, so• change or turn, but this is more of a revolution, designed to con• lar or other renewable sources. These Œfeed•in tari s were paid 1

The Economist June 15th 2013 9 SPECIAL REPORT GERMANY

2 for by a surcharge on all electricity bills. To protect German com• a loss. Because producers of renewables are paid a †xed price, petitiveness, the most energy•intensive †rms, such as producers their subsidy rises as the spot price of electricity falls. On cloudy of chemicals, were spared the extra whack. days Germany relies ever more on brown coal. Last year its CO2 The incentives were designed to be predictable, but energy emissions rose. policy, particularly in Mrs Merkel’s second term, has been any• The cost of this mess is passed on to electricity users. thing but. The †rst U•turn came in 2010, with the passage of a Household fuel bills have gone up by a quarter over the past new law that nuclear power plants, originally destined to be three years, to 40•50% above the EU average. And because the phased out by 2022, would be switched o only when they contracts guaranteeing renewables prices are set for 20 years, the reached the end of their working life. That decision, deeply un• problem will get worse as more such supplies come on stream. popular with many Germans, was reversed only six months lat• Thomas Vahlenkamp of McKinsey reckons that the cost of the er, prompted by Japan’s Fukushima nuclear disaster in March Energiewende will double over the next decade. Rising electricity 2011. The day after Fukushima Mrs Merkel decided that Ger• bills will dampen German consumers’ spending, exactly the op• many would ditch nuclear power after all. Eight reactors were to posite of what is needed to rebalance the economy. be switched o immediately, the rest by 2022. The chancellor claimed that her second U•turn was a rea• Winners and losers sonable response to the Fukushima catastrophe. The dangers of The impact on German business is complicated. Some nuclear power had been made all too clear. Cynics saw an ulteri• †rms have grown fat on the renewables surge. Siemens now gets or political motive. Largely because of its pro•nuclear stance, Mrs 40% of its revenues from energy•saving and green technologies. Merkel’s CDU party, which had long dominated politics in Ba• But industrial power users are in a bind. As the renewables sur• den•Württemberg, a big southern state, was slipping in the polls charge has risen, ever more companies have demanded exemp• before an election there. The change of mind was a desperate at• tions. The number of oˆcially Œenergy•intensive †rms has ris• tempt to show green credentials. In political terms it failed: the en from 59 in 2003 to over 2,000 today. Between them they use CDU lost and the Greens gained their †rst state premier. Econom• around a †fth of Germany’s power. Companies that do not qual• ically the switch brought huge uncertainty. ify for the exemption but still use a lot of power are increasingly Germans had responded with gusto to the generous building their own generating capacity to avoid paying the green feed•in tari s, installing anything from solar panels on roofs to levy. For instance, Storopack, the packaging †rm described in the industrial•scale wind parks. Bavaria now has more photovoltaic previous section, has built a biomass•fuelled generator at its capacity than America, with only 0.7% of its land mass. The plant in Mainleus. As more †rms generate their own power, few• share of Germany’s electricity derived from renewable sources er contribute to the high prices promised to renewables produc• rose from 15% in 2008 to 22% in 2012. On current plans it will be ers. And the European Commission has started to investigate the 48% by 2022, says Stephan Kohler, head of the German Energy exemptions as a possibly illegal form of state aid. Agency, a research group. All this is happening as prices for natural gas and electricity The trouble is that most wind and solar power is generated in North America are plunging, thanks to the shale revolution, so a long way from the parts of the country where the nuclear Germany’s most energy•intensive industries are now eyeing ex• plants are to be switched o , so new power grids have to be built pansion on the other side of the Atlantic. There is a risk of a rip• (see map). Their construction is far behind schedule. On current ple e ect as their customers start to move, too. plans Germany needs more than 4,000km of new transmission In recent months e orts to keep a lid on companies’ power lines by 2022, of which less than 300km have been built. One costs have led to even more perverse policy shifts. Germany, Eu• reason is the Osterath mentality: people see no paradox in de• rope’s self•professed leader in the †ght against climate change, manding an end to nuclear power but objecting to the new trans• did nothing to stop the collapse of the European carbon•trading mission grid being built in their backyard. Another is the lack of system (the EU’s main collective tool for reducing carbon emis• co•ordination between di erent states. Political wrangling has sions). The market had not been working well, largely because made cross•country projects hard to plan too many permits to emit carbon had and harder to †nance. Fifteen out of 24 been issued. The European Commission grid•expansion projects are up to seven 100 km DENMARK proposed reducing their number, but Mrs Baltic years behind schedule. S e a Merkel refused to support the proposal, A second problem is that many N o r t h mainly to avoid spooking big German sources of renewable energy are intermit• S e a †rms already worried about power costs.

P

tent. The wind does not blow, nor does O Silence from Europe’s most powerful gov•

L

the sun shine, all the time. Bulk electricity A ernment helped to sink the commission’s NETH. storage is still in its infancy, and there are N plan in the European Parliament. D Berlin not enough mountains for much hydro• Back in Germany no politician is electric storage, so Germany still needs a willing to renege on the promise to ditch big back•up capacity of conventionally GERMANY nuclear power by 2022, let alone on the generated power. But because so much re• Osterath commitment to renewables. The ques• newable power has come on stream, and tion is how boldly to revise the plans for because it has priority access to the grid, C Z E C H getting there. With the election looming, the spot price of electricity has fallen to a REPUBLIC Mrs Merkel has taken a timid, tactical ap• level at which modern, clean natural•gas Powerlines proach. The talk is of tinkering with power plants are not viable. Only ageing, Existing feed•in tari s, †ddling with corporate ex• dirty brown•coal power stations with Planned emptions and encouraging the states to FRANCE Stuttgart low variable costs can compete. new speed up the expansion of the grid. Planned The result is a web of grotesque dis• Munich upgrade The strategically minded are push• tortions. On sunny days Germany pushes Source: Bundes- ing for more fundamental overhauls. netzagentur its excess power into the European grid at SWITZ. AUST. Bold ideas include replacing the pricing 1

10 The Economist June 15th 2013 SPECIAL REPORT GERMANY

Spanish craftsmen of many kinds, from bakers to stonemasons. Europe’s handicap 5 It organises interviews via Skype and provides help with accom• Industrial energy prices, ¤ cents per kWh modation and German lessons. Messrs Medina and Traublinger are at the leading edge of a Electricity Gas trend that could transform Germany. With the world’s second• 12 4 oldest population (after Japan) and one of the lowest birth rates Germany * * 10 in Europe, the country is facing a demographic bust. Its number EU average 3 of workers is set to drop by 6.5m between now and 2025, the 8 EU average Germany equivalent of losing every worker in Bavaria. By 2050 the num• 6 2 ber of working•age people in Germany will be a lot smaller than 4 in France or Britain, even though its overall population is bigger. United States 1 Over the next ten years the public sector will need to replace 1m United States 2 employees, a quarter of the total. Half of all teachers are over 50. 0 0 And there will simply not be enough young people around to †ll 2000 02 04 06 08 10 12 2000 02 04 06 08 10 12 the apprentice slots in German †rms. Source: Enerdata/McKinsey *Estimate This shortage of workers can be countered in two ways. One is to look outwards, like Mr Traublinger, and encourage more foreigners to come to Germany. The other is to coax more 2 distortions with a market based on production capacity rather work from the existing population by persuading older people than output: power producers would be paid by the amount of to retire later, women to do more paid work and making better capacity they had installed rather than the amount of electricity use of the least skilled. In practice both approaches will have to they actually produced. There would also be a greater focus on run in parallel. This will have profound e ects on Germany’s energy conservation, including more incentives for investment economy and society. in retro†tting buildings; more public investment into energy• storage research; and, from planning the expansion of the grid to Open wider the creation of new renewables capacity, a European, rather than Start with migration. Germany has long had a complex atti• a national, vision for the Energiewende. tude to outsiders. As its economy boomed during the Wirt• Such boldness would be good for German economic rebal• schaftswunder years in the 1950s and 1960s, it imported huge ancing and for Europe as a whole. After all, Europeans live so numbers of foreign workers from southern Europe and Turkey. close to each other that a national energy policy makes little Know as Gastarbeiter (guest workers), they were meant to be sense: how safe is a reactor•free Germany when nuclear power temporary, and no e ort was made to integrate them. Yet most of stations go on running next door in France, the Czech Republic them settled. Their o spring form the core of Germany’s large, and, in due course, in Poland? And in a supposedly single Euro• and largely low•skilled, migrant community. In the 1990s Ger• pean market, is a renewables revolution at national level even many absorbed huge numbers of ethnic Germans from the east, possible? Instead of a national Energiewende marked by U•turns particularly Russia, Ukraine and Kazakhstan. The eastward ex• and uncertainty, Germany needs to think European. Fortunately pansion of the EU, and the gradual removal of barriers to labour it has already begun to do so to manage its second big economic mobility, brought a surge of Poles, Romanians and Bulgarians. As transformation: its looming skills shortage. 7 a result Germany already has the largest immigrant population in Europe. According to the latest census, just out, some 6.2m of its 80.2m inhabitants, or 8%, are not German citizens, and several Labour million more were born abroad. But Germany has never thought of itself as an immigrant country. Until 2000 citizenship was mostly reserved for ethnic Erasmus generation Germans. In recent years Gastarbeiter and their o spring have been able to apply for citizenship, but dual nationality is still barred to those over 23. For many years migration was tolerated, not encouraged. Newcomers were, on average, less skilled than To overcome its skills shortage, Germany needs to Germans. For most of the past decade the net number of incom• ers has failed to make up for the falling number of native Ger• remodel its society mans, and the population as a whole has been shrinking. A YEAR AGO Werner Santiago Medina was an unem• That is now changing. Thanks to the strong economy at ployed engineer in Las Palmas, the biggest city in Spain’s home and the troubles elsewhere in Europe, the number of new• Canary Islands. Today he is an electrician in Munich, employed comers is rising. In 2012 more than 1m people moved to Germany by a small †rm that specialises in converting old oˆce buildings. and net immigration stood at 370,000, the highest level for al• He has brought his family and is slowly learning German. His most two decades. Most of the new arrivals came from within seven•year•old daughter is already ‡uent. He still supports Bar• the EU, particularly Poland, Romania and Bulgaria. The numbers celona football team but reckons his future is in Germany. coming from southern Europe are also rising fast, though from a Mr Medina’s path from the Canaries to Bavaria was small base. According to oˆcial †gures, the number of people mapped, in part, by Heinrich Traublinger, proprietor of a string from euro•zone crisis countries who moved to Germany last of Munich bakeries, who heads the Upper Bavarian craftsmen’s year was over 130,000, a 40% rise on the year before. trade association. Mr Traublinger was shocked by a 2011 survey The new arrivals are younger and better educated than of his 79,000 members which showed that more than one in six their predecessors. German newspapers are full of stories about of them was short of workers. When he saw television reports of Œwelfare migrants sponging on the country’s generous social• high Spanish unemployment not long afterwards, he spotted an security system, but they are overblown. Almost 70% of Roma• opportunity. The trade association now runs a scheme to attract nian and Bulgarian migrants are highly quali†ed, often with uni• 1

The Economist June 15th 2013 11 SPECIAL REPORT GERMANY

Many German graduates have them• selves studied elsewhere in Europe, thanks to the EU’s Erasmus scheme which facilitates student exchanges. Ge• org Fichtner, head of the Stuttgart Cham• ber of Commerce and Industry, says it is time to talk about o ering apprenticeship exams in English. Home•grown talent Nonetheless, migration alone can• not solve Germany’s skill shortage. In terms of sheer numbers, the more impor• tant part will be to get Germans to work more. Older folk are already staying on longer. Germany has the EU’s third•high• est labour•force participation rate for the over•55s (after Sweden and Estonia). Most German women, too, hold down jobs: at 72%, the participation rate for women of working age is well above the EU average. They just do not spend a lot of time doing them. Almost half of working women are part•time, putting in an average of only 18.6 hours a week. West German society long frowned on combining motherhood and work and its social infrastructure was not set up for it. A mother who took up paid employment instead of caring for her children full•time was denounced as a Rabenmutter (Œraven mother). West German schools traditionally †nished at Many more needed lunchtime, and provision for younger children was poor. (East Germany, where under communism almost all women 2 versity degrees, says Klaus Bade, a migration expert. Migrants worked, has lots more all•day schools and child•care facilities.) from the euro zone’s crisis countries, like Mr Medina, are even Politicians have long recognised the need for change. A de• more likely to be young and well educated. cade ago Mr Schröder’s government boosted federal pre•school With labour shortages looming, the oˆcial attitude to• funding and launched a drive for all•day schools. Even Mrs Mer• wards migration has been slowly shifting. Mr Schröder’s govern• kel’s CDU, despite its heritage of traditional family values, has ment paved the way in the early 2000s, with changes in citizen• pushed for reform. The main force behind this has been Mrs von ship rules and a scheme to encourage foreign engineers and IT der Leyen, herself a mother of seven, †rst as family minister and experts to come to Germany. In 2012 Mrs Merkel’s government now as labour minister. She introduced paid paternal leave, in• became one of the EU’s †rst to implement a new Œblue card sys• creased federal funding for pre•school care and fought for new tem to admit skilled foreign workers from outside the EU. In the statutory requirements. From August this year all German chil• same year the federal government passed a law recognising for• dren will have the right to a day•care place from the age of one. eign technical quali†cations. The economics ministry has a Not everyone in the CDU is happy with this shift. To placate whizzy bilingual website called ŒMake it in Germany which of• her conservative wing, Mrs Merkel agreed to an additional child• fers tips on applying for a job. The idea, says Ursula von der care bene†t for full•time mothers. But most politicians recognise Leyen, the labour minister, is to create a Œwelcoming culture. that the economy needs more women to spend more hours at a The trouble is that old rigidities die hard. Although the fed• job. There is a limit, though, to what the federal government can eral government now recognises foreign technical quali†ca• do. For example, it cannot simply insist on all•day schools, be• tions, only †ve of the states do. Germany’s apprenticeship sys• cause education is devolved to the states. And the debt ceiling tem still creates, in e ect, a closed shop. Virtually the only route constrains public investment at both federal and local level. A to many technical occupations is to join as a 16•year•old school• good deal of progress has been made: around half the schools leaver. One study suggests that 3m immigrants in Germany work are now open all day. But there is more to do. in jobs well beneath their technical quali†cations. Language is All•day schools and better pre•school provision would also also a big barrier. Mr Traublinger’s attempt to recruit a Spanish boost another potential source of workers: the children of mi• optician for a Bavarian village failed because the candidate did grants who currently fall o the education ladder. The †gures are not speak enough German to understand his clients. grim. A quarter of young people with a migrant background lack Such barriers will not be broken down overnight, but Ger• a secondary•school diploma; less than 7% graduate from univer• mans are trying harder to do so. The Goethe Institute, a govern• sity; and as a group they are more than twice as likely to be un• ment•funded network of cultural centres abroad, is expanding employed as the national average. Poor language skills are a big its o erings of German lessons. For younger, well•educated Ger• part of the problem, reinforced by a system in which children mans, working with colleagues from abroad comes naturally. spend so little time at school. Many third• or even fourth•gener• 1

12 The Economist June 15th 2013 SPECIAL REPORT GERMANY

is falling steadily. Much of the credit for that goes to domestic re• Missing millions 6 forms, prodded by the euro zone’s new German•inspired com• German labour force, m petitiveness rules, but outside †nancial help also played a role. 45 Austerity was eased and rescue funds provided by other euro FORECAST members were converted into low•rate loans extended over sev• 44 eral decades. The European Transformation Fund, a German•in• 43 spired EU initiative, encouraged foreign investment in public• 42 private partnerships. 41 In this rosy future vision of Europe the division between a strong north and a weak south is less stark. A booming export• 40 oriented industrial belt stretching from northern Italy to the 39 Netherlands, with Germany at the centre, attracts a steady 38 stream of workers from all over Europe. So, too, does Germany’s ŒAgenda 2020, a package of reforms introduced after the 2013 1991 95 2000 05 10 15 20 25 election to boost public and private domestic investment in pro• Source: OECD jects ranging from education to energy conservation in order to rebalance the economy. All those new jobs have prompted a German construction boom as property prices have risen. But 2 ation Turkish migrants still cannot speak German properly. the movement of people has not been all one way. Thanks to the But, here too, there are signs of progress. At the Rütli high shake•up in the EU’s health•insurance rules, for instance, Spain school in Neukölln, a Turkish• and Arab•dominated district in now has a ‡ourishing business looking after elderly Germans. Berlin, virtually all the students come from migrant homes. In 2006 the school achieved national notoriety, having become so Through a glass, darkly violent and dysfunctional that its teachers asked the Berlin state Yet looking around the euro zone today, darker outcomes government to close it. Now it has become a model all•day high seem much more plausible. It is all too easy to imagine the Eu• school. A cadre of support sta help with homework and extra rope of 2020 having su ered a lost decade, with no growth, an lessons in the afternoon, and grades have shot up. ever bigger debt burden and chronically high unemployment. In From mothers to migrants, Germany is faced with a long much of the continent de‡ation and a mentality resigned to de• to•do list. Whether it can act fast enough to compensate for the cline will have set in, as they did earlier in Japan. Southern Eu• demographic bust is not clear, but it seems at least to have got rope will still be down in the dumps, and even France’s economy moving. Helpfully, all the changes it needs to make are likely to will remain moribund. These countries’ capacity to grow will boost domestic spending. The growing scarcity of workers will have been permanently damaged as a generation of young peo• push up wages, leaving more disposable income. A higher la• ple have grown up without any experience of work. bour•force participation rate means increased household in• In this pessimistic scenario, the odds of political backlash comes and higher consumption. As women work more, they are high. Several southern European economies have left the sin• will spend more money on things from child care to convenience gle currency after Eurosceptic parties took power. The euro, now food. More immigration will boost demand for housing. But just con†ned to a group of northern European economies, has as important, German society will change as more people like soared, hitting the German export machine hard. German †rms Mr Medina come to call it home. 7 and banks are battling with defaulting debtors. Capital controls are ubiquitous. With fragmentation as the dominant economic theme, Europe’s post•war integration project is in tatters. And in German leadership the minds of many foreign guests at Germany’s birthday party, their hosts will bear most of the responsibility for the mess. A few may even mutter, unkindly, that Germany, for the third time Overcoming the in just over a century, has wrecked the continent. How can Europe avoid this grim outcome and improve the demons chances of a better future? What needs to be done will be diˆ• cult but not impossible. The euro zone does not need a super• state or full political union to recover its momentum. A banking A successful Europe requires a new kind of Germany union and a proper euro•wide bank restructuring will draw a line under the †nancial bust, cleaning up balance•sheets, recap• FAST•FORWARD SEVEN years to 2020, the 30th anniversa• italising viable banks and allocating losses. The common rules ry of German uni†cation (and, counting from the †rst to boost competitiveness on which Germany is so keen can be Greek rescue package, the tenth anniversary of the start of the introduced without a wholesale revision of Europe’s treaties. euro crisis). Leaders from across the European Union are arriving Sensible schemes to encourage investment in southern Europe in Berlin for Germany’s birthday celebrations. What sort of Ger• do not require the creation of a permanent transfer union. many will they be dealing with, and what sort of Europe will This special report has argued that disproportionate re• they be living in? sponsibility lies with Germany not only to lead Europe’s reform First, let your optimism run wild. Imagine that the euro agenda but also to change at home‹and the reforms needed to area is growing at a healthy pace, well into a recovery kick•start• secure Europe’s future will do a lot of good at home too. More do• ed by the comprehensive clean•up and restructuring of Euro• mestic demand will help ease the adjustment in Europe’s south• pean banks after the creation of the European banking union in ern economies, but it will also bring real gains to Germans who 2014. Southern Europe’s economies have had a complete make• have been forgoing higher living standards for a savings surplus over, with far freer labour markets, smaller, more eˆcient gov• that has been poorly invested abroad. An overhaul of the Ener• ernment and a number of bold privatisations. Unemployment giewende aiming at a more sensible pricing system, more invest• 1

The Economist June 15th 2013 13 SPECIAL REPORT GERMANY

2 ment in energy conservation and the rapid completion of a new country mentality to responsi• smart power grid will boost German growth and form the core ble leadership is similar. Even Offer to readers of a coherent European energy policy. Reforms that encourage for America it was hard to make: Reprints of this special report are available. A minimum order of five copies is required. immigration and the investment in child care and schools that Congress rejected key elements Please contact: Jill Kaletha at Foster Printing will allow women to do more paid work will bene†t both Ger• of the proposed international Tel +00(1) 219 879 9144 many and Europe. economic machinery, such as e-mail: [email protected] The question is not whether Germany can lead Europe to a the International Trade Organi• Corporate offer better future, but whether it is willing to do so. More than any• sation. But, overall, it looked be• Corporate orders of 100 copies or more are thing else, that demands a change of mindset. This special report yond narrow national interest available. We also offer a customisation has argued that Germans have a skewed view of the euro crisis to create the IMF, the World service. Please contact us to discuss your (ŒIt’s due to failures in the periphery economies); an incomplete Bank, the †xed•exchange•rate requirements. interpretation of their own economic success (ŒIt’s because we system and other pillars of the Tel +44 (0)20 7576 8148 e-mail: [email protected] tightened our belts) and limited awareness of the links between post•war economic order. For more information on how to order special their own economy and others (ŒGermany must be protected Germany does not need to reports, reprints or any copyright queries from the mess elsewhere). create a new institutional archi• you may have, please contact: tecture, as America did. The EU The Rights and Syndication Department Look outwards has plenty of that. But it needs 20 Cabot Square As a result, too many German politicians believe that a to think boldly about how the London E14 4QW large external surplus is a sign of strength to which other coun• European system, and the euro Tel +44 (0)20 7576 8148 Fax +44 (0)20 7576 8492 tries, too, should aspire, and de†ne Europe’s action plan almost zone’s economies, †t together. e-mail: [email protected] wholly in terms of what others must do. They regard their do• That means complementing www.economist.com/rights mestic decisions, whether eschewing nuclear power or bringing Mrs Merkel’s competitiveness forward their budget consolidation, as intellectually and practi• agenda with a †nancial frame• Future special reports cally distinct from the future of Europe. The narrowness of Ger• work for Europe’s peripheral The Arab spring July 13th Biodiversity September 14th many’s approach is reinforced by its emphasis on legalism rather economies, a strategy for pull• Brazil September 28th than economics. At a time of record low interest rates, for in• ing along a weakened France The world economy October 12th stance, it makes economic sense for Germany to borrow more to and a vision for rebalancing the invest in schools or in the new power grid. But the new constitu• German economy. Previous special reports and a list of forthcoming ones can be found online: tional debt brake, strictly interpreted, makes it impossible to do For the moment, there is economist.com/specialreports that without imposing spending cuts elsewhere. not much sign in Berlin of any Can this attitude change, and change in time? The shift re• bold thinking along these lines. quired is huge. Germany’s politicians must switch from a small• The government has ‡oated a country mentality to one in which their country thinks more few modest bilateral proposals in recent weeks, such as using broadly about the interests of Europe as a whole. They must do Germany’s development bank to help †nance southern Euro• so in a way that maintains support from voters who fear that †• pean †rms and to encourage investment in venture•capital nancial stability and European integration are at odds. And they funds. But so far these ideas seem to be more about softening must lead in a manner that other Europeans can accept. Germany’s image than changing its strategy. There will be no big Perhaps Germany can draw inspiration from the experi• initiatives until after the election, and whatever its outcome, ence of another hegemon, America. Having shunned global Germany’s attitude to leadership and policy towards Europe is leadership in the 1930s, America took responsibility for the inter• unlikely to change suddenly or radically. German politicians national system after the second world war. Germany’s circum• have not even begun to acknowledge the inconsistency and stances today are di erent in crucial ways: there is no military di• short•sightedness of their current approach, let alone o er a bol• mension, and the economic gap between itself and the rest of der and better one. In the short term, therefore, it is hard to see Europe is far smaller than the historic one between America and Germany doing what it needs to do if the euro is to survive and a Europe devastated by war. But the need for a shift from a small• the EU to prosper. But further ahead there is at least a chance that this might change, for two reasons. First, if Mrs Merkel wins the elec• The question tion, she will be looking for her place in the history books. She will want to be the is not one who †xed Europe, not the one who whether allowed it to fail. And second, even if Ger• many’s politicians act less boldly than Germany they should, the country is already pro• can lead grammed to change sharply over the next few years. The demographic arithmetic is Europe to virtually certain to boost domestic spend• a better ing and make German society more inter• national. By 2020 Germany will have future, but many more skilled migrants and more whether it women in the workplace. It will become more of a modern European melting pot. is willing to So the best reason to be hopeful is that, do so though the future of Europe will be made in Germany, the future of Germany will also be made in Europe. 7

14 The Economist June 15th 2013