FT SPECIAL REPORT Investing in Germany

Wednesday November 16 2016 www.ft.com/reports | @ftreports

Inside

Coffers are Demographic dilemma The country suffers from having a rapidly ageing population overflowing Page 2 Negative rates add to pressure on banks but optimism Painful restructurings hold key to survival Page 2 is wearing thin Slow progress getting refugees into work Smaller companies have been better at integrating new arrivals Populism and protectionism could derail healthy Page 3 economic progress, reports Stefan Wagstyl Decision to keep ‘dirty’ urope’s biggest urban devel- lowest level since reunification 25 years Typical presides over Germany’s turn at the at BlackRock, the US-based investment opment scheme is under way ago. Many Germans are grumbling understatement: helm of the G20 group of world econo- group, “But I am worried about the energy pays off in the German city of Ham- about the potential costs of 1m newly- Chancellor miesandpreparesfornextyear’sparlia- mediumterm.” RWE’s strategy of hiving burg alongside the busy Elbe arrived refugees but that is not stopping Angela Merkel mentary elections. She is widely Perhaps the most serious challenge is off its green assets looks E river. In place of old ware- themfrombuyingcars,foreignholidays has pointed to expectedtostandforafourthterm. rising populism, which is making itself houses and docks, construction compa- and kitchens. Low interest rates are Germany’s Not everything is plain sailing, how- felt not only in anti-immigration senti- better than Eon’s choice nies are building offices, flats, shops, feeding surges in the housing market in economic ever, even at home. Germany frets ment provoked by the arrival of around Page 4 barsandhotelswhichwillonedayserve big cities such as Berlin and Munich, as strength about Deutsche Bank, its struggling big 1m refugees since early 2015, but also in 12,000residentsand40,000workers. wellasHamburg. Markus Schreiber/AP lender, and has still to see the end of the ‘This is a supportforprotectionism.UlrichGrillo, There have been some setbacks but “Germany is at the moment in a good scandal surrounding carmaker head of the BDI, the German industry Hamburg is ploughing on with its mas- economic position,” chancellor Angela Volkswagen, its largest manufacturer, golden age association, has called for political ter plan. With a growing population and Merkel said last month with typical afteritadmittedcheatingdieselexhaust for German actionagainst“globalisationbashing”. dynamic industries, the city’s economy understatement. “That helps us with emissionstests. Populism has undermined even sup- hasplentyofmomentum. managing[our]problems.”Thegovern- Other problems are lurking for the industry. port for the dominant Ms Merkel. The What is true for Hamburg is true for ment has raised its forecast for growth future, including growing skilled labour But I am rightwing populist Alternative for Ger- Germany. Despite political and eco- ingrossdomesticproductto1.8percent shortages, an ageing population, a many (AfD) party has helped to reduce Entrepreneurs push nomic turmoil in many parts of the for 2016, from 1.7 per cent last year.The creaky transport infrastructure and worried backing for the chancellor’s ruling cen- the boundaries world, Europe’s biggest economy is government’s coffers are overflowing, technological change that could under- about the tre-right CDU/CSU bloc down from 41 Strength in engineering humming. with bumper tax revenues set to gener- mine some of Germany’s competitive per cent in the 2013 election to about 32 Exports are at record levels, while ate a fiscal surplus for the second year advantages. “This is a golden age for medium percentinrecentopinionpolls. could help in internet- domestic consumption is strong with running. German industry,” says Martin Lück, term’ Barring shocks, the CDU/CSU is of-things ventures wages rising and unemployment at its All this assists Ms Merkel as she chiefinvestmentstrategistforGermany Continuedonpage2 Page 4 2 ★ FINANCIALTIMES Wednesday 16 November 2016 Investing in Germany Why wages need to rise — and fast

fall even further. The phenomenon of level since Germany began compiling improvements in productivity. Their Incomes Pay has failed German real wages and falling prices was one reason why the thedatain2011. failure to do so since reunification has to rise in step with labour productivity GreatDepressionwassopernicious,and Though the latest figure for wages did given companies an advantage over for- productivity, giving Q4 1991=100 why Japan’s economic troubles have not take into account reasonably gener- eign competitors and may be a factor Productivity 140 provedsointractable. ous pay deals agreed with the metals behind Germany’s healthy current German businesses an (real output per hour) The threat of a vicious spiral of falling and chemicals industry, the broader account surplus: lower wages keep prices and falling wages in the eurozone trend is that pay deals in recent decades export prices down and reduce demand edge over foreign rivals, 130 is serious. Now at 0.5 per cent, inflation have undershot improvements in pro- forimportsthatconsumersmightbuyif reports Claire Jones in the eurozone has consistently under- ductivity. Some experts remain uncon- theywereearningmore. 120 shot the ECB target in recent years, vinced there is a problem. “[Wages] Atthesametime,wagesatthebottom Coffers are arioDraghi,thepresident making it desirable for wages in Ger- haverisenandtheyarerising,andfairly end of the labour market, where bar- of the European Central manytorisefasterinordertooffsetfalls substantially,”saysGregorDornbusch,a gaining by trade unions is less of a fea- Bank, seldom finds his 110 in prices and stagnant wages in less well partner at law firm Baker & McKenzie. ture, have risen at an even slower pace. overflowing views on how to boost the Real wages offpartsoftheeuroarea. “If you look at the agreements between “If you look at the worst paid jobs, such M eurozone’s recovery 100 The case for higher wages in the euro- unions and certain industries, we’re as hairdressers in East Germany, they aligned with those of the Bundesbank, zone’s economy is, Mr Draghi said in more or less at 2.5 to 3 per cent. That’s are not participating in any collective but optimism Germany’slenderinchief. September, “unquestionable”. He muchhigherthaninflation.” bargaining agreements,” says Marcel Bond buying under its quantitative 90 warned that if the environment of low MrDornbuschacknowledgesthatthe Fratzscher, head of the DIW think-tank wears thin easing programme is seen in Berlin and 1991 95 2000 05 10 16 inflation made low wages a permanent after effects of the Agenda 2010 labour in Berlin, who has written on growing Frankfurt, the country’s political and FT graphic Source: Haver Analytics feature of the labour market, it would market and welfare reforms, designed wage inequality. “That’s an important financial capitals, as a bailout of profli- become increasingly difficult for the to get people back into work, may have part of the picture.” A minimum wage, gate southern member states. Negative banktohititsinflationtarget. keptwagesdepressed.Hebelieves,how- introducedthisyear,hashelpedaddress Continuedfrompage1 interest rates are lambasted for penalis- them do their job. The ECB and other That sentiment has been echoed by ever, that the political climate favours theproblem.Originally€8.50anhour,it expected to win the 2017 elections and ing German savers and in some central banks target inflation of below, theBundesbank,whosechiefeconomist payrestraint.“Therearethosewhopre- willriseby4percentinJanuary. lead a new coalition government. “Mer- instances have been blamed for the rise but close to, 2 per cent. The reason why Jens Ulbrich suggested unions should fer Keynesian economics,”he says. “But “The minimum wage has helped 4m kel at risk? Probably not,” says Holger of nationalism. Yet while the German the target is not closer to zero is because callforbetterpaydeals. the image of the ‘Swabian housewife’ people, that’s almost 10 per cent of the Schmieding, strategist at Berenberg economic establishment has objected thatwouldexposeeconomiestotherisk The question of why German wages who prefers to keep the house in good workforce,” says Mr Fratzscher. But he Bank. “She has no obvious rival or suc- fiercely to the ECB’s economic policies, of deflation, or falling prices. While are not rising faster is one of the biggest order is prevailing . . . in politics at the addsthattheeffectonincomeshasbeen cessor. Even without Merkel, any con- there is one point both sides agree on: cheaper goods and services may sound riddles of the economy.Unemployment moment.” reduced by the government cutting ceivablecoalitioninBerlinwouldbesol- Germanwagesneedtorise—andfast. good in theory, a vicious bout of defla- isclosetoitslowestlevelsincereunifica- Some economists argue that inflation back in-work benefits. There has also idlypro-EUandpro-euro.” Central bankers care about this tion can lead to falling wages and weak tion,yetnegotiateddealssawpayriseby is the wrong measure for setting wages been a lot of avoidance of the minimum That said, the aura of invincibility becausehigherwagegrowthintheeuro- demand as people and companies delay just 0.9 per cent in the second quarter — instead, they suggest, German wages wage, he says, “with workers having to surrounding Ms Merkel has gone and zone’s largest economy would help purchases in the hope that prices will from the previous quarter — the lowest should have moved in line with workunpaidovertime”. with it much of the likelihood that the government will engage in radical mar- ket-oriented reforms of the kind which revived a stagnant German economy a decade ago. The biggest economic pol- An age-old problem Migrants boost the population but cannot easily fill Germany’s skilled labour gaps icy moves of the current parliament Immigration alone will have been a compulsory minimum wageandheftypensionshandout. notbeabletosolvethe The finance ministry calculates that problem of a rapidly Germany can afford such largesse, even if it is uncomfortable with the example ageing population it sets for weaker eurozone economies. Finance minister Wolfgang Schäuble is Despite the arrival of nearly 1m refugees on course to cut the ratio of public debt in Germany last year, the country’s to gross domestic product from more biggest demographic challenge is not Net migration in Germany has fluctuated in recent decades But recently arrived refugees are less well educated than 80 per cent six years ago to 60 per too many people but too few. Net migration (thousands) and may take longer to integrate cent in 2020 — the eurozone’s planned Education level achieved by migrants applying for asylum in 2015 (%) The population is set to decline from a 1,000 ceiling level. The budget is generating 2002 peak of 82m to 74.5m by 2050, Recent inflows have been high but migration University Full secondary Middle school Primary None* surpluses, so the government is imple- according to the United Nations. The flows are very volatile, so migrants cannot in 800 school menting tax cuts and hinting at more percentage of Germans under 15 is a predictable way solve the long-term All migrants aftertheelection.Buthandoutsarekept 600 forecast to fall to 13 per cent, among the demographic challenge Syria under tight control. Berlin continues to world’s lowest. The share of those over resist pressure from the IMF, the Euro- 400 60 is expected to rise from 27 per cent Iraq pean Commission and others to boost to 39 per cent. 200 Albania public spending and reduce the current With the economy growing and Pakistan account surplus — and so help invigor- unemployment at just 6 per cent, labour 0 Afghanistan ateothereurozoneeconomies. shortages abound. Government and Ludger Schuknecht, the finance min- 1991 2000 2010 0 20 40 60 80 100 business have responded to the * No formal schooling/other istry’s chief economist, says the idea challenge by hiring more women and Immigrants are getting better qualified Apprenticeship applications have always exceeded that public investment in Germany will more older men. After years of lagging Education levels of migrants by date of arrival (%) somehow create demand in Spain is behind Britain and France in terms of vacancies – but the gap has narrowed as applications fall mistaken. “Experience shows that this With no leaving certificate female participation in the labour force, Arrival date Number of applications and vacancies doesnotwork.” 1955–1973 1,000 Germany has almost caught up, with 54 1974–1987 Berlin is sticking to its sceptical view per cent of working-age women in 1988–1997 Fewer migrants with no of the European Central Bank’s easy 1998–2004 employment compared with 51 per cent 2005–2010 leaving certificate 800 money policies. While the government in France and 56 per cent in the UK. For Local population benefits from near-zero interest rates in male workers aged 60-64, the result has 1955–1973 Apprentice qualification its debts, savers are angry that their 1974–1987 600 been even more dramatic, with the 1988–1997 deposits generate little income and Ger- employment ratio rising from 28 per 1998–2004 man banks chafe at their wafer-thin 2005–2010 Vacancies 400 cent in 2008 to over 50 per cent. Local population Increasing These reserves, however, are now 1955–1973 proportion of University degree being exhausted, just when the working- 1974–1987 migrants with 200 age population is set to fall. So more 1988–1997 ‘Merkel at risk? Probably 1998–2004 university degrees difficult problems lie ahead: encouraging 2005–2010 0 not. She has no obvious people already approaching 65 to work Local population longer, and pushing people of all ages to 2004-5 0102030 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 rival or successor’ take a more flexible approach towards FT graphic Sources: Destatis; BAMF; Bundesagentur für Arbeit life-long training and retraining. Employers hope a steady rise in the increasing the burden on a shrinking investing in life-long education. There is Germany is rising but the most recent retire annually over the next few years. margins. Mr Schäuble has even blamed, retirement age from 65 to 67 will extend working population. In Germany the a good scenario, you can go for. There is cohort — the refugees arriving in 2015- By comparison the government has in part, the AfD’s rise on ECB president working lives, especially with the spread total cost of the elderly to the public also a bad scenario.” 16 — are an exception. While the intake been planning for a net immigration of MarioDraghi. of flexible-contract posts that appeal to purse is forecast by the European Immigration can ease the pressures includes Syrian engineers, Iranian 200,000 per annum. Last year’s refugee Despite shortages of skilled labour, older workers. The government this year Commission to rise from 24 per cent of but only when immigrants are software developers and Iraqi doctors, surge took the net immigration figure — comparatively high payroll taxes and tweaked rules to allow more pensioners gross domestic product in 2013 to 28 per successfully integrated into the jobs many others have little formal immigration minus emigration — to a complicated bureaucracy, foreign com- to continue working part-time without cent in 2040. In the UK the share is market. That is harder to do with education. Experience shows that it record 1.1m. The ensuing outcry panies are drawn to Germany’s deep suffering big pension cuts. expected to grow from 22 per cent to 24 refugees from unstable countries, in the takes five years before 50 per cent of suggests that such inflows are almost reserves of technology, sophisticated The longer people work, the more the per cent and in France to stay flat at Middle East for example, than with working-age refugees are in jobs. certainly politically and socially servicesandsafelegalenvironment. costs to the pension system is reduced. around 31 per cent. migrant workers from developed Even with successful integration, only unsustainable. Immigration can help One group of buyers — Chinese inves- Pensions and heath care costs are Ludger Schuknecht, the finance countries in, say, southern Europe. huge migrant inflows over many years manage the demographic change but it tors — is so keen that Berlin has raised expected to grow more rapidly than the ministry’s chief economist, says: “ A lot As the charts show, the typical would change the demographic outlook. is unlikely to avert it. objections to them. In the first nine long-term economic growth rate, depends of people working longer and education level of migrants into Some 500,000 people are forecast to Stefan Wagstyl monthsof2016,theybought41German enterprises worth $11.29bn — more than the cumulative total for all previ- ous years, according to Dealogic, the data company. Officials insist that Ger- many remains open but are pressing BeijingforreciprocalrightsinChina. Negative rates add to list of pressures on bankers Whileoneortwointerventionsdonot make a trend, growing calls for protec- tionism in Germany and the EU could encourage Berlin to scrutinise deals Lenders is battling to get to grips with the ever,were sufficiently unnerved that, at ECB has pushed rates ever lower, this MrFahrenschonhasacknowledgedthat withChinamoreclosely.Thedifficulties chancesandproblemsposedbydigitali- the height of the panic, the German incomestreamhasbeensqueezed,com- althoughtheyaredoingeverythingthey thathavearisennegotiatingtheplanned sation and the ever tightening pressures financeministrywasforcedtodenythat pounding the competitive pressures can to avoid it, if rates do not rise, Ger- free-tradedealswithCanadaandtheUS The biggest institutions are ofthepost-crisiswaveofregulation. Berlinwasworkingonarescueplan. that the whole German banking system many’s savings banks may have to take —CetaandTTIP—alsodonotbodewell restructuring and now By far the longest shadow is cast by The turbulence surrounding Deut- already suffers as a result of being the similarsteps—adrasticmoveinacoun- for free trade and investment. As the savings banks are set to thewoesofDeutsche.Thebankhaslong sche has made its efforts to restructure mostfragmentedintheeurozone. trywheresavingisprizedasavirtue. BDI’s Mr Grillo says, “nationalism, pro- been a crucial cog in global capital mar- itself far harder and many observers “It’s as if you woke up tomorrow and Most banks are doing all that they can tectionismandisolation”areontherise, follow, writes James Shotter kets and was one of the main pillars of expect that the bank’s high command, found that water had started flowing toavoidthiscourseofaction.Thosethat includinginGermany. the postwar German economy. After led by chief executive John Cryan, will uphill. On the first day it would still be can have increased lending volumes. Each autumn, the German newspaper posting a €6.8bn loss for 2015, however, havetorethinkitsplanoncemore. funny but our systems are not set up to Others have started to charge fees for Consumption has grown into Handelsblatt hosts a conference it has had a tumultuous 2016. Concerns The problems facing Germany’s sav- copewithit.Sluice-gateswouldn’twork. services that they previously provided a bigger driver of the economy attended by the great and good of Ger- over its comparatively weak capital ings banks — whose business model has Reservoirs would overflow,”says Georg free of charge. Some branch networks Change on previous quarter man finance, entitled “Banking in position have been compounded by been upended by the ECB’s decision to Fahrenschon, head of the German sav- arebeingscaledback. Upheaval”. Almost every year, the par- fears of potentially expensive settle- slash interest rates to historic lows and ings banks association. “And that’s how Many observers, nonetheless, think Real GDP Private consumption ticipants joke that the title has never mentsforpastmisdemeanours. into negative territory — are less dra- we experience [negative rates]. When moreradicalstepswillbeneeded.Hans- 1.0 beensoapt. InFebruary,Deutsche’sshareswereat matic. Yet the consequences could well the interest effect is removed, or even Walter Peters, a partner at Berenberg, This year, the title really was fitting. the centre of a wild sell-off in financial be profound. Germany’s savings banks becomes a punishment, then many sys- and head of the association of Ger- 0.8 Germany’stwo biggest banks, Deutsche stocks prompted by fears that it might are highly dependent on net interest tems do not work and we are sending a many’s private commercial banks, said Bank and Commerzbank,areinthe notbeabletopaycouponsonsomeofits income — the difference between the dangeroussignal.” this year that the country’s “three pil- 0.6 throes of painful restructurings. Two of hybrid capital. In September, the bank amounttheypaycustomersfordeposits In response to the pressures — which lar”bankingsystem—composedofsav- its regional banks with big maritime was plunged into deeper turmoil by and what borrowers pay them for loans weighonthelikesofDeutscheandCom- ings and regional banks, co-operative 0.4 loan books are struggling with the fall- news that the US justice department — for the bulk of their earnings. As the merzbank, and Germany’s regional banks and bigger commercial lenders — outfromthecrisisintheshippingindus- had demanded $14bn to resolve an banks — some lenders have started to mightneedstructuralchange. 0.2 try. The normally stable world of Ger- investigation into alleged mis-selling of passnegativeinterestratesontobigcor- Martin Hellmich, professor at the many’s savings and co-operative banks residential mortgage-backed securities €18.5bn 25% porate customers, as well as institu- Frankfurt School of Finance & Manage- 0 —whichaccountforthebulkofGerman intherun-uptothefinancialcrisis. tional clients such as pension funds. ment, agrees. “Branches will have to be The net gain to The drop in the -0.2 retail banking — has been upended by Deutsche has repeatedly insisted that Germany’s coffers number of 30-44 Two tiny co-operative banks have said closed.Buttherewillalsohavetobefur- theEuropeanCentralBank’sultra-loose it has no intention of settling for any- in the first half of year olds from that they will charge negative rates to ther consolidation. Not just on a 2014 15 monetary policy. Meanwhile, everyone whereclosetothisfigure.Markets,how- this year 2000 to 2015 private clients with large balances. regionallevel,butalsoacrossborders.” FT graphic Source: Deutsche Bank Wednesday 16 November 2016 ★ FINANCIALTIMES 3 Investing in Germany

All welcome: people walk past a mural outside the Foreigners Agency in Berlin, which registers and issues residency permits to immigrants — Sean Gallup/Getty Images Slow progress on getting refugees into work

“It’s an advantage to be privately offered full-time jobs in those compa- integrating and educating migrants. It That proved to be the case at Epos, a staff, while another young man from Migrants Smaller owned: you just decide that it’sgood for nies—afigurethatseemstinywhenyou began with 20 refugees selected for a 25-employee company near the south- Afghanistan is currently in a training companies can be better society and just do it,” says Regina consider that nearly a million migrants five-dayassessmenttounderstandtheir ern city of Karlsruhe, which installs programmeforelectricalengineering. Wiechens-Schwake, director of corpo- enteredEuropein2015alone. qualifications and background. Eight homeautomationandsecuritysystems. Ms Zor says much more needs to be at integrating new rate communications. “It’s different for There were about 4,000 internships were chosen for a three-month intern- Epossetupaprogrammein2013togive done but the German government has arrivals because senior a big company that is probably on the or occupational training programmes ship, which included learning how to migrants training and the possibility of setupagoodframeworkforhelpingref- stock exchange. The decision processes aimed at migrants at these companies, operate machinery and taking German a job. Nicole Zor, manager of finance ugees. She says larger, better-resourced figures get involved, says are different. [Mr Loh] can say, ‘It’s my and nearly 600 more refugees were lessons to acquire specialised jargon for andhumanresources,saysshemarched companies need to become more Patrick McGee company, my money, I can do what I undertaking a traditional paid appren- themetalindustry. down to the local jobs office and said: involved to follow the successful exam- want.’” ticeship typically lasting between two Two of the eight have since started a “OK, I have a refugee and I want to offer plessetbyothers. InJuly,manywereembarrassedwhen andthreeyears. two-year apprenticeship programme to him a training position. What can I do? “We are often critical of the big com- rivate, family-run businesses the Frankfurter Allgemeine newspaper Wolfgang Schuster, a member of the becomemachineandplantoperators. How does it work? Are there possibili- panies,” she says. “If possible we would often claim a superior struc- produced a survey showing that Ger- Lahn-Dill regional council in Hesse, has Klaus Fuest, a consultant at Roland tiestosupporthimfinancially?” take many more people . . . [but] of turetopubliclylistedcompa- many’s top public companies — the 30 said programmes aimed at teaching Berger, says small- and medium-sized The one-on-one interaction helped course we cannot take a new person nies when it comes to invest- listed on the Dax index of blue-chip migrants work skills are not only a companies can be better suited to inte- her figure out how to navigate the every week. This depends on our size P ing for the long-term. As Ger- companies — had hired just 54 refugees moral good, but something Germany grating migrants because they often bureaucracy—or“agencyjungle”asshe andwhatweneedformanpower.” many’s migrant crisis continues, some with fixed, long-term contracts. Virtu- needs: “The region [Lahn-Dill] is at haveseniorcolleagueswhoareinaposi- puts it — often cited as a key challenge Mr Fuest says most companies want are showing they are better at investing allyallofthemwereatDeutschePost. present home to 90,000 people in paid tion to work directly with the migrants alongsidelanguageandqualifications. to be involved, but need to work out insocialcapital,too. A wider and more recent study from employment. By 2030, the number of andwithlocaladministrationandhous- Epos started by establishing a two- to how. With top-down pressure from the FriedhelmLohGroup(FLG),amanu- the consultancy Roland Berger of 132 residents of working age will have ingofficials. six-week training programme, whose government, and migrants finishing facturing and services group with companies of all sizes, but including dropped by 30,000. As a result, we need “Whilebigcompanieshavethemeans main goal was find out if the applicants language and other training pro- 11,500employees,saysitwasabletoini- some of Germany’s biggest employers, controlled immigration; otherwise, our and the organisational resources or skill fitted within the company. Thirty grammes, he is optimistic the pro- tiate a programme for refugees earlier shows progress. Almost 90 per cent economyisatrisk.” sets to take in and train larger numbers migrants have gone through the pro- grammescanwork. than most simply because Friedhelm employedrefugeesinsomecapacity. FLG launched its pilot programme ofrefugees,smallercompaniesmightbe gramme, Ms Zor says. Three males aged “There is a gap between the intention Loh, the billionaire owner of the com- But details of the report are less in early 2015 with the regional better in organising the ‘full package’,” 20 to 24, hailing from Somalia, Eritrea, and the actual doing,” he says. “[But] pany,considereditaduty. inspiring: only 530 refugees had been government of Lahn-Dill, to support hesays. and Syria, have become permanent thisgapisclosing.” Country urged to spend its surplus on long-term needs

Economy Growth powers ahead of rest of eurozone but lags behind the US Real GDP (Q4 2007=100) Berlin resists economists’ US Germany Eurozone 110 calls for more investment in 105 infrastructure and schools, 100 writes Claire Jones 95 90 2007 08 09 10 11 12 13 14 15 The eurozone’s powerhouse remains Germany, its largest economy, account- Current account surpluses still mount, drawing envy and criticism ing for just under a third of all economic Trade in goods, sum over previous 12 months (€bn) activity. But the IMF is among critics Exports 1200 worried about a shortage of investment by the government and the country’s 1000 abilitytohandleitsageingpopulation. Imports For now the German economy 800 remains in rude health, so much so that 600 the country recorded a much higher- than-expected budget surplus for the 2007 08 09 10 11 12 13 14 15 first half of this year. Berlin received €18.5bn — or 1.2 per cent of gross the German labour force is already thanhere.Withinthecountry,viewsare domestic product — more than it spent declining. From 2019, the labour force more mixed. Wolfgang Schäuble, Ger- inthefirstsixmonths. will start shrinking,” says Mr many’s finance minister, has attacked The scale of the surplus has revived a Fratzscher. “The good budget situation the IMF’s position and warned at the longstanding debate between the gov- will probably last another three or four Fund’s annual meetings in Washington ernment and economists on whether years, but that won’t still be there in five this autumn that already high levels of Germany should spend more. “This is a or10years’time.” global debt, held by both governments hugely political issue here in Berlin,” Clemens Fuest, head of the Center for and companies, presented a risk to the saysMarcelFratzscher,headoftheDIW Economic Studies’ Ifo think-tank in healthoftheworldfinancialsystem. think-tank. There seems little pressure Munich,saysthecurrenteconomicsitu- “The German economy is growing to act in the short term. Germany’s ation is helped by demographics. “The above its economic capacity. What they economy is set to grow by 1.7 per cent baby boomers are at the peak of their [theECBandtheIMF]shouldsayisthat thisyear,accordingtotheBundesbank’s productivity. Can we maintain produc- Germanyshouldcapspending,”saysMr projections — a figure that is slightly tivity?Weprobablycan’t,”hesays. Fuest. “The concept of fiscal space is more than the eurozone average after Mr Fuest’s own research shows there troubling.Itisasthoughtheyaresaying, years of Germany outperforming other has been a 30 per cent drop in the any country that isn’t close to bank- economiesintheregion. number of start-ups since 2000, which ruptcyshouldgetthereassoonaspossi- Labour market reforms, made in the he sees as a signal that Germany will ble.” early 2000s, are paying off. Unemploy- struggle to replicate recent productivity But some think Germany could use ment is at post-reunification lows and gains. He points out that companies part of its budget surplus to address its labour force participation is impressive. tend to be set up by people between the loomingproblems.Partofthereasonfor The buoyancy of the labour market is ages of 30 and 44. There were 25 per its bigger-than-expected surplus is the one reason why the tax take that the cent fewer people in this age bracket in ECB’s quantitative easing programme, government received in the first half of Germanyin2015thanin2000. under which it is buying around €10bn theyearwassohigh. Economists—amongthemofficialsat ofGermangovernmentdebtamonth. The country is also benefiting from a the European Central Bank and the The German government has been macroeconomic climate where oil is International Monetary Fund — want among the fiercest critics of the central cheap and interest rates low, helping to Germany to spend more, not only to bank’s actions. Yet the ECB’s purchases boost consumption. Membership of the addresstheseproblems,buttoprovidea of government debt have lowered bor- single currency has protected exporters boost to the eurozone’seconomic recov- rowing costs for Berlin, cutting its debt fromthefatesufferedbytradersinSwit- ery too. Both multinational organisa- burden. Mr Fratzscher says the windfall zerland, who have had to adapt to a tionshavecalledonBerlintouseits“fis- should be used to repair bridges and muchstrongercurrency. calspace”toboostGermanandregional investineducationandtechnology—all Yet, longer term, the big concern is growth, which has been much slower measures which could help to raise Ger- how the German state addresses shift- mangrowthinthedecadesahead. ingdemographicsandslowproductivity “The best option is to spend the wind- growth. Society is ageing. After Japan, Clemens Fuest: fall on public investment. You need to Productivity levels thecountryhastheworld’soldestpopu- are likely to decline makeexistingworkersmoreproductive lation: 28 per cent aged 60 years or over as more baby if social security payments need to rise in2015,accordingtotheUN. boomers reach significantly because of population age- “Ifyoulookatitwithoutimmigration, retirement age ing,”hesays. 4 ★ FINANCIALTIMES Wednesday 16 November 2016 Investing in Germany RWE and Eon find fortunes diverge

“The risks are still there but they’re plants squeezed out of the market by Hoymann, a utilities analyst at Bank had expected it to be as high as €2bn — Energy Hiving off manageablenow,”hesays. heavily subsidised wind and solar Metzler, says the flotations of Innogy and said it had ruled out the option of a ‘dirty’ gas and coal-fired The restructuring has radically energy. and Uniper pale into insignificance next dilutiverightsissue. redrawn the German energy landscape Thecompanieswerealsoaffectedbya tothenuclearissue.Reachingamutual- For RWE, on the other hand, the out- power stations seems to bysplittingitintotwoparts—ostensibly decline in the wholesale price of elec- ly-acceptable solution on storage costs look has improved since Innogy’s flota- have been a mistake, a “clean” one and a “dirty” one. RWE tricity and Germany’s decision, in the “is critical for the future of both compa- tion. The listing valued Innogy at and Uniper have the old gas and coal- wake of the 2011 Fukushima disaster in nies”, he says, and “key to their sur- €20bn, more than twice RWE’s current says Guy Chazan firedpowerstationsthatsymboliseGer- Japan, to close all its nuclear power sta- vival”. market capitalisation and five times many’s fossil fuel past, while Eon and tionsby2022. It is one of the reasons why, for Eon, morethanthemarketvalueofUniper.It hree months ago, investors Innogy hold the clean, green businesses They face another hit. Last month the the spin-off of Uniper has proved to be raised €5bn, €2bn of which goes to wanting exposure to Ger- such as infrastructure and renewables. government confirmed an announce- something of a false dawn. “Eon hoped Innogy and €3bn to RWE — a useful On the up: new apartment blocks many’sutilitieshadachoice The original companies, Eon and RWE, ment that it made in April that Ger- that its shares would re-rate after the infusionofcash. of two leading companies. arestilloperatingthenuclearassetsand many’s four nuclear energy companies [Uniper] IPO,”says Roland Vetter, head Meanwhile, RWE will retain 75 per T Now,afteroneofthebiggest are liable for any bills and future — RWE and Eon along with Vattenfall of research at PraXis Partners, a utili- cent of the new company. “Then, if it Brexit boosts restructurings the German power clean-upcosts. ties-focusedinvestmentfund.“Butpeo- gets into financial trouble, or if it needs industryhasseen,theyhavefour. “We’re allowing investors the option ple have woken up to the fact that its money to help it meet its nuclear Both RWE and Eon have divided to position themselves in one or the balancesheetisstretched.” liabilities, it can just sell more booming themselves in two, creating respectively other risk class,” Johannes Teyssen, ‘RWE owns 75 per cent of The nuclear problem is one of the Innogy stakes,” says one industry con- the entities Innogy and Uniper, which chief executive of Eon, said in an inter- something worth €20bn, mainfactorsinthat. sultantwhofollowstheGermanutilities listed within less than a month of each view earlierthisyear. Eon had more bad news last week closely. housing otherontheFrankfurtstockexchange. The Innogy and Uniper listings come Eon owns 46 per cent of when it announced a widening net loss In the view of some analysts, RWE’s Suddenly, an industry that seemed to after a long period when their parent something worth €4bn’ of €9.3bn in the first nine months of strategy of hiving off the green assets — sector be in perpetual crisis has something to companies were seen as near-hopeless the year, after booking an impairment rather than following the example of bragabout.SharesinInnogyandUniper basket cases, as they staggered like and EnBW — should pay a combined charge of €6.1bn against Uniper. Eon and spinning off the conventional haverisensincetheirflotations. wounded giants from the impact of Ger- €23.6bn into a state-controlled fund to But Bernstein analyst Deepa power stations — has proved to be the For Stephan Lehrke, senior partner at many’s revolutionary embrace of cover the cost of storing Germany’s Venkateswaran says the results were moresensibleapproach. Property Boston Consulting Group, the utilities renewables — the so-called Energie- nuclear waste. This is €6.2bn more than not all bad: Eon also announced that a “RWE owns 75 per cent of something “are now looking to the future” and can wende,“energyturningpoint”. thefourhadprovisionedfor. potential capital raising to finance the that is worth €20bn, while Eon owns 46 Investors are beginning to start thinking about growth options, as RWE and Eon found the power The storage cost problem is make- additional cost of the nuclear clean-up per cent of something that is worth look beyond biggest cities as well as even mergers and acquisitions. generated from their coal and gas-fired or-break for RWE and Eon. Guido would be capped at €1.3bn — analysts €4bn,”saysMrVetter. deal volumes start to fall due to a shortage of good assets, writes James Shotter ‘Data is the new The day after the UK voted to leave the European Union was a busy one for For- mart, the German real estate developer. “Wegot three orders for condominiums in Frankfurt,” says Saul Goldstein, oil . . . who’s going whose private equity group ActivumSG runsfundsthatownFormart. Germany’s property market has been booming for several years, as to own it?’ investorslookforwaystogainexposure to the country’s stability and relatively robust economy. Between 2009 and 2015, investment in German property Entrepreneurs Venture Capital funds like Kleiner leapt sixfold to €82bn according to data Perkins,SequoiaCapitalandIndexVen- from Savills, the UK property group, tures are increasingly active in Ger- and since Britain’s vote to leave the EU Information is powering many.“It’scheaper to invest in German therehasbeenspeculationthatthemar- Berlin’s start-up industry, start-upsthanUSonesbecausethevalu- ketcouldgetanothershotinthearm. reports Guy Chazan ations are so much lower,” says Peter “Some money that was targeted to go Lennartz,EYstart-upinitiativehead. to the UK is now being targeted to go BehindanumberofGermany’srecent elsewhere,”saysGuntherDeutsch,head Deutsche Bahn, Germany’s rail opera- success stories is Rocket Internet, an of European transactions at Barings tor,prides itself on the punctuality of its incubator that has helped found dozens Real Estate Advisers, adding that Ger- trains.Yetithasnoeasywayofchecking of e-commerce start-ups. It raised manyhasbeenaparticularbeneficiary. whether the clocks in its stations are €1.6bn in an initial public offering in In three months following the UK’s showingtherighttime. October2014. referendum, Germany did indeed over- Or at least not until Relayr came Experts say the explosion of interest take Britain as Europe’sbiggest destina- along. The Berlin-based start-up in tech is partly due to a change in out- tion for property investment, drawing advised Deutsche Bahn on the installa- look among young Germans. “Becom- in €13.6bn to the UK’s €10.1bn during tion of sensors — rather like a wearable ing an entrepreneur is seen as a viable the third quarter, according to data fitness tracker — that transmit data and respected alternative to working in fromRealCapitalAnalytics. from the clocks and show when they the corporate world,” says Harry Nelis The property market in Germany — needfixing. ofAccelPartners,theSiliconValleyven- where home ownership rates are the “It’s a Fitbit for non-organic mate- turecapitalfirm. lowest in the EU and residential proper- rial,” says Jackson Bond, a Relayr co- Germany still has a lot of catching up ties are often owned by property com- founder. to do. According to start-up research panies — looks set to continue to draw Deutsche Bahn is not Relayr’s only company CB Insights, of the world’s174 investors. According to RCA, of the top satisfied customer. Schindler, the lift so-called unicorns — companies with a 10 European cities ranked by property manufacturer, uses Relayr technology valuation of a $1bn or more — only four deal volumes so far this year, four are to transfer data about the health of its areGerman. German. Experts say the decline in deal lifts and so enable “predictive mainte- One big obstacle has been the dearth volumes in the third quarter was more nance”. offunding.Thesedaysalittlemorecapi- due to reluctance to part with prime The internet of things, or IoT,is a hot- tal is flowing in, largely from family assets than any lack of demand. “The button topic in the tech scene right now. offices and German corporates worried investment pressure on institutional Hundredsofcompaniesaretryingtofig- about falling behind in the digital game. investors is enormous,” says Matthias ure out how to harness the data being But “the problem with that kind of Stanke, managing partner at Colliers in thrown off by cars, aeroplane engines money is that it’svery volatile,”says Mr Frankfurt. “If they sell an asset, then andhouseholdappliances. Heinemann. “That’s why most venture Boosting efficiency: a Trumpf staff member welding in the production hall in Ditzingen — Christoph Schmidt/dpa theyneedtofindsomewheretoreinvest “IoTisachanceforGermanytouseits capital firms in the Anglo-Saxon world themoney.” engineeringandindustrialbaseandfind trytorelyoninstitutionalmoney—pen- Wolfgang Behrendt, who heads UBS’s digital applications for that,” says Flo- sion funds and hedge funds — which is global real estate business for Emea rian Heinemann, founding partner of preciselywhat’slackinginGermany.” In-house invention turns giant’s takes a similar line. “It is getting more ProjectAVentures,whichinvestsinear- The German government aims to fill and more difficult to find good assets, ly-stagecompanies. thegap.Itcontributestoaventure-capi- eveninoff-marketdeals,”hesays. RelayrhopesitsearlysuccesswithIoT tal investment initiative known as the In response to the intense competi- continues:“Dataisthenewoil—andthe High-TechGründerfonds,whichinvests rivals into potential clients tion for properties in Germany’stop cit- question is who’s going to own it?” says seed capital in start-ups. KfW banking ies, investors are moving to less well Mr Bond. Founded in 2013, Relayr group, a state-owned development boasts some big backers, including bank, is involved, as are large compa- Industry 4.0 theirsmartphones.Whensomeone maker.Now,morethan20companies Kleiner Perkins, the Silicon Valley ven- nies such as BASF, Bayer and Daimler. movesasetofmaterialsaQRcodescan areusingitandapipelineofnewclients 3.5% 4.5% turecapitalfirm. High-Tech Gründerfonds has about Trumpf’s digital platform for markscompletionofthetask,rendering hassigneduptobenext,hesays. Rental yields on Potential prime The company’ssuccess is emblematic €576mundermanagement. paperuseless. Axoomnowhasabout100 some prime rental yields in of the spirit of Berlin, a city that has The government’s German Accelera- integrating logistics is being Trumpfclaimsthatdigitisingthese employees.TheKarlsruhe-based properties in Leipzig or become Germany’s start-up capital and tor scheme helps start-ups enter the US used by 20 other companies, taskshastrimmeddowntimeenoughto offshootmarksacompletedeparture Berlin Dresden one of Europe’s leading tech hubs. Last market by giving them access to men- boostefficiencyby10percent-20per fromhowTrumpfhasbeenmakingits year, the city’s tech companies received tors and office space in Silicon Valley says Patrick McGee cent.Theprogrammehasonlybeenin bread-and-buttersince1923. known destinations, according to Tom €2.15bn in venture capital funding, andNewYork.MrHeinemannsaysGer- placesinceMarch,butTrumpfplansto “Thisistotallychangingthegame, Leahy, director of Emea analytics at compared with €1.77bn attracted by man start-ups need more if they are to rollitouttoits71subsidiariesaround becauseithasnothingtodowiththe RCA. He says while rental yields on London’s tech companies, says profes- feel as confident as US counterparts. InGermanyitisnotuncommontocome theglobe.NicolaLeibinger-Kammüller, machinesthatwehave[built]inthe prime properties in Berlin could be as sional services firm EY. Overall, inves- “There are a lot of engineers here, but acrossanindustrialgiantthatplaysa chiefexecutiveofTrumpfsince2005, past,”MrFischersays. lowas3.5percent,inLeipzigorDresden torsput€3.1bnintoGermanstart-upsin you need angel investors, accelerators, criticalroleintheglobaleconomy. saysthecompany’ssignificantpush Theshifthashelpedtoturn itispossibletogetyieldsof4.5percent. 2015, nearly double the total for 2014, venture capital — the whole infrastruc- OneofthemisTrumpf.Andthough towardsdigitalconnectivityispartofan challengesintoopportunities.In2005, Investors are looking at assets such as EYadds. ture,”hesays.“That’sstilllacking.” youmightnotbefamiliarwiththename efforttomaintainanedge. Trumpfhadeightcompetitorsintwo- hotels and care homes, which have thereisadecentchanceyourcoffee CentraltoTrumpf’seffortstomoveto dimensionallasers.Today,ithas150, higherrunningcostsbutwhichofferthe machine,showerheadorcardoorframe Industry4.0wasthelaunch,inearly butforAxoomthesenewcompetitors prospect of higher returns. Primonial, a wasmadeusingitsproducts. 2015,ofAxoom,abrowser-baseddigital areallpotentialclients. Frenchwealthmanager,hasspentmore Contributors TheDitzingen-basedcompanyisa platformforintegratinglogistics. Axoomisdevelopingtoolstohelp than €1bn on German housing for the leaderin“high-technology”machine Axoomdigitisestasks,enablingusersto with“predictivemaintenance”.Ithas elderlyin2016. Stefan Wagstyl Alan Knox toolsandlaser-cuttingmachinesused trackinventory,reordermaterialsand alsolaunchedanappstore,partnering Germany’s huge number of migrants Chief correspondent, Germany Picture editor aroundtheworldtoformshapesoutof choosethebest-valueshipping withmorethan50companiesto — there were 442,000 asylum applica- metal.Butithasrecentlytakenanearly solutions. improveworkflowsandperhapseven tions in 2015 — also need accommoda- Claire Jones leadinIndustry4.0—theso-called StephanFischer,whojoinedTrumpf becometheAppleofmachinery tion. “The refugee influx isn’t likely to Frankfurt bureau chief For advertising details, contact: fourthindustrialrevolution,comprising to2014asheadofsoftware logistics,MrFischersays. havemuchimpactonthemiddleorhigh Vera Huebner, 0049 69 1568 5128 and theinternetofthings,machinelearning developmentsaysthatatthetimeupto Investinginnewtechnologieshas end of the market, but it will certainly James Shotter [email protected], or your usual FT and“smart”factories. 90percentoflogisticsworkwasbeing comeatacostforTrumpf.Researchand affect the low end,” says Mr Goldstein, Frankfurt correspondent representative. WhileTrumpfislargerthanthe doneonpaperandmostdigitaltasks developmentspendingjumped11.7per whose fund is financing a site in Berlin averageMittelstand(smalland weredoneinExcel. centintheyeartoJune,to€296m.That tohelpprovidetemporaryaccommoda- Patrick McGee medium-sized)company,withmore Toimproveefficiency,hesayshe isonereasonwhynetincomefell12.8 tionfornewarrivals. Frankfurt correspondent All editorial content in this report is than11,000employeesand€2.8bnin researchedpossibledigitalplatforms, percentto€235m,evenasrevenues MrStankeagrees.“Ithinkthewaveof produced by the FT. Our advertisers have annualrevenue,itsrecentexperience butquicklydiscoveredtherewerenone rose3.4percentto€2.81bn.ButTrumpf refugee arrivals will make it easier to Guy Chazan no influence over or prior sight of the couldserveasanexampleforother tochoosefrom.“Wewerecrazyenough arguestheseareboldinvestments rentoutbuildingsforwhichitwasprevi- Berlin correspondent articles. machinerycompanieswhowantto tosay,‘Let’sbuildourown,’”hesays.All designedtopayoffinthelongterm,as ouslyhardtodrumupmuchinterest.” exploittheworldofdataanalyticsto ittookwasconvincingmanagement—a Industry4.0activitiessuchasAxoom The biggest driver, however, is likely Emma Boyde enhancetheirbusinessofferings. 15-minutemeeting—andthencreating generatenewlinesofrevenue. to remain the combination of Ger- Commissioning editor All FT Reports are available at: InDitzingen,employeesonasensor- it.Fromscratch. “Theonewhoownstheplatformwill many’seconomicstabilityandrock-bot- ft.com/reports equippedshopfloormovefromone MrFischersaysitwasobviousfrom basicallydictatewhat’sgoingon,and tom interest rates that has fuelled the Steven Bird projecttoanotherafterreceiving thestartthatitcouldbeemployednot nowwehaveoneofthoseplatforms,”Mr marketforthepastfiveyears. Designer Follow us on Twitter @ftreports instructionsviacloudmessagingon onlybyTrumpfbutbyanymachinery Fischersays.“It’sthatsimple.” AdditionalreportingbyJudithEvans