Angela Merkel’s economic legacy in the spotlight as challenges face her successor | Economic news

The end of an era is approaching in Germany.

Angela Merkel’s The 16-year reign as Chancellor is almost over.

However, while Ms Merkel has undeniably been a dominant figure in world politics, there is a huge debate about its economic heritage.

First of all, the positives.

As the Goldman Sachs business team points out, Germany has become considerably richer under Merkel, with its GDP growing more than its neighbors Italy and France and by roughly the same amount as the UK.

However, take demographic shifts into account – primarily the fact that Germany’s population has grown less rapidly than that of comparable economies – and the picture looks even better, with GDP per capita growing much more over the period than the Great -Brittany, the United States or the rest of the euro zone.

The team notes that although Germany has contracted more sharply during the global financial crisis than the rest of the euro area, it has grown by an average of 1.1% per year since Merkel took office. in 2005, about twice as much as the rest of the currency area.

He points out that unemployment fell to a historically low level during his tenure, without the economy overheating and inflation taking off, although much of the credit goes to Gerhard Schroder, his predecessor, whose reforms the labor market made it more attractive for millions of Germans to find a job than to stay at home on benefits.

The Goldman team also highlights the benefits of Merkel’s frugal approach to Germany’s public finances.

The outgoing Chancellor has often compared herself to the ‘schwaebische hausfrau’, or Swabian housewife, a stereotypical woman from southwestern Germany who cares about her family’s money.

Ms Merkel summed up her approach when, during the global financial crisis, she was asked about the collapse of Lehman Brothers and replied: “You should have asked a Swabian housewife.

“She would have told us that you cannot live beyond your means in the long term.”

The outgoing chancellor reduced Germany’s budget deficit and ensured that the country’s finances were in solid shape when the global financial crisis and then the COVID-19 pandemic struck, allowing Germany to pass through the twin crisis.

She also oversaw minimal disruption of the financial crisis with the so-called “Kurzarbeit” program on which Rishi Sunak, the British Chancellor, modeled the UK’s leave scheme during the pandemic.

These are all entries in the credit column, but there are also a lot of debits.

Ms Merkel’s attempts to install the values ​​of the Swabian housewife in the enlarged euro area tested the idea of ​​a European monetary union almost to destruction; undoubtedly, the single currency did not survive the crisis – certainly caused by countries like Greece which cook the books for many years – thanks to the daring action taken by Mario draghi, then President of the European Central Bank.

This action, it should not be forgotten, was taken in the face of furious opposition from the Bundesbank, the German central bank, presumably with the tacit support of Merkel.

As Roger Bootle, founder of the consultancy firm Capital Economics, puts it: “German fiscal probity has both constrained the performance of the German economy and exacerbated imbalances within the eurozone.

This fiscal conservatism has also resulted in miserable standards of public infrastructure.

During Merkel’s tenure, net public investment in Germany as a proportion of GDP was lower than that of comparable economies, notably the United States, the United Kingdom and France.

The result is that Germany’s once admired motorway network is dilapidated in places as the country lags behind its peers in its pace of digitization and broadband capacity.

The Goldman team sums it up as follows: “Germany has fallen behind in modernizing its economy.

This did not prevent Ms Merkel from be re-elected four years ago but can accumulate problems for the future.

Germany’s industrial sector remains the envy of the world, especially in areas such as car manufacturing and machine tools, while its companies spend more on research and development than their peers in Britain, the United States or elsewhere in the euro area.

But that picture is distorted by the heavy research and development spending of German automakers – masking weakness in other areas like artificial intelligence (AI), semiconductors and nanotechnology.

Deutsche Bank’s economics team delivered a damning assessment earlier this year: “Germany is falling behind as a research and innovation powerhouse.

“When it comes to green technologies, Germany is well positioned to maintain its technological leadership and reap the benefits of technology adoption by exporting competitive products.

“An important generic feature is the evolution of foreign regulatory frameworks and industrial policy initiatives. In terms of big data and AI, the picture looks less rosy.

“Germany (and the EU) is unlikely to catch up in the race for AI. In particular, they struggle to transfer AI research into viable business models and applications.

Another flaw, ironically for a country where the green movement has been stronger and more deeply rooted than most other European nations, is Merkel’s energy balance.

Its brutal decision to exit nuclear power following the disaster in the Japanese city of Fukushima in 2011 plunged the German energy giants into chaos.

The country is burning coal and in particular its dirtier version, lignite, as if it is going out of fashion.

Germans were also shocked to learn, via a series of corporate scandals, that some of their country’s most prestigious companies were not as good as they claimed.

The auto industry has been rocked by revelations that Volkswagen cheated emissions tests on its diesel vehicles as last year saw the spectacular collapse of Wirecard, one of the leading companies in the German technology sector and a component of DAX, the German equivalent of the FTSE-100.

Other once proud pillars of German industry, such as the engineering conglomerate ThyssenKrupp, were also brought to their knees.

These corporate calamities are not necessarily Ms. Merkel’s fault, but they embody the sense of drift that there has been at times.

There are therefore many challenges for Ms Merkel’s successor.

One is that the German workforce is aging faster than elsewhere.

The country’s old-age dependency ratio, a measure of the number of retired workers supported by working-age people, is much worse than in France, Britain, the United States or Canada.

This could potentially lead to higher taxes or erosion of benefits across the board.

German companies also need to invest more in AI and other new technologies and arguably reduce their dependence on exports, making German GDP more vulnerable to fluctuations in economic fortunes elsewhere in the world. than in other countries.

The biggest challenge of all is the transition to electric vehicles.

The jobs of several thousand Germans currently working in car manufacturing and its supply chain will be lost as electric vehicles require fewer parts than vehicles with internal combustion engines.

The retraining and re-qualification of those who wish to remain in the labor market, rather than take early retirement, will be essential if Germany is to avoid social upheaval.