The end of Germany's economic miracle

Yet another recession in the eurozone looms, as German economic growth stumbles.

Any hopes that German growth is set to stage a recovery were dented by the latest set of statistics from the eurozone's largest economy. The closely watched Ifo business sentiment survey tumbled to 103.2 in October, from 104.7 the previous month. That was its sixth consecutive decline and the lowest reading since December 2012.

Both exports and domestic consumption appear to be struggling. GDP contracted in the second quarter of 2012 and many economists expect third-quarter figures due in early November to show a second successive decline. The IMF recently cut its forecast for growth in 2015 to 1.5%.

What the commentators said

"Europe's economic powerhouse is losing its lustre," said Olaf Storbeck on Breakingviews. The problems besetting Germany are structural, not cyclical.

It's easy to blame the Ukraine crisis, sanctions in Russia and sluggish growth in Europe, but that's only half the story. The benefits from reforms in 2003 that "reinvigorated that labour market" have run their course and unemployment could soon be ticking up again.

The "private sector's persistent investment freeze" drags down domestic demand and hobbles long-term growth. "Dismal demographics will dampen growth as well"; many employers are already struggling to find skilled workers.

Yet, "Angela Merkel has not woken up to the country's fading economic miracle". "Misguided policies", such as incentives for early retirement, more generous pensions for mothers, a badly designed minimum wage law and the goal of running a balanced budget threaten to "add extra burdens".

This state of affairs isn't just a problem for Germany, added The Economist. "Now that German growth has stumbled, the euro area is on the verge of tipping into its third recession in six years."

True, Berlin isn't the only one at fault; consistent reform-dodging by France and Italy shares the blame. But for the good of the whole eurozone, Germany must stop being "obsessed with deficit reduction for all governments" and increase public spending in order to avoid the looming threat of deflation.

Paradoxically, then, the one reason for hope is that if German data continues to disappoint, policymakers may finally respond to demands for a fiscal boost, said Capital Economics' Jennifer McKeown. "But such calls seem to be falling on deaf ears so far."

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Will a stronger euro ruin Europe's rally?
European stockmarkets

Will a stronger euro ruin Europe's rally?

International investors have been buying into European stocks, driving the euro higher. But that surge now risks dampening the recovery that started i…
21 Sep 2020
No deal is the best deal for Britain – and the EU too
Brexit

No deal is the best deal for Britain – and the EU too

Europe has a lot to gain from a thriving, independent Britain, says Matthew Lynn.
6 Sep 2020
Europe’s magic works better in the dark
EU Economy

Europe’s magic works better in the dark

Europe’s latest fiscal intervention looks like the kind of muddle-through that makes a United States of Europe more likely, says Merryn Somerset Webb.…
28 Aug 2020

Most Popular

How the stamp duty holiday is pushing up house prices
Stamp duty

How the stamp duty holiday is pushing up house prices

Stamp duty is an awful tax and should be replaced by something better. But its temporary removal is driving up house prices, says Merryn Somerset Webb…
25 Sep 2020
The electric-car bubble could get an awful lot bigger from here
Renewables

The electric-car bubble could get an awful lot bigger from here

The switch to electric cars is driving a huge investment bubble. But that’s not necessarily a bad thing, says John Stepek. Fortunes will be made and l…
24 Sep 2020
Can Rishi Sunak’s winter plan save the UK economy?
UK Economy

Can Rishi Sunak’s winter plan save the UK economy?

With his Winter Economic Plan, chancellor Rishi Sunak is hoping to support the economy through the dark months ahead as restrictions tighten again. Jo…
25 Sep 2020