Commentary on Political Economy

Wednesday, 24 June 2020


As can be discerned from a careful reading of this FT story, German industry and finance are still in Nazi economy mode: the mercantilist suppression of wages and consumption at home, forced undervaluation of the currency through the euro parity, and reliance on exports to third-party low-wage economies (China) that then flood the US with their cheap exports causing a current account deficit because of their open capital accounts. This abuse of international trade has got to stop! If Germany's Nazi industrial and finance as well as political descendants do not redeem and chasten themselves fast, we shall throw them back to the Phoenician era from which they say they learned! (See reference below to the Phoenicians by a proto-Nazi German industrialist.) Fair warning!

A different recovery 

The immediate outlook is a lot less bleak than it was even a month ago. But Germany’s prospects are not so encouraging over the long term. For some economists, the country’s heavy reliance on exports conceals a potential trap: the post-coronavirus world could prove hostile to open economies, like Germany’s, that depend on free trade, international supply chains and multilateral institutions, amid a burgeoning backlash against globalisation. “German growth between 2010 and 2019 was largely due to foreign trade, but you won’t see that in the coming years,” says Gabriel Felbermayr, head of the Kiel Institute for the World Economy. “Countries are putting up trade barriers. They’re encouraging ‘reshoring’ by subsidising companies that want to relocate to their home market. China and the US are decoupling. And all that really hurts Germany.” The rise of China, and its insatiable demand for German cars and machines, was one of the big drivers of Germany’s 10-year economic boom, the longest in its postwar history. Yet China’s economy contracted for the first time on record in the first quarter and “now it’s questionable whether it will grow at all in 2020”, says Mr Felbermayr. Whatever happens, it “won’t have the same pull effect that it had from 2010, in the wake of the global financial crisis”. There are other looming dangers, too. Ifo’s Mr Fuest points to the rapid upheaval that digitisation will inevitably wreak on German businesses and society, and the impact green policies to mitigate climate change will have on the automobile sector — a key pillar of Germany’s strength. He cites the 800,000 people employed in Germany’s car industry, many of them specialising in building internal combustion engines — skills that risk becoming redundant with the rise of the electric vehicle. “I’m really worried about them,” he says.

 Isabel Schnabel, a former economics professor at the University of Bonn who joined the executive board of the European Central Bank in January, says Germany will have to make a “substantial” adjustment to the new, post-coronavirus reality. But it should also seize the opportunities that this provides. “Germany will have the problem that it cannot return to the old normal, but that it will have to find a new normal,” she says. The chances are, she says, that in the aftermath of the coronavirus crisis “economic activity shifts towards certain areas that are more conducive to economic growth, like digitisation or towards a carbon-free economy,” she told the FT. “For Germany, that is one of the big challenges, given the relevance of the car industry.” Already, there are signs that the government realises it needs to seize the opportunity for change. The stimulus it passed earlier this month is built around a big temporary cut in value added tax and a €300 one-off payment for every child in the country: but it also contains a €50bn “future package” of investments in the hydrogen economy, quantum technologies and artificial intelligence. Meanwhile, the penny has dropped that Germany’s economy will not fully bounce back unless Europe as a whole also recovers. That was the reasoning behind the Franco-German proposal for a €500bn post-virus recovery fund financed with debt raised by the EU — an idea long opposed by Berlin — that will help European countries worst affected by the pandemic. “The fact that Germany is part of the EU means it must carry the financial burden that accrues,” says HAWE’s Mr Haeusgen. “That’s the principle of solidarity.”

 Grounds for optimism

 Even with dark clouds hanging over the long-term outlook, there is growing evidence that the German economy is already starting to rebound from the pandemic. The Council of Economic Experts predicted on Tuesday that although Germany’s GDP will shrink by 6.5 per cent this year, it will expand by 4.9 per cent in 2021, with a “slow recovery” setting in this summer. Monika Schnitzer, a council member, says she has noticed “a marked improvement in mood”. She points to the latest IHS Markit purchasing managers’ index, published on Tuesday, which rose from 32.8 in May to 45.8 in June — its highest level since the pandemic began (though still below the 50 threshold that indicates expanding business activity). “Electricity consumption is stabilising, the truck toll mileage index [based on the toll payments made by truck-drivers on German autobahns] is up, as are restaurant reservations,” she says. “These are all real-time indicators that provide a good snapshot of the mood and give grounds for optimism.” The better mood is reflected in the Ifo's business climate index, which rose to 86.2 points in June, up from 79.7 points in May — the biggest increase on record. Previous Ifo surveys have also reflected a big uptick in production expectations among German companies — particularly in sectors such as furniture, leather goods and footwear. Trippen, the Berlin-based craft-oriented shoe label, is one of those now beginning to look tentatively to the future. It continued to produce all the way through the shutdown, and received a €60,000 lifeline from its home state of Brandenburg. “It was just astonishing — the money was in my account within two days,” says Michael Oehler, Trippen’s co-founder. Trippen will be one of many beneficiaries of the slight uptick in consumer confidence that researchers have recorded. A closely watched index, the GfK consumption climate, is showing signs of recovery, having reached a historic low in May.

New car registrations, which dropped by 31.5 per cent in March and 31 per cent in April, were up 30 per cent in May. “The shock-induced paralysis is over and a new normality is setting in,” says Peter Fuss, an auto industry expert at EY. Even still, many companies acknowledge they’ve taken a big hit, and will take time to recover. Mr Oehler expects that Trippen’s orders for the next two-to-three seasons will be 50 per cent down on previous years, that he’ll have to shed 60 of his 120 employees and shell out more than €1m in severance payments. “Bang goes my pension,” he says. Volkswagen factory, Wolfsburg. Rapid digitisation and green policies could wreak havoc on jobs in Germany’s auto sector which employs around 800,000 people

 Mr Haeusgen says HAWE has also been through the wars: orders are down 20-25 per cent. “We’ve reached a low point, and we’ll stay there for the next two to four months,” he says. Next month, 10 per cent of the workforce will have to be furloughed. Revenues will be down 10-20 per cent this year, year on year. “But things will start to bounce back at the end of September,” he says. HAWE will, he insists, recover more quickly than it did after the global financial crisis. “The 2009 downturn hit manufacturing much harder than the corona crisis did,” he says. Economies with big service sectors — Spain and Portugal with their tourism industries, for example — will suffer. “But for us, 2020 will definitely not be as bad as 2009.”

 For Mr Altmaier, it is the strength of German exports that is key to the country’s resilience. “Since the rise of the Phoenicians more than 2,500 years ago,” the economy minister said earlier this month, “export-oriented, networked, interactive economies have always proven to be much more prosperous and successful, and had stronger growth, than autarchic societies which cut themselves off from the outside world.” 
The hope is that it is precisely this openness that will help Germany's economy to revive — and reverse the deep losses suffered in the pandemic.

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