In every problem lies an opportunity

Germans went to the polls on 24 September, but there’s no real indication that the dust is yet settling. Indeed, there could be a fair few twists and turns before its clear which politicians will occupy which posts in the next government. More pressingly it is also going to take a number of months before we know what the next government is planning to do. IASGP Chair Dan Hough talks us through what might be coming down the line next.

German elections used to have a nice rhythm to them. Parties would campaign, Germans would vote and a prospective government would then emerge out of the numbers. Then, two or three months later, a coalition agreement would be announced and German electors (who would normally have long since lost interest) would carry on more or less regardless.

The 2017 election has definitively thrown a spanner in that particular set of works. German electors didn’t bowl out their politicians in the way that French, American or arguably even British voters have done recently, but they certainly did fire in a pretty nasty yorker. German politics has just got really very interesting.

It’s not so much that there are a plethora of governing options available. There aren’t. It’s more that with four parties in power there will be more plates to keep spinning. The social liberalism of the Greens and the FDP, for example, means that culturally they are no longer as far apart as they once were, but the Greens’ willingness to spend (or ‘invest’, if you are a Green supporter) more on environmental projects simply doesn’t fit with the FDP’s election promises to cut millions from Otto Normalverbraucher’s tax burden.

Angela Merkel may subsequently be the unofficial leader of the free world, but she has some very local problems to sort out. How can she placate the CSU on the issue of immigration limits? How will she finance the ever more expensive ‘Energiewende’? How is Germany’s creaking infrastructure going to be modernised? What does Germany do in terms of the still percolating Eurocrisis? Merkel has a to do list that is not inconsequential.

Every problem brings with it opportunities
One thing this election result may nonetheless do is inadvertently push Germany to start addressing problems that very few of its politicians are currently willing to discuss. As IASGP stalwart Wade Jacoby argues in a thought-provoking paper for the Transatlantic Academy (see here), Germany’s economic dynamism has made it blind to some of the problems that have built up at home. This election result could nudge German decision-makers to start thinking about these just a little more.

As Jacoby argues, growth (in Germany, as in everywhere else) comes from a combination of three things; trade, consumption and investment. Germany is, as is widely known, a real trading power; it’s not for nothing that Germany proudly competes with China for the title of ‘Exportweltmeister’. This trade prowess has served Germany well over many years and is one of the key reasons behind Germany’s economic success.

A solid agenda for long term grown nonetheless requires a focus on the other two parts of the equation. It is there that Germany performs much less impressively. Germans (once again like the Chinese) save. A lot. Germans remain deeply suspicious not just of not saving but also of debt per se. Look at the number of places (when compared to the Anglo-Saxon countries) that still refuse to take credit cards for run of the mill transactions. Germans don’t just save for a rainy day, they prepare for bad weather of a hurricane-like proportions.

This mountain of savings ensures that consumption levels remain very low. The German state, particularly under the tutelage of Wolfgang Schaeuble in the finance ministry, further exacerbates this with its unwillingness to invest over and beyond the minimum. Sure, budgets may be balanced, but this is absolutely not a sign that all is in order. In an era of low interest rates it makes sound economic sense to fix the economic roof when the sun is shining. Don’t leave it until the weather turns and Autumn arrives. Everything gets harder to do then.

Consumption and Investment
Jacoby illustrates that many Germans don’t really appear to understand that there is a problem here. Many believe that Germany simply makes great cars, for example, and sells them at competitive prices. What’s not to like? If others are unhappy with Germany, then simply get out there and trade better yourselves. Leaving aside the fact that Germany enjoys a range of trade advantages, there will nonetheless come a time when these bountiful trade surpluses will causes problems both for Germany as well as for others. Germany needs to be ready for that to happen and to have plans to deal with it. Surpluses in one place are deficits in another, after all. And excessive amounts of either should prompt a state reaction.

And therein lies the opportunity for the soon to be cobbled together government. If the rise of the AfD tells us anything, it is that a significant portion of the German electorate is grumpy. In British-speak the JAMs (those who are ‘just about managing’) are tired of a decade of effectively no wage increases. They are unhappy with the crumbling infrastructure that makes their life difficult. They are uneasy at what looks to many like a problematic process of integrating hundreds of thousands of newly arrived immigrants.

The answer to this problem is not to be found in the watering can; German elites don’t need to sprinkle money everywhere and all be well. But targeted investments in transport, in environmental projects, in education and training will not just do Germany good, they will slowly begin to balance out those large surpluses. Furthermore, targeted wage increases will encourage those who can’t save (as they can’t afford it) to begin spending a little more. The German JAMs really do deserve it. A targeted focus on consumption does not need to lead to credit-induced bubbles; it simply helps an economy to balance itself out and reach a more sustainable footing.

The politics of focussed investment and coaxing and cajoling Germans to spend just a little more is not straightforward.  But it is downright impossible if the government remains fixated on the wrong goals.  There is a chance here for Germany’s first ‘Jamaica’ government, but if that chance is to be taken then the problem first needs to be recognised and adequately understood before it can be solved.  There was little indication that either the previous grand coalition or a hypothetical CDU/CSU-FDP government were going to do that. Maybe the new German government will surprise us and face this problem down sooner rather than later.

Dan Hough

University of Sussex

d.t.hough@sussex.ac.uk

 

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