Global Report

Why Germany needs to live a little

Austerity gets a boost

Angela Merkel greets supporters after her Sept. 22 re-election (Photo: Markus Schreiber/AP)

Angela Merkel greets supporters after her Sept. 22 re-election (Photo: Markus Schreiber/AP)

One campaign poster seemed to sum up the spirit of Germany’s national elections in September: it featured a close-up of Chancellor Angela Merkel’s tented fingers, and read “Germany’s future in good hands.” Voters, who granted Merkel a historic third-term victory, apparently endorsed that view, along with the chancellor’s austerity agenda at home and in the eurozone. Further belt-tightening, though, risks keeping southern Europe in recession and could hurt Germany itself, economists fear.

The country’s economy is growing, unemployment enviably low and the budget almost balanced, all of which helped Merkel at the ballot box. But the campaign glossed over some unflattering statistics Germany must contend with: productivity growth has lagged other advanced countries for most of the past 10 years, capital investment as a share of GDP lags below 1995 levels, and 22% of all employees toil in low-wage jobs.

German manufacturing’s competitiveness is largely the product of policies that kept labour costs low, according to Sebastian Dullien, professor of economics at Berlin’s University of Applied Sciences. Public and private thriftiness also helped inflate Germany’s high current-account surpluses as the country cut spending, including on imports. Copying such policies throughout Europe would trigger a beggar-thy-neighbour race to the bottom, Dullien wrote recently.

Instead, Berlin should pour money into education, research and development, and infrastructure, which would boost productivity, lifting wages without hurting growth, argues Adam Posen, president of the Peterson Institute for International Economics. A wealthier Germany might in turn buy more from the rest of Europe, boosting beleaguered countries like Italy, Spain and Greece.

Berlin’s model, in sum, seems neither sustainable nor exportable. Germany must learn to live a little. A bit more spending from Europe’s core might be the spark that turns on a stronger eurozone recovery.