THE BLOG
25/11/2013 06:18 GMT | Updated 25/01/2014 16:01 GMT

Jein: Germany Is Not as Strong as It Looks

What many of us think about Germany

With the so-called "peripheral" Eurozone countries - Portugal, Italy, Greece and Spain - currently struggling to pull themselves out of the economic calamities, many people look to the "core" countries, especially Germany, not only as the leader of the EU but also as the saviour of the Euro crisis. It's not hard to see where they are coming from, since Germany:

• Has the highest GDP in the EU with $3.5 trillion, about half a trillion more than France, the next largest economy. The country also has the best GDP growth among the largest European economies including France and the UK;

• Has seen its GDP grown by over 8% since 2009 and 1.2 million new jobs have been created. Indeed, in 2012, it has gotten a budget surplus of 0.2% of GDP;

• Has the second lowest unemployment rate with 5.4%. This is a notable exception in the EU: the rate in France, Italy and Spain, the next 3 largest economies in the Eurozone, is 11%, 11% and 27%, respectively. But what's more telling is youth unemployment. The jobless rate for those aged 16 to 24 stands at 8%, compared to 20% in the UK, 22% in France and a whopping 50% in Spain and 60% in Greece;

• Has a trade surplus hitting its second highest in more than 60 years in 2012. This year, it's likely to be running another surplus: at 7% of GDP, it is the comfortably the largest in the Eurozone;

• The Deutsche Bundesbank is the biggest among all the national banks to contribute to the ECB. It therefore has the loudest voice in how the bank should run the monetary policy of the Eurozone.

What few of us realise about Germany

All these indicators point to the economic - and hence the political - strength of Germany. Yet, these headline figures can be giving out the wrong perception; they divert our attention away from sensing the weaknesses of the country. And trouble is bubbling below the surface.

• This month the EU government has contested Germany for exporting too much at the expense of other Eurozone countries. Many Germans responded to what they see to be an absurd claim by saying that people outside the EU wants to buy made-in-Germany products - it can't help that their products of exceptional quality and standard. Yet, it's too easy to forget that the weakness in Euros - the result of the on-going Eurozone crisis - has made its export cheap and therefore competitive;

• Germany's strong export actually highlights its weakness rather than its strength: the country is far from investing enough. Germany's current investment represents only 17% of its GDP; even countries in more difficult economic environments such as France and Italy are investing more in their own countries. Public spending is a paltry 1.5% of GDP. The result: chronic under-investment in energy supply, transport infrastructure and education. Let's delve deeper into education. With spending at about 5.3% of GDP, it is lower than both average of 15 European countries and OECD average of 6.2%; The investment gap is particularly big in early childhood education where prospective returns on education are especially high;

• The high quality of German products is undoubtedly mostly due to the continuous investments by the private sector. Yet, the current level remains inadequate: growth in productivity has been on a decline since 1999. Regulations have discouraged private investment, especially in the services sector;

• While the Germans some of the biggest savers in the world, they are unwilling to invest it in local firms. Instead, the Germans prefer to make overseas investment. Yet, one estimate suggests that between 2006 and 2012, these investors could have lost as much as €600 billion, roughly 22% of GDP. The result is that local firms are shut out of the capital needed for investment;

• Germany's current budget surplus is not only the result of low public spending - it is also collecting a lot of taxes. Looking at the demographic pyramid, it is possible to see that, compared to other G7 countries, with the exception of Japan, the percentage of the German population in their 40's and 50's is particularly high. The good news here is that there are a lot of people currently paying taxes, contributing to the state coffer; the bad news is that without a massive boost in investment, especially in education, it will be increasingly difficult for the country to support the forthcoming old age government pension burden.

In short, the country is living on the fruits of its past labour; it must do more if it wants to ensure its economic future.

The trouble of not knowing

The fact that Germany is not as strong as we believe means that the country may not be able to lift Europe out of its economic woe. If this is really the case, we are pinning our high hope on the wrong leader. It therefore makes a lot more sense for us to come up with new ways to solve the Eurozone crisis: one that does not require Germany to take the lead. Instead, we can perhaps think of directly helping the peripheral countries stand on their own feet.

But this shift in our thinking can happen only if we start to realise that, ja, Germany is doing well for the moment, but, nein, it will be less - perhaps much less - so in the future.