Germany At A Crossroads

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Includes: EWG
by: Joseph Shupac

Summary

Germany, which accounts for an estimated 21% of the European Union’s GDP, is now facing 5 big economic challenges.

Germany is facing economic and political diminishing returns in its eastward economic integration.

Low energy prices do not benefit Germany in the way that many think.

Germany, which accounts for an estimated 21% of the European Union's GDP and has an unemployment rate that is less than half as high as the EU average, is now facing five big economic challenges:

  1. Germany has one of the oldest populations in the world: it's old age dependency ratio is as high as Greece's and higher than any other country apart from Italy and Japan; the share of its population aged 80 or older is higher than in any European country apart from France or the "PIGS". The largest part of Germany's population is between 45-60 years old. Old age is beckoning.
  2. Whereas Britain, France, Italy, Russia, India, China, and Turkey depend on exports of goods and services to account for an estimated 20-30 percent of their GDPs, and the United States, Japan, and Brazil for just 10-20 percent, Germany gets approximately 46 percent of its GDP from exports. As economies throughout Europe and the developing world are simultaneously growing slowly right now, such a dependence on exports may not be a good thing to have.
  3. Low energy prices do not benefit Germany in the way that many think, nor does it benefit Germany's neighbours in northern Europe, central Europe, or the former Soviet Union much (see links for more: here, here, or here). According to the Wall Street Journal, oil imports account for just an estimated 2.4% percent of Germany's GDP, compared to 3-6% in Spain, Greece, Turkey, Poland, Japan, South Korea, Taiwan, and India, while, according to the World Bank, imports of energy in general account for approximately 62% percent of Germany's overall energy use, compared to 70-95% in Spain, Portugal, Italy, Turkey, South Korea, and Japan.
  4. Germany is facing economic and political diminishing returns in its eastward economic integration. In the past generation, it has looked to East Germany and Eastern Europe, but Eastern European countries are no longer so cheap; Czech Republic and Slovakia now have nominal per capita GDP's of around $19,000, for instance, up from $5,700 in 2000; Russia has reached $14,000, up from $1,800 in 2000. Increasingly, there are also political limitations of various sorts to German involvement to its east. Many Eastern European countries, for example, would rather not see the Germans and Russians become too close with one another economically, and also do not want to become German economic satellites themselves. Things may be becoming more politically fraught than they were a decade or two ago.
  5. A similar dynamic is true of Germany's domestic politics. In the 1990s, Germans could unite over the goal of German reunification, while in the 2000s, they could unite over European expansion into Eastern Europe, a region located for the most part directly on the borders of Germany or German-speaking Austria. Now, though, with both those goals having been realized to a large extent, there could be room for inter-German regionalism to become more prominent.

It has still been just 145 years since German unification, and 25 since reunification; the three-way divide between eastern Germany, western Germany, and southern Germany, aka Bavaria, may still be somewhat in play. This was seen recently, when Merkel's longstanding political coalition finally came under pressure as a result of internal opposition from Bavaria over the refugee issue. Germany is under no threat of dissolution, obviously, but regionalism could nevertheless threaten the ability of its central government to continue forming majorities, and it could threaten the ability of any majority government it does form to take decisive political action.

Germany's parliament is already regionally split to a slight degree: the Christian Social Union in Bavaria, the regional sister-party of Angela Merkel's national Christian Democratic Union, holds 7 percent of the seats in Germany's parliament. Southern German states, moreover, in particular Bavaria but also neighbouring Baden-Wurrtemberg, tend to be more right-wing in their voting patterns, whereas eastern German ones tend to be the most left-wing. (Here's an article describing some of the geographical patterns in Germany's 2013 election).

There may be other triggers for future regionalist challenges in Germany as well. If, for example, Europe's banking and political system, which is currently under pressure from struggling economies like those of Italy, Greece, and perhaps even France, ends up being badly damaged, it may hurt western or southern Germany more than eastern Germany, because Frankfurt (in central-western Germany) is Europe's banking and transportation hub, the Netherlands and Belgium (with which western Germany is close) are Europe's political and shipping hubs, southern Germany is relatively close with nearby northern Italy, and western Germany is relatively close with France. Of course, this is all extremely speculative; I am not actually predicting that these events will occur.

The Crossroads

There are, perhaps, two basic roads Germany can now go down. One is to become a more nationalist, more insular Germany. German nationalism could be used as a tool to attempt to bring about cooperation in parliament. Germany could restrict immigration flows as most other countries (and Bavaria) have wanted to do. Germany could try to use technology rather than immigration to solve its looming old-age crisis. And Germany could attempt to overcome its dependence on exports by reorienting its economy: either by having the government buy up the "surplus" goods that Germany now exports to other countries, or else by producing fewer goods and attempting the difficult task of making money in other ways instead.

On the other extreme, Germany could become even less nationalist and even less insular than it is now - and it is already quite a bit less nationalist or insular than most other countries, as a result of its 20th century history and its export-intensive economy. It could continue to welcome immigrants from places like Africa, Arabia, and Asia, which could help it to address its old-age problem and, along with the population of Turks and many other groups already living in Germany, would make Germany a globally diverse country, somewhat like Canada, Britain, and the United States are. Germany could continue to happily use the English language without being worried that this will threaten the German language, rather than move towards a linguistic protectionist model as countries like France often have. And Germany could continue to integrate economically with Eastern Europe, Russia, and Turkey, but become so non-nationalist in identity that this expansion will not be so likely to create political backlash.

Which direction will Germany choose? I suspect, regretfully, that it will be the former. Nationalism may simply be too difficult for a nation to overcome.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.