German elections 2013 - boring?
Is Germany’s economy weathering the storm? This was the title of Dr Holge Sandte’s presentation in Luxembourg. The Chief European Analyst of Nordea spoke to LFF about the risks and challenges Germany is facing and the elections in September.
You moved to Copenhagen half a year ago to become Nordea’s Chief European Analyst. From your perspective as an expat, what has changed in your home country Germany?
First of all, I wasn’t aware of how much people look to Germany. I recently had a forecast meeting with colleagues from the Nordic countries and everybody waited for my view on Germany because it is the most important trading partner for many economies. Second, there are things you reflect more about once abroad such as the low home ownership ratio (only 42% of Germans live in their own home). In Denmark this figure is almost double; that is why it was difficult for me to rent a house when I moved there half a year ago.
In your presentation you mentioned that Germany’s economy was fairing relative well. What are the challenges and risks of Europe’s largest economy?
There are a number of factors supporting the German economy. The situation on the labour market is very stable with a relatively low number of unemployed people. The good news is that a lot of jobs were created even with slow economic growth. What is more, the public debt is high but under control and our export sector, which has a large exposure to emerging markets, is competitive. The fact that Germany is so export-oriented is excellent news in good times, such as when economies recovered after the financial crisis.
The German economy picked up rapidly because companies hadn’t had massive layoffs. In most cases, they managed to keep most of their employees with short-term work schemes. On the other hand, let us assume that the Chinese or US economies were slowing down dramatically, or that France was to enter a severe recession; then this export-dependency would be a negative factor. So this is clearly a short-term risk.
What is the long-term challenge for Germany?
The long-term challenge is a demographic one. Germany, along with Japan, has the oldest population in the world. In the decade to come, the working population will decrease by five and a half million people. This is equivalent to the whole of Bavaria. Growth depends on productivity and input. If your input decreases, something has to happen: you either work longer hours, start your career earlier or retire later.
Alternatively, though Germany is not perceived as being an immigrant nation, this phenomenon has helped us over the past years to have net immigration. This is good news for Germany but bad news for countries like Spain or Italy where people are emigrating.
What is Germany’s position with regard to the future of the Eurozone?
Germany has an interest in keeping the Eurozone from falling apart. My country does not share the Anglo-Saxon view that the Eurozone was a mistake from the beginning and that it should therefore break up. Though it might not be an ideal situation, I don’t think that a collapse would be a solution because this would lead to political and economic chaos.
What is your outlook on the German elections coming up on September 22, which are considered Europe’s most important in 2013?
I think that Angela Merkel will remain Chancellor, though there is no guarantee because the SPD (Social Democrats) and the Green Party could have a small majority. If Mrs Merkel makes it again, she has two options: to continue governing with the Liberals from the FDP, which I think is slightly more likely, or a grand coalition between Merkel’s conservative CDU/CSU party and the SPD.
Why do you think a coalition with the Liberals is more likely?
On voting day a lot of conservatives discover their affinity for the Liberals and give their second vote –which is the most important one – to them. But it will be a close race in any case. What worries me is that the government in power has rested on its laurels and has not enacted many reforms over the last four years. It has for instance introduced things like the “Betreuungsgeld”, a childcare subsidy that encourages women to not go to work, if I analyse this measure from an economist’s point of view.
This is not the right way to deal with the demographic problems the country is facing. You have to incentivise people to go to work. If you look at the two main parties, you can see that they are very close. It is not a 180-degree difference between the Left and the Right, like it is in Italy, but rather closer to 20 degrees.
What will happen if the next chancellor is a Social democrat?
If the SPD makes it, I have no doubt that the government will increase some taxes. Afterwards, people might feel better in the name of social justice but it will hamper economic growth. Europe is waiting for the election in Germany in September, because some things in Europe will remain at a standstill until voting day on September 22. Talking about a banking union, for example: will there be a European authority for banking recapitalisation and restructuring? Germany is opposed to that because they are afraid of giving German taxpayers’ money to Spanish banks.
You called Angela Merkel a moderator. Let us assume that Peer Steinbrück (SPD) were to become the next chancellor. How will that change Germany’s relationship with France?
First of all, both Francois Hollande and Peer Steinbrück are from the same political camp. I think that Steinbrück has more emotional ties with France. Angela Merkel was born not far from the Polish border and her grandfather was from Poland. But we should not give too much importance to that because she knows that France is an important partner.
But let us imagine a French Socialist President, a German Social democrat Chancellor and a Socialist Italian Prime minister; they could try to twist the balance between austerity and reform in Europe.
Everybody is waiting for France to make a move. What is the government in Paris waiting for?
I think that the government is afraid of the protests reforms might cause if they tried to change the pension system or tackled the labour market. Germans don’t go to the street that easily, but they did because of the "Hartz" reforms, which were meant to change the German labour market system. Imagine such a reform happening in France. I guess that the French approach is to muddle through somewhat.
The French President is probably afraid of losing the next elections; this is the difference between a politician and a statesman. But we should not forget that Gerhard Schröder is now considered a statesman. But at the time when he was the German chancellor, he was seen as a normal politician too.
Part of the situation in France is also cyclical. If the situation in Italy and Spain – France’s second and third most important trade partners – were improving, that would help the French economy too. So not only the lack of dynamism should be blamed.
On the bright side, France is attractive for investors who buy bonds. If you think that the German Bund yield is too low and Spanish yields have too high a risk, then you buy something in between and you end up with French bonds. Lucky for them, France is a big country; otherwise, speculators might have attacked it already. CW