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Karina's Column

An insider’s view on the City of London and beyond

Germany – you are the weakest link. Goodbye!


The travails of a giant

Which country, dear reader, is the weakest link in Europe? Greece with its annual debt reschedulings? Italy with a banking crisis of massive proportions? Spain, with no government in eight months?

All problematic, yes. But I would argue that it is mighty Germany, whose economy makes us all sigh with envy, which is looking shaky. Its institutions have lost credibility, its economy is facing headwinds, and its people are angry.

Let’s take those in turn.

Angela Merkel, having been in power for over a decade, certainly counts as an institution. Her approval ratings are at record lows, even as she mulls over running for a fourth term in elections next year. In the last few days, in an early September regional election, her party had its worst-ever result, polling in third place behind the AfD (Alternative for Deutscheland). The AfD with its anti-immigrant, anti-Muslim stance is making huge strides on the back of the Chancellor’s “open door” policy decision on refugees a year ago. There are now well over 1 million in the country.

Merkel’s modus operandi hasn’t changed – taking her time, seeking consensus, moving her party, the CDU, to the more popular centre ground. But public opinion has, and they see her as ineffective and misguided in her refugee strategy.

Another institution, Deutsche Bank, poses the biggest risk to the global financial system, according to the IMF. Germany’s banking system in general is not that healthy. The country is overbanked, useful for financing business, but as we saw in the financial crisis, when there aren’t enough profits at home, the temptation to buy risky assets increases.

And what about Volkswagen? An institution that stood for all we admired in German manufacturing, turns out to have been faking emission results.

That lack of trust also applies to the press. In fact, the Germans have coined a word for it, “lugenpresse”, which stands for “liar’s press”. One German, whose home borders the Austrian border, told me about television last year only showing images of refugee families with young children streaming into Germany, when in fact he was seeing young, male refugees.

On the economic front, Germany’s obsession with achieving a balanced budget means its much-vaunted infrastructure is suffering from chronic under-investment. Even Transport Minister Alexander Dobrint admits “there is a lot of catching up to do.”

The German post-war approach, a belief that policy decided between government, business and the unions, would boost growth and protect workers, has also suffered a collapse. Following the Hartz reforms, German workers accepted years of salary restraint, while during the financial crisis they agreed a shorter working week to protect jobs. Yet there is increasing inequality, automation is making inroads, and 6.1% unemployment looks likely to rise, not least because of Brexit.

Last year, Germany exported €89 billion worth of euros to the UK, with cars a major part of it. The collapse in sterling won’t help this trade. Plus, there is a deep division between German business which is looking for continued access to the UK, while German politicians have to juggle their voters’ jobs with the need to make exiting the EU as difficult as possible, to avoid other countries following suit.

If internally, there are problems, these are mirrored on the international stage. Germany is becoming ever more lonely.

US Treasury Secretary Jack Lew recently stated that there was a consensus about putting growth ahead of austerity in the developed world. Yet is not true for Germany. Finance Minister (and putative heir to Merkel), Wolfgang Schauble insists “the debt-financed growth model has reached its limits.” Or, in the phrase Germans use internally, the “black zero” is sacred.

Meanwhile, Southern Europeans say the euro is simply a devalued Deutschmark, of benefit to German exporters but a disaster for them. Germans, instead, believe they are continually bailing out the So