Fail­ing to build on solid foun­da­tions could come back to haunt Merkel

Irish Independent - Business Week - - BUSINESSWEEK - Olaf Stor­beck

GER­MAN Chan­cel­lor Angela Merkel’s past eco­nomic omis­sions may come back to haunt her if she wins a fourth term. Since tak­ing of­fice in 2005, she has failed to in­vest enough, tai­lor the wel­fare state to an age­ing pop­u­la­tion, or pre­pare the coun­try for costly cli­mate change tar­gets. The econ­omy will pay the price dur­ing the next down­turn.

Fault lines are cur­rently hid­den by an eco­nomic boom. Ger­man’s econ­omy grew faster than the eu­ro­zone in nine out the past 12 years. The num­ber of peo­ple in work has risen by a fifth since 2005, to 32 mil­lion. Un­em­ploy­ment is at a record low, and the gov­ern­ment ex­pects to run a bal­anced bud­get ev­ery year un­til 2021. But these achieve­ments are largely the re­sult of his­tor­i­cally low in­ter­est rates, labour mar­ket re­forms en­acted by Merkel’s pre­de­ces­sor Ger­hard Schroeder, and years of wage re­straint.

The Ger­man leader has not built on these promis­ing foun­da­tions. She failed to use good eco­nomic times to in­vest – think tank DIW Ber­lin es­ti­mates the back­log in pri­vate and pub­lic in­vest­ment is equiv­a­lent to roughly €75bn a year, or 3pc of GDP.

As a re­sult, many bridges, roads and wa­ter­ways are in poor shape. Ger­many is also lag­ging com­pa­ra­ble coun­tries when it comes to fi­bre broad­band connections, which ac­counted for less than 2pc of all broad­band sub­scrip­tions in 2016, com­pared with an av­er­age of 21pc in de­vel­oped coun­tries, OECD data shows.

The good times won’t last for­ever, es­pe­cially if out­side shocks hit the econ­omy. To make mat­ters worse, an age­ing pop­u­la­tion means Ger­many’s work­force will shrink by one mil­lion dur­ing the next par­lia­ment if work­ing pat­terns such as the labour par­tic­i­pa­tion rate re­main con­stant, DIW pre­dicts. That will de­press Ger­many’s growth po­ten­tial by 2019, ac­cord­ing to the coun­try’s cen­tral bank.

In­stead of giv­ing peo­ple in­cen­tives to work longer, Merkel’s gov­ern­ment has made it more at­trac­tive to re­tire early by low­er­ing the pen­sion age for some.

And Jan­uary’s 4pc in­crease in the min­i­mum wage may be harm­ful for low-skilled jobs, par­tic­u­larly in eastern Ger­many, where pro­duc­tiv­ity is lower. More­over, one in 10 in­dus­trial jobs is de­pen­dent on the in­ter­nal com­bus­tion engine – a technology whose long-term prospects are bleak.

As for Ger­many’s am­bi­tious cli­mate-change tar­gets, past foot-drag­ging means that the 40pc re­duc­tion in car­bon emis­sions be­tween 1990 and 2020 can only be met if brown coal mines and power plants are phased out quickly.

That could put 70,000 jobs on the line, many of them in east Ger­man re­gions that are al­ready poor.

De­spite fight­ing myr­iad fires dur­ing the financial cri­sis, Merkel has so failed to tackle the many smoul­der­ing ones at home. (Reuters Break­ing Views)

A worker pastes up a cam­paign poster for An­gel Merkel’s CDU party in Ber­lin

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