Germany is not the sick man of Europe: it is time to take a punt on Deutschland Inc
Germany is never as strong as it looks; Germany is never as weak as it looks, to borrow an old expression.
We built a myth of a uniquely competent nation during the glory years of Deutschland Inc, when Germany seemed to have found the secret of prosperous modernity, with stable coalitions, and trade unions sitting on company boards in a blissful partnership of Mitbestimmung.
Germany purred along as the world’s top exporter, engineering the most sought-after cars, with a rock-solid D-Mark managed by an unflappable Bundesbank, bequeathed to Europe’s monetary union in an act of remarkable generosity.
The narrative today has swung to the opposite extreme of a broken national model. The three-way coalition is at daggers drawn over everything. The two great Volkspartei of German post-War democracy can no longer hold the centre as the political system splinters, with the pro-Putin, pro-fossil, AfD running at 20pc on the Right and Sahra Wagenknecht’s heady brew of anti-woke and anti-foreigner socialism scrambling the electoral picture on the Left.
The railways are on strike. Farmers blockaded Frankfurt airport last week. Industrial output has been falling for seven consecutive months, and is now down 14pc since mid-2017 in a longer slump than the Great Depression. There are ever louder warnings that the German car industry may go the way of Coventry in the 1970s.
The housing market is undergoing a very unGerman boom and bust cycle, thanks to the European Central Bank’s lurch from extreme monetary creation and negative rates in 2022 to an emergency stop a year later after the economy had already hit a brick wall. Home prices have fallen 12pc from their peak. TAG Immobilien expects them to drop by 30pc.
The mood is dreadful but revulsion can be a powerful catalyst. “I like it because this level of despair is what we need to shake us out of comfortable complacency,” said Moritz Kraemer, chief economist at LBBW Bank in Stuttgart and former head of global sovereign ratings at Standard & Poors.
What is striking amid the doomism is that Germany has entirely eliminated its dependence on Russian gas – previously provided at below market cost in a political sweetheart deal with Putin – without precipitating a full-blown crisis.
Gas storage levels are safely above seasonal levels at 74pc. Benchmark TTF gas contracts for March are trading at pre-war levels of €27.77 MWh, down 90pc from the peak.
“We were all speculating that large parts of German industry would shut down. It didn’t happen,” said Dr Kraemer.
The government passed an “LNG Acceleration Act” to build terminals for liquefied natural gas at war-time speed, contracting five floating ‘regas’ ships in the meantime. Uniper rushed through the first onshore terminal from drawing board to production in a once-unthinkable ten months.
“It shows that when we really have to do something, we still can. We got through last winter with the best subsidy regime in Europe,” said Holger Schmieding, chief economist at Berenberg Bank.
After a botched start, Germany is coming good on Ukraine, cranking out ammunition for the Gepard anti-aircraft tank and for Iris-T SLM batteries – though it is still dragging its feet on Taurus cruise missiles. It is now the largest supplier of weapons in Europe by huge margin, dwarfing France or Italy twenty times over, according to the Kiel Institute. A formidable military-industrial power is awakening.
“Germany is not the sick man of Europe. It is highly-geared to the global cyclical through reliance on exports and trade with China. People are making the standard mistake of extrapolating a cyclical downturn into a structural malaise,” said Dr Schmieding.
“Have we hit bottom yet? Probably. The inventory correction is coming to an end, and it has been a really bad one for family Mittelstand firms. Structurally, Germany is in mediocre shape but that is not too bad considering the shocks that have been thrown at it,” he said.
What I notice is the stream of big investment projects in clean-tech and cutting-edge industry. Northvolt is building its next EV gigafactory in Schleswig-Holstein. Tesla’s Elon Musk is building his plant outside Berlin, and plans to raise annual car production in Germany to one million. Intel, TSMC, Infineon, ZF/Wolfspeed are all building semiconductor foundries in Silicon Saxony in a €48bn (£41bn) expansion.
There is a risk that this lurch into industrial policy will lead to rampant overcapacity. But you cannot accuse Berlin of policy paralysis or clinging to the status quo. Nor is it clear to me that Germany has lost the EV race. Volkswagen co-owns the Chinese company behind the new ‘LMFP’ manganese battery, which slashes cost while boosting range to 600 miles.
It has taken shockingly large subsidies to lure these companies, but that is the point. Germany is shaking off its Ordoliberal phobia of debt, which led to negative net public investment for much of the last twenty years and a pre-modern digital infrastructure, with a broadband ranking lower than Turkey.
“You can live off your past substance for a while but it catches up with you. The railways are atrocious, bridges are crumbling, and the locks don’t work on the canals,” said Dr Kraemer.
Our old image of Germany as a pocket superpower was never what it seemed, says Marcel Fratzscher, head of the German Institute for Economic Research (DIW) and author of The Germany Illusion. “We’re living in cloud-cuckoo land,” he once told me.
It was particularly misleading in the early years of the euro after China’s WTO accession, when Germany became supplier-in-chief of machine tools and capital goods for the industrialisation of Asia, which of course allowed Chinese companies to reverse-engineer everything and copy it.
“At that phase of its development China needed to buy a lot of stuff from Germany but the Chinese are building this stuff for themselves now, more cheaply, and sometimes better,” said Dr Kraemer.
The other pillar of that era was the Hartz IV labour reform – ie, making it easier to fire workers. It compressed wages and amounted to an ‘internal devaluation’ against the rest of the eurozone.
Germany conquered market share across Club Med with an undervalued intra-euro exchange rate, racking up a current account surplus of 8pc of GDP in what became a mercantilist trade policy. “It would not have been possible if Germany had had a floating exchange rate,” he said.
This export surge was funded by vendor financing through capital flows, leading inevitably to the eurozone debt crisis. This was then miscast as a morality play of fiscal saints and sinners.
Germany looked strong because it controlled the machinery of bail-outs, and imposed its debt-collection policies on Greece, Ireland, the Latin bloc, but that weird episode reflected the half-constructed nature of the euro experiment, launched without a lender-of-last-resort or fiscal union. In reality the Wirtschaftswunder was already fading.
Germany’s world has crashed all around since then. It lost China, it lost Russia, it lost its fat trade surplus with Britain, and it lost the combustion engine. Its workforce is shrinking by half a million a year and it is now well into the Japanese phase of its demographic crisis.
But it is still standing and has shed most illusions. Its leaders are grasping the nettle with impressively Teutonic determination. There is no going back to boom conditions but, in trader parlance, Germany is underloved and oversold.
It is time to take a punt on Deutschland Inc.
