But in an ironic twist, the feel-good triumph in Brazil may have
come at a time when Germany's new "Wirtschaftswunder", or economic
miracle, is coming to an end.
In recent weeks, the economy that proud German politicians have
taken to describing as a "growth locomotive" and "stability anchor"
for Europe, has been hit by a barrage of bad news that has surprised
even the most ardent Germany skeptics.
The big shocker came on Thursday, when the Federal Statistics Office
revealed that gross domestic product (GDP) had contracted by 0.2
percent in the second quarter.
"The euphoria that we've seen, the perception that the German
economy is booming is simply misplaced," said Marcel Fratzscher,
director of the DIW economic institute in Berlin.
So why is Germany suddenly ailing?
The standoff with Russia over Ukraine has received its fair share of
blame in the German media. But that conflict may not hit the economy
with full force until the third quarter. It was only last month that
Europe stung Moscow with economic sanctions, prompting a tit-for-tat
response from Russian President Vladimir Putin.
In reality, economists and some government officials acknowledge,
there are deeper reasons for the recent downturn. And they have
little to do with the spike in geopolitical tensions in eastern
Europe or the Middle East.
They start at home, where Chancellor Angela Merkel's abrupt exit
from nuclear energy after the Fukushima disaster in Japan and
aggressive push into renewables has unnerved German industry. A
recent overhaul of the country's complex renewable energy law has
done little to alleviate uncertainty over future policy or assuage
fears about German energy competitiveness.
"Energy intensive industries in particular have lost confidence in
the future of Germany as a business location," said Thomas Mayer, a
former chief economist at Deutsche Bank who now runs the
Cologne-based Flossbach von Storch Research Institute. "I think this
is a major issue that will burden German industry for years to
Further souring the mood among businesses has been a roll-back of
economic reforms that Merkel's predecessor Gerhard Schroeder
introduced a decade ago, and which many credit with fuelling a sharp
drop in German unemployment and a rebound in growth that began in
2006 - when Germany itself hosted (but failed to win) the World Cup.
Since coming to power in late December, Germany's left-right "grand
coalition" government has pushed through a reduction in the
retirement age for some workers and won parliamentary approval for a
nationwide minimum wage of 8.50 euros($11.40) an hour. Next on the
agenda are stricter limits on temporary workers.
The pension reform, which allows longtime workers to retire four
years early at 63, risks aggravating a skilled labor shortage in
some sectors of the economy. Ratings agency Moody's said this week
that it undermined the sustainability of the German pension system.
The unintended effect of the policies has been to discourage firms
from investing at home. Corporate investment in machinery and
equipment, for example, hit an all-time low of 6.2 percent of GDP
last year, Elga Bartsch of Morgan Stanley points out, despite solid
domestic demand dynamics, low lending rates and still-upbeat
Compounding the problem has been pronounced weakness in public
investment. A study by the DIHK Chambers of Commerce and Industry
last month said Germany was suffering from an overall investment gap
amounting to 3 percent of GDP, or 80 billion euros annually.
At roughly 17 percent of GDP, total annual investment levels in
Germany lie below those of other industrialized countries, which
average over 21 percent. In Germany's southern neighbor Austria, for
example, the level is 27 percent.
Pointing to these figures, DIHK President Eric Schweitzer likens the
current mood in Germany to that on the Titanic: "Everyone is
partying and no one sees the threat of the looming iceberg."
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In private, government officials also admit to concern. The Economy
Ministry has been examining ways to tackle Germany's investment
problem and Minister Sigmar Gabriel has invited outside experts to
discuss the matter later this month.
After his Social Democrats (SPD) pushed through the pension and
minimum wage legislation, Gabriel is trying hard to show the
business community that he is listening. Earlier this month he spent
nearly a week touring small-to-medium-sized Mittelstand companies in
"There have been periods, for example in the late 1990s, when
Germany lost its economic edge," said one government official, who
requested anonymity due to the sensitivity of the growth debate.
"Are we heading into another of these periods? There are people who
are concerned that we are."
RUSSIA GAME CHANGER
Germany still looks good compared to European partners such as
Italy, whose economy also contracted by 0.2 percent in the second
quarter, and France, which admitted this week it would miss its
deficit targets for this year after its economy stagnated in the
Part of Germany's second quarter weakness can be explained by
weather effects: the mild winter led construction firms to invest
more heavily in the first three months of the year, at the expense
of the recent quarter.
German unemployment, at a rate of 6.7 percent, is near
post-reunification lows and wages are on the rise, supporting
domestic demand, which has taken over from trade as the economy's
main growth pillar.
In contrast to some of its European counterparts, Germany's finances
are also in excellent shape.
Data released on Thursday showed total public debt - combining
federal and state governments, local authorities and the social
security system - fell last year for the first time in the post-war
era. The government's 2015 budget contains no net new borrowing for
the first time since 1969.
"It doesn't look like we're on the brink of disaster," said Andreas
Woergoetter, head of division at the economics department of the
Paris-based Organisation for Economic Cooperation and Development
Still, economists including DIW's Fratzscher believe the economy
will continue to shrink in the third quarter, putting Germany into
recession, and deepening concerns about the broader European
Woergoetter says it would be foolish to dismiss the long-term impact
of the Russia conflict, which he believes could be far bigger than
bilateral trade ties - Russia makes up only about 3 percent of total
German exports - would suggest.
"Whatever comes out of this crisis, it is a game changer because the
framework for German-Russian economic cooperation has been seriously
damaged," he said.
"Russia was an extremely profitable market. It was an investment
opportunity for which there is no replacement and now the strategic
plans of many companies will have to be rethought. That too will
contribute to the uncertainty in Germany."
(1 US dollar = 0.7469 euro)
(Editing by Jeremy Gaunt)
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