Germany has an economic model of “I’m all right Jack”

There is much to consider right now in the outlook for Europe and the Euro area’s largest economy. A developing theme for 2015 has been the decline in world trade prospects that I discussed on the 26th of August with this currently symbolised by the Baltic Dry Index for shipping rates which at 881 is some 14% below the level of one year ago. This matters a lot for a country which runs such a large export surplus and of course is entwined with the apparent slow down in the economy of China. According to the German statistics office the last year there was a trade deficit was 1951 and last year saw a record trade surplus of 216.9 billion Euros.

Volkswagen Crisis

Part of the reason for Germany’s trade surplus has been its reputation for quality engineering which going forwards has to have been dented by the Volkswagen scandal. You do not need to take my word for it just remember the phrase “never believe anything until it is officially denied” as you read this from the BBC below.

The Volkswagen emissions scandal was a “dramatic event” but would not inflict lasting damage on Germany’s reputation, Angela Merkel has said.

I am sure that Volkswagen was not alone as other car manufacturers produced cars with similar and in some cases better emissions performances.  Putting this into context it has a share price of 100 now as opposed to the peak of 254 in August.

Monetary Policy

We can add the Volkswagen effect as a factor for monetary policy too as it has impacted on the Dax equity index and we know that central banks like to quote “wealth effects” from higher equity markets. However the Dax at 9747 is now (just) down in 2015 as well as being around 20% lower than this years highs and only 6% up on a year ago. Something of a disappointment for the QE (Quantitative Easing) policy of the ECB and not something to boast about at central banking dinner parties.

Indeed the ECB may be wondering what bang it is getting for its buck or rather Euro in Germany. It has purchased some 80.8 billion Euros of German government bonds including some 11.8 billion Euros in September alone. Indeed Euro area taxpayers may wonder why they are giving an implicit subsidy to Germany? This is because all the way out to the 5 year maturity the yields are negative and the ECB will therefore take a loss on bonds held to maturity with the German Treasury making a corresponding profit. Mostly this will be transferred to the German Bundesbank as we see yet another example of “innovative” modern finance at the central banking level.

There is of course the elephant in the room which is did Germany need QE? If you take the view that the Euro project for Germany was a way of getting a more competitive exchange-rate for its exporters then it will welcome the around 6% lower trade weighted exchange rate it  has brought. However some care is needed here as since QE actually began it has sung along to The Detroit Spinners.

I’m working my way back to you, babe

To get the 6% fall I am allowing for the announcement/expectation effect and going into a type of alternate universe where something which has yet to happen has an effect.

Population and Migration

This is quite a double-edged sword right now. Germany does have its own demographic issues along the lines of the Japanese ones I analysed yesterday albeit not as severe. In terms of the percentage of the population over 65 Germany had 21.1% at the end of 2014 as opposed to 19.9% in 2007 or is where Japan was in 2007 (h/t Vconomics). We will see if it has the acceleration Japan has seen since (25.8% now). For those wondering the UK is at 17.5%.  On longer-term grounds getting in migrants is a bonus but of course the recent road has been a bit more than bumpy. From Bloomberg.

With an estimated 800,000 people seeking shelter in Germany this year, the government has earmarked more than 6 billion euros ($6.7 billion).

The situation is in a state of flux with some reports saying that 1.5 million are now expected. As we have seen in the UK this poses all sorts of questions for schools and hospitals for example. It also assumes that they are coming to work rather than for other reasons. Accordingly the jury is out here. In the longer-term if people settle it is indeed a win for Germany but if they do not it will be an example of where rising GDP can be as much of a problem as a benefit.

The Economy

It was only a few short weeks ago that I pointed out that in 2015 so far the Greek economy has grown faster than that of Germany! That will end in the third quarter as the Greek economy shrinks but what is the outlook for Germany?

Business Surveys

The Markit Purchasing Managers Indices series has completed this morning so let us investigate.

Germany’s manufacturing sector lost some of its growth momentum in September, with the headline PMI down slightly since August. Nevertheless, the average for the third quarter as a whole was the best in over a year,

The results from the Services PMI come on the back of positive manufacturing numbers, suggesting that the upturn in Germany’s private sector remains broad-based. The data are consistent with moderate GDP growth in the third quarter.

German retailers reported further sales growth in September. Despite the rate of increase easing to a three-month low, the average reading for the third quarter was the best in almost nine years.

These show that Germany had a good third quarter for the year but that there was something of a slow down in growth in September. Actually the September dip was seen by quite a few countries including the UK.

Official Data

This told a somewhat different story this morning.

the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing in August 2015 decreased a seasonally and working-day adjusted 1.8% on July 2015. In July 2015, the decrease on the previous month showed a corrected –2.2% (primary –1.4%).

Previously if we allow for the inevitable monthly fluctuations it had been heading upwards but as you can see there will need to be quite a rise in September for the third quarter of 2015 to be even flat let alone the 3% growth of the previous one. So we have quite a different picture is we compare it to the Markit business surveys.


If we are looking for stereotypes we can look at Kraftwerk who spent up to 22 minutes in the song Autobahn in essence telling us this.

We drive, drive, drive on the motorway

At least the Tom Robinson Band offered some lyrical variety in 2-4-6-8 Motorway! But yesterday we saw the Chief Economist of the German Finance Ministry in similar vein in the Financial Times.

Such an approach is also needed for public finances. Nations such as Germany have a strategy geared to­wards resilience, but face criticism for it.

However he also made some extraordinary observations.

Germany’s sound public finances are also the basis for European stability.

This skips past the role of the German economic model in creating the crisis but even this is dwarfed by this bit.

The myopia in macroeconomic policy contrasts with much more convincing global action to repair the banking sector.

Deutsche Bank anyone?

So Germany seems set to continue with its model of an artificially lower currency via its membership of the Euro (just imagine where a German Deutschmark would be now!) and export surpluses. If the migrant crisis provides it with a new labour supply then its future may be kicked like a can around a decade forwards. There are dangers from the Chinese slow down but perhaps the ECB will respond by pushing the Euro lower. The trouble is that one of the ways that the world got into its current malaise was via imbalances like the German trade surplus. It speaks for itself that it was 195.3 billion Euros in 2007 and 216.9 billion in 2014.

What is the German for I’m all right Jack?


17 thoughts on “Germany has an economic model of “I’m all right Jack”

  1. Great article, as usual, Shaun. The odd thing to me is how muted opposition is to the German juggernaut. There seems to be no sense that I can discern that the French/Italians/Spanish governments want to change the EU at all. I know that you don’t do politics, but the “I’m all right Jack” German attitude has severe implications for others in the EU and especially those in the Eurozone.
    The recent immigration crisis may succeed, however, where economics has not, as it became rather obvious that Frau Merkel cares not a hoot what any other country thinks on that subject.
    We live in interesting times.

    • Hi James and thank you.

      If we just stick to the economics it is plain that pre credit crunch ECB monetary was Bundesbank driven and at best a form of Bundesbank-lite. Since the Euro crisis there have been plenty of protestations about defeats for it in the various bailouts but it has continued to provide Germany’s industrial sector with a much lower exchange rate than it would have had otherwise. Can you imagine how large the Dm Carry Trade might have been? So it probably thinks that it is still winning.

    • Hi ChrisL

      Would it claim that as a currency area it has a relatively lower surplus and hide under the Euro banner one more time? Actually I think that the deficit nations also need to consider their behaviour which has near the top the UK and US as there are two sides to this issue. This lunchtime reminded us.

      “The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that the goods and services deficit was $48.3 billion in August, up $6.5 billion from $41.8 billion in July, revised.”

      Also the numbers need revision in the UK as I pointed out to the Bean Economic Review as we do not have much of a grip on the service sectors exports.

      Mind you it would be a nice change for Germany to lose on penalties…

    • That surplus may deceive. Much of those exports are on the TARGET tab – meaning that Germany has a large credit and Greece has red ink -> should Grexit and default happen, that tab won’t get paid ….

  2. small point Shaun but immigration is not the panacea thats its made out

    very doubtful theory or really posits are used to support it

    in the short term businesses do get access to cheaper labour ( I contend that that isnt always in the best interest of those aready there, new Germans and old alike ) but they are citizens as well and get to get old and have kids and buy houses

    and therefore cost as well

    And anyway I have an idea for Merkel – adopt India !

    yes over night Germany will have over a billion more citizens ! all cheap !

    Bigger GDP !

    whats not to love ?


    • Immigration is a sort of human Ponzi scheme, where the next generation must be ever larger than the one before to pay for the ageing population.

  3. Thanks for this interesting post. Clearly Germany needs to expand domestic demand and reduce its CA surplus in order for the Eurozone to recover without draining demand from the rest of the world. Do you think there are any automatic mechanisms which could make this happen, given that an expansionary fiscal policy is apparently politically impossible? A fall in private savings, and a rise in consumption and investment would surely help the economy to rebalance and benefit the ROW, but it is not clear to me how this might happen.

    • Hi Nick Johnson and welcome to the comments section

      One argument from the past is that Germany needs to raise its level of real wages. Actually there have been a few hints of that happening. The catch is that one of the themes of the credit crunch era and indeed the preceding period is an increasingly difficult path for real wages. Could Germany maintain it?

      The other way would be for it to abandon its plan and run a fiscal deficit as there is plenty of scope up to the Euro area limit of 3% per annum. Maybe the migrant crisis is being used as a route towards that trying to circumvent the political opposition you mention.

      • Hi thanks for your reply. Higher wages and consumption and lower private savings relative to investment must surely be part of the solution to the imbalances. The unions could help in this. And if wage increases match productivity then competitiveness need not be harmed. Am I right in thinking that they lagged behind in the 2000s or has productivity growth been poor as well? And now it seems that Germany’s weakness in domestic demand is catching up with it as China and other export markets slow. Somebody surely has to realise sooner or later that we can’t all export our way to prosperity! In the UK we have the opposite problem. Domestic demand is fairly healthy, while foreign demand has been weak, leading to large current account deficit, although it has improved recently.

  4. Hi Shaun,

    Great article that hits the nail on the head.

    VW is like the Bundesbank, they both got to number one by cheating. VW as the number 1 volume car manufacturer and the Bundesbank by breaking EU agreements on money expansion rates and inflation, to increase their surplus and competitive advantage and to consolidate Germany as the leading Euro economy and German Hegemony.

    As soon as Merkel opened the gates for the Syrian refugees I said she has just cured there demographic problems. The majority of the refugees are also the from the better educated more affluent families, who I’m sure are bring many useful skills to Europe. Where birth rates show that Europeans largely can’t be bothered to breed anymore to provide the next generation(s), then it is essential to accept increasing numbers of people from countries that have high birth rates to keep our Ponzi European welfare and pensions systems going. All of us will be the most expensive burden on the state once we have retired and need our pensions and expensive state provided care funded by younger tax-paying workers.

    The exploited benefits of the Euro to Germany have to a lesser or greater extent been at the expense of the other Euro member countries and their industrial bases and has had the opposite effect to that intended of ever closer political union of driving countries apart with much stronger look after number one at anybody elses expense attitudes.

    Germany is doing things (to the disadvantage of other EU and Euro nations), to further increase their position as the leading country in Europe, which may well long term end in tears. Nord stream 2 gas pipeline project is a good example, where Nord stream 1 is only running at 50% capacity and Nord stream 2 will double the capacity. This multi-billion Euro project only makes sense if Germany supplies all of the Russian gas to Western Europe and gets all of the gas transit fees currently earned by most East European countries. Poland is leading the fight against this project within the EU where it is a duplication of existing capacity and Germany’s fee gain will be at theirs and most other Eastern European countries expense. This may well prove to be a Kiel canal completion moment, where the great Lord Fisher saw the dangers and geared the Royal Navy’s buildup and modernization program around this saying we will be at war once it is completed. He was one month out, it was finished in July 1914 and we and France were at war in August! Incidentally, the country currently with the fastest growing defense budget in Western Europe is Poland along with the Baltic states!

    • Hi Rods,

      One of my contentions is the new citizens quickly become the old citizens and as Western Kulture ( correct spelling ! ) encourages “self” and not family then they too will not breed

      Not all groups will start that way but 2nd 3rd and then 4th generation will

      then as James pointed out , it becomes ever more important and economic imperative to get more young skilled people in , whilst the last lot are still here wanting the same bennies as the previous last lot ….. rinse and repeat

      perhaps it was wrong to curb smoking …… if you see the economic side …


  5. Hello Shaun

    On this point

    “The trouble is that one of the ways that the world got into its current malaise was via imbalances like the German trade surplus. It speaks for itself that it was 195.3 billion Euros in 2007 and 216.9 billion in 2014.”

    Isnt that like California to USA and London to the UK ?

    This either calls for Germany to leave the Eurozone , or for greater fiscal union and all of us being the Greater Germans ?

    interesting times


    Ps: why does Germany need Syrians ? because wasnt Bulgaria, Poland and Ukraine ….. ah yes Ukraine got sorta blown out by that war and even Turkey got refused ……

    • Hi Forbin

      In many ways yes it is but as you are well aware there is both fiscal and political union in your two examples. Is one allowed to say these days that the migrant policy is a sort of reverse lebensraum?

      Meanwhile in the background oil is recovering some of its losses and Brent Crude has passed not only US $50 but US $51 today…..

  6. and yes this bit was n’t written correctly

    “The myopia in macroeconomic policy contrasts with much more convincing global action to repair the banking sector.”

    should be

    ” The much more convincing global action in macroeconomic policy (!) contrasts with the myopia to repair the banking sector.”

    better !


  7. Hi Shaun

    You are right about Germany but I can’t see this lasting.

    I cannot for the life of me see the Euro as sustainable and, with the attitude of the Germans in your quotes, even less so. At some point the Euro is going to be restructured/ fail and this is unlikely to redound to Germany’s advantage, as you imply ( if the Euro goes the DM rockets).

    With regard to immigration as some posters have said it is a type of Ponzi scheme which can kick the can down the road – but with uncertain results.

    At the end of the day, as with Japan, you are stuck with a declining population which means difficulties of adjustment and, for all the muted triumphalism now, I cant see these difficulties being sidestepped easily. Few of the west European countries will have an easy ride in the next twenty years and Germany is no exception.

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