ECONOMY

The Merkel era in charts: what changed in Germany?

In her 16 years as German chancellor, Angela Merkel has seen four US and French presidents, five UK prime ministers and nine Italian and Japanese premiers. Sometimes described as the most powerful woman in the world, she has also presided over a national economic revival. Since 2005, Germany has moved from being the “sick man of Europe” to become an economic powerhouse.

Perhaps most remarkable of all, Merkel, who enjoys an 80 per cent popularity rating, has overseen vastly expanded job opportunities for women and the old, all while taking in more than a million refugees.

Yet the legacy Merkel leaves Germany after the September federal election is mixed. A common criticism is that while she has proved a deft crisis manager, her three terms as chancellor lacked vision and left Germany unprepared for a greener and more digitised world.

An economic “miracle”

Since 2005, German gross domestic product per capita has risen twice as fast as in the UK, Canada, Japan or France.

Today, Germans can revel in what Carsten Brzeski, head of macro research at ING, calls Germany’s “second Wirtschaftswunder”, or economic miracle. With unemployment near a two-decade low, nearly 70 per cent of Germans say they are happy with their economic situation

However, not all of that success is thanks to Merkel. Much of its groundwork was laid with reforms by her predecessor, Gerhard Schroeder, said Neville Hill, chief European economist at Credit Suisse. Germany’s second economic miracle happened “without Merkel’s government doing . . . anything”, added Christian Odendahl, chief economist at the Centre for European Reform.

Furthermore, German manufacturing, which now accounts for 40 per cent of all eurozone output, piggy backed on China’s rise. Today, German dependence on China as an export market is uniquely high in the eurozone

Line chart of % of goods exports to China, rolling 12-month average showing German reliance on exports to China is the EU's highest

Still, Merkel did not just stand by as Germany grew rich. Her response to the 2009 financial crisis, such as a cash-for-clunkers scheme that supported car sales, helped to shelter the economy. So too did her decision to funnel billions of euros into Germany’s Kurzarbeit program, a government unemployment insurance system.

One consequence of that has been Germany’s success in creating jobs.

German employment rates have increased among most groups. 4 charts showing employment rates %, rolling 4-quarters for women, foreign-born people, older people (65-69) and total employment for 20-64 year olds

Jobs, jobs and more jobs

Arguably, the Merkel era’s biggest achievement has been an extraordinary rate of job creation — especially for women. Germany today has the highest rate of female labour force participation among all G7 countries, helped by improved childcare, said Oliver Rakau, lead German economist at the consultancy Oxford Economics.

Line chart of women aged 25 to 64 years , % showing German female labour participation tops all G7 countries

Just as remarkably, employment increased among immigrants. It took courage for Merkel to stick to her 2015 policy that brought in and then integrated over 1m refugees fleeing war in Syria, Afghanistan and Iraq. As she once put it, “we can do this”. Then she did.

Column chart of Applicants in Europe, '000 showing Merkel opened Germany's doors to asylum seekers

The same is not true, though, for the quality of employment. A high share of workers remain in low earning jobs, with little improvement over the last two decades. Many women’s jobs also remain part time, and only one company in Germany’s blue-chip Dax index has a female chief executive.

Little debt, but not much vision or investment either

Despite the pandemic, Germany is now almost as rich as it has ever been. Government accounts are broadly healthy with relatively low levels of debt, in part thanks to the 2009 balanced budget law.

But, by the same token, with everything seemingly going so well, “the German economic boat was not rocked by grand vision” said Katharina Utermöhl, senior economist at Allianz. Despite the growth and rise in jobs, there has been little modernisation. Critics add that low rates of public investment have left the country ill-prepared for the future.

Line chart of general government gross fixed capital formation, % of GDP showing German public investment is weaker than its peers

The country’s shift to renewable energy accelerated after the 2011 Fukushima nuclear reactor incident and with Germany’s more recent plan to phase out coal power by 2035. Even so, the country lags EU peers.

Its per capita greenhouse gas emissions are above EU averages, it has a lower share of energy from renewable sources, and also higher CO2 emissions from new passenger cars.

Germany ranks poorly on many green measures Average CO2 emissions per km from new passenger cars share of renewable energy in transport Greenhouse gases (tonnes per capita)

Much the same is true of Germany’s shift to the digital economy. Lack of investment has led to low penetration of high-speed broadband, an urban-rural divide in connection speeds and below-average mobile broadband data consumption.

All these sectors “were not given the necessary attention”, Odendahl said. “The lack of investment has probably been the biggest weakness of Merkel’s economic policy legacy,” Brzeski added.

Bar chart of EU digital economy and society sub-indices, 2020 showing Germany lags behind in many measures of digitalisation

Even before the pandemic, Germany needed an estimated €450bn of public investment to begin to decarbonise, improve communications, boost education and strengthen infrastructure — which failed to contain this summer’s floods. Indeed, the need for more investment has become a rallying cry among some of the candidates now vying to succeed Merkel.

“The Covid-19 crisis put a magnifying glass on [Merkel’s] shortcomings which the incoming government will need to address to ensure that the green and digital transition are a success,” Utermöhl said.

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