Germany has emerged as a clear leader of the European nations not only for its economic strength but also for its diplomatic acumen. At the beginning of the G-7 summit in Quebec, there was a talk about inviting Russia back to the group. However, German Chancellor Angela Merkel unequivocally stated the position of European countries which are opposed to this move as long as Russia displays aggressive behaviour towards Ukraine. Germany had previously also strongly advocated for keeping the nuclear deal with Iran, and joined France and other signatories in opposing the USA. Germany and Angela Merkel are now at the forefront of the global initiative to maintain peace, stability, and prosperity in these turbulent times.
I am currently travelling in Germany and when we landed in Berlin's Tegel Airport, on a clear morning in early June, I could not wait to start recording every single detail of my experience in this amazing country. Since US dollar has been gaining against Euro, strengthened by the political crisis in Italy, we decided that this was the right time to visit Germany to gather some first-hand experience and to enhance my understanding of a nation which is the envy, as well as a target, for its trading partners, both rich and poor. I was aware that Germans suffer from an image problem. They are reputed to work hard, save much, and import little. “Germany's export-heavy economy and healthy trade surplus has clearly aggravated Trump, who feels that Europe as a whole has been taking unfair advantage of the US economy for too long now,” according to Tim Focas, a financial specialist based in the UK.
Ironically, Germany is paying the price for its own success. Only a decade ago, it faced a serious economic downturn, and it had appeared that Germany might be saddled with the problems it inherited from East Germany after reunification. But thanks to its adept economic management, strong manufacturing sector, culture of hard work and savings, and commitment to fiscal restraint, Germany is the world's fourth largest economy and the leader of Eurozone—the 19 nations that use Euro as the single currency. However, it runs a USD-65-billion trade surplus with the US, which is small in absolute terms in contrast to the Chinese surplus of over USD 365 billion, but Germany is much smaller than China. In 2017, Germany had a USD 777 “per capita trade advantage” with the US, a figure calculated by dividing the US deficit with Germany by Germany's population, in comparison with China's USD 270. Why is that a problem?
According to international monetary agencies, Germany's export surplus is indicative of stagnant wages, high savings, and low investment. Many in the international community advise Germany to raise its wages to enable its workers to buy more goods from the vulnerable EU nations such as Greece, Italy, Portugal and Spain. This year, it tightened its belt further and increased the budget surplus to 1 percent of GDP. Even the IMF, a traditional advocate of fiscal restraint, is leaning on Germany to undertake major structural reforms and to do so while the economy is strong. Christine Lagarde, IMF's Managing Director, chimed in, “The time to repair the roof is when the sun is shining.”
The new coalition government led by Chancellor Angela Merkel has set its sight on three challenges: 1) wage growth and inflation; 2) aging society, budgetary surplus; and 3) more balanced savings and investments.
During my visit to Germany, I could clearly identify the basis for Germany's solid and steady economic growth. While the most well-known German brand names are VW, BMW, Siemens and BASF, the backbone of German economy is the small and medium-sized family businesses also known as Mittelstand. These SMEs account for 99 percent of the three million businesses with less than 500 employees each. “These innovative and internationally competitive firms that we call the Mittelstand are extremely important,” says Ferdinand Fichtner, head of forecasting and economic policy at the German Institute for Economic Research in Berlin. “It's not only for export industries but for the German economy in general. It is the backbone of the economy.”
The average Germans I spoke with in Berlin, Potsdam and other cities expressed the optimism that the strength of their economy and its membership of EU will allow the nation to overcome any hit it might take from any possible trade war. German exports are doing very well, and industrial growth is robust. While the decline in the value of Euro is good for tourists and benefits German exports, its impact on growth in the rest of Europe is unclear.
In the final analysis, Chancellor Angela Merkel is a seasoned politician who can outfox any other world leader. Her coalition government has promised to invest billions of euros in digital infrastructure, education, and social housing in the coming four years.
Dr Abdullah Shibli is an economist, and Senior Research Fellow, International Sustainable Development Institute (ISDI), a think-tank in Boston, USA. His new book Economic Crosscurrents will be published later this year.