On September 24, Germany voted to determine who will rule the country for the next four years.
As expected, Angela Merkel won a fourth term as Chancellor. Under her leadership, Germany has been a beacon of stability, prosperity and reasonable government. Real gross domestic product has recorded annual growth rates of nearly 2 percent for the past three years. In many respects, the German economy has outperformed expectations. Unemployment has fallen more sharply than anticipated, and high inward migration has delivered strong economic momentum rather than increase joblessness, as some had feared.
Economically though, Chancellor Merkel has been fortunate. A recent Economic Insight by Allianz notes that the extensive labor market and social reforms of Agenda 2010, initiated by the previous Social-Democrat/Green coalition, have played a considerable role in the economic success story of the last few years. The reform package is credited with helping turn the German labor market around. Since the reform measures were introduced, the number of people working has risen by more than 4 million, while unemployment halved. This is despite the impact of the global financial crisis, the European sovereign debt crisis and the large influx of refugees.
In the Economic Insight, suitably titled ‘Lasting Economic Success Cannot Be Taken For Granted’, authors Gregor Eder and Rolf Schneider argue that emerging cracks to ongoing prosperity can no longer be plastered over. Maintaining economic growth at rates to recent years will require considerably faster productivity growth, which implies high investment in education and state-of-the-art physical capital.
“Such investment, however, is precisely one of the current weaknesses of the German economy,” the authors write. Both the public and private sector have long undergone a pronounced investment weakness.
For example, last year, investment by the German private sector in machinery and equipment had only reached a level last seen in 2007, the year before the financial crisis hit – despite GDP being 25 percent higher. Such low investment rates are hurting Germany. It is falling down rankings on digital and infrastructural competitiveness.
With Germany’s economy expected to continue to perform strongly after the elections, the authors argue that the new government should use the next few years “to lay the foundations for the country’s lasting economic success from a position of strength.”