Creeping angst in Germany as economists fear best is over

BERLIN - Germany, which has long seen itself as the star pupil among debt-mired European economies, is heading for a steep decline driven by serious delusions about its own model, prominent experts are warning.

This gloom-and-doom scenario for Europe's top economic power is at the heart of a new book by Marcel Fratzscher, head of the influential German Institute for Economic Research, which is coming out Monday and already inviting wide scrutiny.

In "The Germany Illusion", Fratzscher argues that the bare facts paint an angst-inducing vision of the future in which some of the key sources of German national pride - discipline and thrift - become the tools of its undoing.

"The economy of this country is sputtering. Its growth since 2000 is weaker than the European average. Salaries have risen more slowly and poverty, on the rise, is impacting one child in five." So opens the 277-page call to action.

The reader could be forgiven for thinking the subject was any number of ailing southern European countries.

Fratzscher argues that Germany's own flattering self-image when it comes to management of its economy, a model driven by deficit-trimming and trade surpluses, is simply "dangerous".

Germany, he says, is "resting on its laurels" while the average household income has sunk three per cent since the turn of the millennium, and five per cent for the poorest citizens.

He acknowledges that the country has come a long way since it was known as the "sick man of Europe" a little over a decade ago, and bounced back from the debilitating 2009 financial crisis.

Meanwhile Chancellor Angela Merkel's left-right "grand coalition" has for next year put forward the first balanced German budget since 1969.

Enormous lack of investment

All the trumpeted achievements, however, cannot mask "the fundamental weaknesses of the German economy", notably its "enormous lack of investment".

Outlays for investment, still at 23 per cent of gross national product in the early 1990s, have now fallen to 17 per cent - markedly below the 20 per cent average for industrialised countries.

This has hobbled growth in output as well as salaries.

"The downfall of the German economy will accelerate if we do not fundamentally change the current policies," Fratzscher warns.

After watching a dreary march of negative indicators in recent months, the business editor of Germany's Die Welt and Welt am Sonntag newspapers, Olaf Gersemann, also presents a bleak outlook in a book released earlier this month, "The Germany Bubble".

We are witnessing the "swan song of a great economic nation", he warns, convinced that the country is taking advantage of a mix of "very favourable circumstances" that will "soon disappear".

Pride comes before a fall

Gersemann, like Fratzscher, frets that Germany is on its way to becoming the "sick man" again.

"Germany is hailed as the model for the world... but pride comes before a fall," he writes.

A ranking of economic growth over the last two decades puts Germany at 156th out of 166 countries, just behind Polynesian archipelago Tonga, and in the same ranks as Italy, Portugal, Ukraine, Haiti and Greece, Gersemann notes.

And despite a steep drop in the number of unemployed, many have gone back to work in part-time or temporary jobs that offer far less financial security.

Gersemann questions the credit given to former chancellor Gerhard Schroeder, a Social Democrat, for labour market reforms widely touted as restoring Germany's relative economic strength in Europe.

Gersemann argues that it was rather the country's renowned automobile industry - with champions such as Volkswagen, BMW and Daimler - and its robust machine tools sector that have been able to exploit the emergence of a large middle class in countries such as China.

Demographic collapse

The final component of a German fall from grace will be the ticking time bomb that is its shrinking population, the experts argue.

Fewer than 700,000 children are born in Germany each year, half the figure seen in the mid-1960s.

Germany in 2050 will slip from the top to become only the third most populous country in Europe, after Britain and France.

"No later than the beginning of next decade, the number of retirees will start to rise... and pensions will be paid by generations that are smaller and smaller," Gersemann said.

To turn the trend around, 400,000 to 500,000 immigrants would be needed per year - a prospect the experts say is "unrealistic".