FRANKFURT — Long one of the globe’s economic stars, Germany is on a brink of a reversal of fortune which some fear imperils the prosperity built by its post-war generation.
While on the surface, the German economic engine is purring, a recent reversal in exports and steep stock price falls betray deep-seated problems in the continent’s most populous and industrious country, a central pillar of the European Union.
In May, Europe’s biggest economy imported more than it exported for the first time in three decades, breaking a winning streak as “Exportweltmeister” or “global export champion” since the country’s reunification.
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Finance minister Christian Lindner compared it with a “profit warning” – a red alert companies issue if earnings are set to disappoint. Selling more than it buys has been a central tenet of Germany’s ascent to the global economic elite.(Graphic https://tmsnrt.rs/3nHJ7eX)
Just weeks earlier, on the same day as Berlin edged towards rationing energy, shares in Deutsche Bank and Commerzbank , the country’s flagship lenders and bellwethers for its economy, tumbled around 12%.
German regulators put that collapse down to fears for the country’s economy in the face of curbs in the supply of Russian gas that underpins industry, said one person with knowledge of the matter.
“This may really be the beginning of a weaker period for Germany,” said Achim Truger, one of the government’s chief economic experts that advises the chancellery.
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“If ever somebody viewed Germany as a role model, maybe it’s time to have a realistic view about strengths and weakness. Nobody’s perfect.”
After the World War Two, Germany, bolstered by U.S. aid, built its economy on cars, machinery and chemicals, controlled through banks such as Deutsche Bank owning stakes in industrial firms – a system known as Deutschland AG, or Germany Inc.
The country’s Bundesbank held its currency steady, cheap Russian gas powered industry and unions were tied into management boards to control wages. The result: an icon of industrialism grudgingly admired around the globe.
All this fueled leaps in exports through the 1980s, 1990s and 2000s, by which time the Deutsche mark had been replaced by the euro at a rate which made German exports attractive.
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Germany, thanks to labor market reforms, overcame a spell as the “sick man of Europe” at the turn of the millennium, but its success in selling more to its European neighbors than it bought, antagonized many countries that borrowed to buy German goods.
Then Berlin’s insistence in the debt crisis that countries such as Greece accept tough conditions for emergency loans fueled more resentment. But many Germans rejected such criticism, crediting their efficiency for the nation’s success.
Seeking to rekindle the collaborative spirit that led to this success, German Chancellor Olaf Scholz this week met trade union and employer association leaders to discuss what he called a “historic” cost of living crisis.
Scholz, a Social Democrat, said he was reviving a model of cooperation established in 1967 when Germany fell into recession for the first time since its post-war boom.
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But it will be harder now to placate trade unions, following a national drive to keep wages low through tax-free “mini-jobs” that capped hourly earnings for many low-skilled workers at about 10 euros – just enough to buy 20 McDonald’s chicken McNuggets.
Reforms to curb unemployment payouts, introduced by Social Democrat chancellor Gerhard Schroeder, who forged close ties with Russian president Vladimir Putin and later worked for a Russian oil giant, further soured relations with unions.
Although Germany appears more stable than Britain, which is facing government upheaval, or France, where people clad in yellow vests protested against soaring costs of living, tensions are simmering.
Growing worker discontent can be seen in the rise of strikes. Those peaked recently in 2015, with roughly 28 strike days per 1,000 workers compared with almost none in 2000, and more recently, unions have warned of more strikes to push for wage hikes.
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“I saw this risk … when there was discussion of a gas embargo,” said Monika Schnitzer, another economic adviser to the government. “I would be seriously worried about stability.”
SYMBOLIC SHIFT
Economists now believe that Germany could be opening a bleak chapter.
Although it held up better than the euro area as a whole during the pandemic in 2020, its economy did not rebound as strongly as the bloc in 2021 and is expected to lag this year.
The European Commission forecasts Germany to grow 1.6% this year compared with 3.1% for France and 4% of Spain.
“Globalization, just-in-time supply chains and cheap energy from Russia – those are things that are changing and they are changing for good,” said Carsten Brzeski, an economist with Dutch bank ING.
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Those advantages have helped make German industry, from giants to hundreds of medium-sized champions, so successful.
“This is a real turning point for Germany,” he said.
Germany’s critical engineering and machinery sector, which outfits factories throughout China and the world, is on edge.
Ralph Wiechers, executive board member at the industry’s VDMA trade body described the trade balance swinging into the red as a “warning.”
“The question now is to what extent customers worldwide will scale back projects,” he said.
Fielmann, the German eyewear manufacturer that operates in 16 countries, is pessimistic. Its shares have tumbled a third this year.
“We are feeling the considerable increase in transport and energy costs and the pressure in the supply chains,” said its chief executive Marc Fielmann.
Gunther Schnabl, an economist with Leipzig University, blames German penny pinching for the country’s predicament.
For years, Germany has saved money on defense and infrastructure while helping exporters by keeping wages low and importing cheap gas from Russia, he said.
“But it wasn’t investing the money. Instead it was using it to hide an erosion of prosperity. This isn’t going to work for much longer. Divisions and dissatisfaction are growing.”
(Writing By John O’Donnell Editing by Tomasz Janowski)
As Joe Biden this week hailed America’s booming economy as the strongest in the world during a reelection campaign tour of battleground-state Pennsylvania, global finance chiefs convening in Washington had a different message: cool it.
The push-back from central bank governors and finance ministers gathering for the International Monetary Fund-World Bank spring meetings highlight how the sting from a surging US economy — manifested through high interest rates and a strong dollar — is ricocheting around the world by forcing other currencies lower and complicating plans to bring down borrowing costs.
Canada’s Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland hold the 2024-25 budget, on Parliament Hill in Ottawa, on April 16.Patrick Doyle/Reuters
Alex Whalen and Jake Fuss are analysts at the Fraser Institute.
Amid a federal budget riddled with red ink and tax hikes, the Trudeau government has increased capital gains taxes. The move will be disastrous for Canada’s growth prospects and its already-lagging investment climate, and to make matters worse, research suggests it won’t work as planned.
Currently, individuals and businesses who sell a capital asset in Canada incur capital gains taxes at a 50-per-cent inclusion rate, which means that 50 per cent of the gain in the asset’s value is subject to taxation at the individual or business’s marginal tax rate. The Trudeau government is raising this inclusion rate to 66.6 per cent for all businesses, trusts and individuals with capital gains over $250,000.
The problems with hiking capital gains taxes are numerous.
First, capital gains are taxed on a “realization” basis, which means the investor does not incur capital gains taxes until the asset is sold. According to empirical evidence, this creates a “lock-in” effect where investors have an incentive to keep their capital invested in a particular asset when they might otherwise sell.
For example, investors may delay selling capital assets because they anticipate a change in government and a reversal back to the previous inclusion rate. This means the Trudeau government is likely overestimating the potential revenue gains from its capital gains tax hike, given that individual investors will adjust the timing of their asset sales in response to the tax hike.
Second, the lock-in effect creates a drag on economic growth as it incentivizes investors to hold off selling their assets when they otherwise might, preventing capital from being deployed to its most productive use and therefore reducing growth.
And Canada’s growth prospects and investment climate have both been in decline. Canada currently faces the lowest growth prospects among all OECD countries in terms of GDP per person. Further, between 2014 and 2021, business investment (adjusted for inflation) in Canada declined by $43.7-billion. Hiking taxes on capital will make both pressing issues worse.
Contrary to the government’s framing – that this move only affects the wealthy – lagging business investment and slow growth affect all Canadians through lower incomes and living standards. Capital taxes are among the most economically damaging forms of taxation precisely because they reduce the incentive to innovate and invest. And while taxes on capital gainsdo raise revenue, the economic costs exceed the amount of tax collected.
Previous governments in Canada understood these facts. In the 2000 federal budget, then-finance minister Paul Martin said a “key factor contributing to the difficulty of raising capital by new startups is the fact that individuals who sell existing investments and reinvest in others must pay tax on any realized capital gains,” an explicit acknowledgment of the lock-in effect and costs of capital gains taxes. Further, that Liberal government reduced the capital gains inclusion rate, acknowledging the importance of a strong investment climate.
At a time when Canada badly needs to improve the incentives to invest, the Trudeau government’s 2024 budget has introduced a damaging tax hike. In delivering the budget, Finance Minister Chrystia Freeland said “Canada, a growing country, needs to make investments in our country and in Canadians right now.” Individuals and businesses across the country likely agree on the importance of investment. Hiking capital gains taxes will achieve the exact opposite effect.
Nigeria’s economy, which ranked as Africa’s largest in 2022, is set to slip to fourth place this year and Egypt, which held the top position in 2023, is projected to fall to second behind South Africa after a series of currency devaluations, International Monetary Fund forecasts show.
The IMF’s World Economic Outlook estimates Nigeria’s gross domestic product at $253 billion based on current prices this year, lagging energy-rich Algeria at $267 billion, Egypt at $348 billion and South Africa at $373 billion.
