Policy change in Germany only when economy 'hits wall'

Berlin - Germany is at risk of economic hubris, a top economist has said, noting that the country should not think it is invulnerable nor that EU membership makes it a victim.

In a new book - The Germany illusion - Marcel Fratzscher, president of the prestigious German Economic Research Institute (DIW), makes the case for a change in Berlin’s economic policy.

His book says that Germany sees itself as a “superstar” something he castigates as an illusion as the country would not have an economic future outside the EU.

The 43-year-old economist, who has also worked for the European Central Bank and the World Bank, accuses Germany of being “obsessed with structural reforms”.

The book has made a few waves in Germany and prompted economy minister Sigmar Gabriel to ask Fratzscher to head up a group of experts meant to deliver an outline for an investment agenda by early next year..

But this does not herald a sudden change in Gabriel’s economic course. On Tuesday (13 October) he made it clear that he supports finance minister Wolfgang Schaeuble’s 2015 zero debt target.

“More debt in Germany does not create growth in Italy, France, Spain or Greece,” said Gabriel.

But Fratzscher believes this is out and the wrong course. This path will be “fatal for the German economy” he says, adding that “debts are not bad” if they enable good investments.

“Germans make bad savings: they own less real estate than in other member states; only a low percentage of the population invested in shares and relatively few have life insurance. Most of them keep their money in their bank accounts with negative return. None of these are good long-term investments”, the economist told this website.

Even if Germany can count three major economic achievements, such as a stable budget, record-high exports and a reduction in unemployment, there are severe problems in the economy, he says. He notes that Germans do not see them only because other countries in the eurozone face even bigger challenges.

Problems with economic growth (Germany currently ranks 13 out of the 18 member states in the eurozone), under-employment (volume of labour and a drop in real wages), low private assets and large income inequality - all this is a result of lack of public and private investments, suggests Fratzscher.

The solution would be what he calls a “grand bargain” of a successful monetary policy linked to structural reforms and a responsible fiscal policy.

Germany’s economic course, particularly its trade surplus, has come in for criticism from outside the country too, including from the International Monetary Fund and the European Commission.

Jyrki Katainen, a future vice president of the European Commission and currently in charge of economic affairs, recently said that German economic growth is not sustainable unless the government increases investments in public infrastructure and the educational system.

But Fratzscher does not see change on the horizon.

“I wish I could be optimistic about a change of policy but it all depends on the growth in the following months,” he said.

“The only hope for a turn in policy will be if economic growth 2015 does not reach the predicted 1.2 percent. Big changes in Germany only come when we hit the wall.”