Merkel assures Germans they're in good hands
But bankers warn the country may be squandering its competitive advantage, writes Ambrose Evans-Pritchard.
The defining picture of Germany's election is a billboard of Angela Merkel's hands, posted next to Berlin's central railway station.
There is no face. There are no words. Nothing else is needed. It is so self-evident to most citizens that their Chancellor has the safest hands on offer that the message speaks for itself.
Her approval rating has reached 70 per cent. It is the mirror image of Germany's unemployment rate, at a post-reunification low of 5.3 per cent. The rate for youth unemployment is 7.7 per cent - against 26 per cent in France, 39.5 per cent in Italy and 56 per cent in Spain. Germany's lead is largely thanks to the country's superb apprenticeship schemes.
Germany had reason to be complacent as it went to the polls on Sunday, but economists warn that this ascendancy is more fragile than it looks, an illusion of the business cycle and a China-driven global boom in machinery and capital goods that is running out of steam. Merkel is encouraging Germans to think that all is well and that nothing needs to change.
"Germany is in a fantastic position but we're squandering our competitive advantage: all the main parties want to roll back reforms," said Christian Schulz from Berenberg Bank.
Joerg Asmussen, Germany's board member at the European Central Bank, says the country will become "the sick man of Europe again in five to 10 years" if it continues to neglect its ageing infrastructure and fails to invest more in education. Germany's top-rated university is Munich Technical, ranked 53rd in the world.
Germany's industry federation, BDI, has called for a drastic change in energy policy, warning that the €1 trillion ($1.44 trillion) dash for wind power, solar and other renewables is pushing power costs to levels that "endanger German competitiveness". Electricity costs 30 per cent more than in the rest of Europe, and twice as much as in the US. Natural gas costs four times more than in the US as the shale revolution alters the global economic landscape at lightning speed, leaving parts of Germany's chemical and plastic industry under mortal threat.
Yet during the campaign none of the main parties proposed any serious change to plans to the so-called "Energiewende" - the goal of sourcing 50 per cent of all power from renewables by 2030, and 80 per cent by 2050 - as if the problem will take care of itself.
The OECD says Germany has one of Europe's most rigid labour markets. Productivity grew by just 0.6 per cent a year from 2000 to 2010, compared with 1.4 per cent for other rich countries. The OECD advised Berlin to take lessons from the Australian Productivity Commission.
Germany ranks 106th for starting a firm in the World Bank's ease-of-doing-business index. It ranks 31 for mobile broadband, 75 for soundness of banks, 127 for hiring and firing, and 139 for wage flexibility, according to the World Economic Forum index.
Economists fret that Germany is coasting as deep structural problems build up, repeating the mistakes of Italy and Spain at the outset of monetary union. While nobody disputes that Germany gained competitiveness in the early euro years, the question is whether this was achieved by a superior economic model or merely by screwing down wages in a "beggar-thy-neighbour" policy. This dispute scarcely intruded on the campaign.
"Real disposable income per capita in Germany has been growing at half the rate in France since the launch of the euro. They have been ripping off their own people to build up pointless trade surpluses," said Charles Dumas from Lombard Street Research.
The risk for Germany is that the damage emerges just as the country's ageing crisis strikes in earnest. The European Commission expects the country's workforce to shrink by 200,000 a year this decade, replicating what happened in Japan.
The old-age dependency ratio will climb from 31 per cent in 2010 to 48 per cent in 2030.
"Germany faces a demographic time bomb," says Mats Persson from think tank Open Europe. Social security liabilities lift the real level of German public debt to 192 per cent of GDP. This compares with 146 per cent for Italy, which has tackled its pension threat.
"Germany can't afford to underwrite the euro for ever," Persson said. German voters already sense this and seem increasingly tempted to vote for the anti-euro movement Alternative fur Deutschland (AfD). A pre-election poll showed the party reached 5 per cent support for the first time, the threshold for seats in the Bundestag.
AfD may scramble the election, depriving Merkel's bloc of its expected majority. Crucially, there may now be a vocal movement in the Bundestag, with electoral legitimacy, committed to breaking up the monetary union - either by German withdrawal from the euro or by forcing weaker states to leave.
This shifts the centre of political gravity, and may embolden eurosceptics within Merkel's alliance.
It will make it even harder for the next government to deflect populist protest over a third Greek bailout, a second bailout for Portugal and a rescue for Slovenia, all expected in the coming months.
If Europe's recovery gathers pace, this may not matter. But if the recovery is yet another false dawn, or it proves too little to stop the debt trajectories of southern Europe spiralling out of control, it will matter enormously.