Trouble settles in at Merkel's table

It’s hard to know which is more humiliating for Germany -- that its economic supremacy is faltering or that Chancellor Angela Merkel is a bit of a grub.

In a book unveiled overnight, former German chancellor Helmut Kohl's true assessment of the protégée he turned against in the late '90s was revealed. His pettiness was laid bare as he remarked Merkel “couldn’t even hold her fork and knife properly” and “she hung around at state dinners so that I had to repeatedly tell her to pull herself together”.

Kohl unsuccessfully launched an eleventh hour bid to halt the release of Legacy - the Kohl Transcripts, the unauthorised fourth and final volume of his memoirs, written after a falling out with his biographer. But it wouldn't have done much good even if he had been successful, since snippets of the interviews it's based on were published by German magazine Der Spiegel earlier this week.

While Kohl and Merkel’s falling out has been well documented, he will nonetheless be incensed at the release of this book, in which he also describes Mikhail Gorbachev as a “failure” and says that the collapse of the Soviet Union was due to its struggling economy rather than Gorbachev’s desire for reform.

Despite the humiliation, Merkel’s got bigger problems to deal with.

All signs point to Germany sliding toward recession, with a number of data releases disappointing in recent days. The latest industrial production read showed a 4 per cent plunge on the previous month, sharply lower than the 1.5 per cent expected and the biggest month-on-month decline since the height of the crisis in 2009.

Factory orders also disappointed, slumping 5.7 per cent between July and August, much lower than the 2.5 per cent expected. Meanwhile, the manufacturing sector is in contraction and the IMF has just slashed the country’s growth forecast from 1.9 per cent to 1.2 per cent for the year.

For Marcel Fratzscher, chief economist of Berlin’s German Institute for Economic Research (DIW), the timing of Germany’s decline alongside the release of his own book warning of the same, must seem like kismet.  

Fratzscher’s book, The Germany Illusion, challenges the notion that the country’s prosperity could be boundless if only Europe wasn’t dragging it down. “Our euphoria is dangerous because it makes us arrogant, blind, and lazy,” he writes.

The thesis of Fratzcher’s book is that Germany suffers from three illusions:

-- The country’s economic future is secure due to its sound economic policy;

-- Germany doesn’t need Europe and its economic future lies outside of the region; and

-- Europe just wants Germany for its money.

Fratzscher argues that these illusions must be shattered in order to push Germany away from its current self-interest and toward closer European co-operation.

Addressing the first illusion, Fratszcher argues that the economy has fundamental flaws and that under-investment is a growing issue. “The decline of the German economy will accelerate unless the present economic policy is radically altered,” he writes.

Attempting to ‘shatter’ the second illusion, he writes that despite continued globalisation, European nations will remain Germany’s most important trading partners over the long term. Interestingly, he also argues that the economic interests of the fourth largest economy in the world can only be represented on the global stage because it’s a member of the EU and that the growing influence of emerging economies means it’s increasingly important for Europe to speak with one voice.

Finally, he says that Germans “conveniently ignore” the many advantages that come with being a member of the EU.

His argument that a radical overhaul of the country’s economic policy is desperately needed is gaining traction among the upper echelon of the political sphere, with Germany’s economy minister, Sigmar Gabriel, proclaiming it “required reading”.

Gabriel has appointed Fratzscher to an expert panel to explore ways of plugging the investment gap in the country, an issue of increasing concern. Germany has one of the lowest levels of public and private capital investment in the OECD, and DIW estimates that the annual investment gap in the country is €80 billion.

Fratzscher and his supporters must now convince the government to increase public investment to drive growth at the expense of the balanced budget it so desperately desires. It’s no easy task, but necessary if Germany is to remain the glue reluctantly holding Europe together.