Clemens Fuest: Productivity levels are likely to decline as more baby boomers reach retirement age
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The eurozone’s powerhouse remains Germany, its largest economy, accounting for just under a third of all economic activity. But the IMF is among critics worried about a shortage of investment by the government and the country’s ability to handle its ageing population.

For now the German economy remains in rude health, so much so that the country recorded a much higher-than-expected budget surplus for the first half of this year. Berlin received €18.5bn — or 1.2 per cent of gross domestic product — more than it spent in the first six months.

The scale of the surplus has revived a longstanding debate between the government and economists on whether Germany should spend more. “This is a hugely political issue here in Berlin,” says Marcel Fratzscher, head of the DIW think-tank. There seems little pressure to act in the short term. Germany’s economy is set to grow by 1.7 per cent this year, according to the Bundesbank’s projections — a figure that is slightly more than the eurozone average after years of Germany outperforming other economies in the region.

Labour market reforms, made in the early 2000s, are paying off. Unemployment is at post-reunification lows and labour force participation is impressive. The buoyancy of the labour market is one reason why the tax take that the government received in the first half of the year was so high.

The country is also benefiting from a macroeconomic climate where oil is cheap and interest rates low, helping to boost consumption. Membership of the single currency has protected exporters from the fate suffered by traders in Switzerland, who have had to adapt to a much stronger currency.

Yet, longer term, the big concern is how the German state addresses shifting demographics and slow productivity growth. Society is ageing. After Japan, the country has the world’s oldest population: 28 per cent aged 60 years or over in 2015, according to the UN.

“If you look at it without immigration, the German labour force is already declining. From 2019, the labour force will start shrinking,” says Mr Fratzscher. “The good budget situation will probably last another three or four years, but that won’t still be there in five or 10 years’ time.”

Clemens Fuest, head of the Center for Economic Studies’ Ifo think-tank in Munich, says the current economic situation is helped by demographics. “The baby boomers are at the peak of their productivity. Can we maintain productivity? We probably can’t,” he says.

Mr Fuest’s own research shows there has been a 30 per cent drop in the number of start-ups since 2000, which he sees as a signal that Germany will struggle to replicate recent productivity gains. He points out that companies tend to be set up by people between the ages of 30 and 44. There were 25 per cent fewer people in this age bracket in Germany in 2015 than in 2000.

Economists — among them officials at the European Central Bank and the International Monetary Fund — want Germany to spend more, not only to address these problems, but to provide a boost to the eurozone’s economic recovery too. Both multinational organisations have called on Berlin to use its “fiscal space” to boost German and regional growth, which has been much slower than here. Within the country, views are more mixed. Wolfgang Schäuble, Germany’s finance minister, has attacked the IMF’s position and warned at the Fund’s annual meetings in Washington this autumn that already high levels of global debt, held by both governments and companies, presented a risk to the health of the world financial system.

“The German economy is growing above its economic capacity. What they [the ECB and the IMF] should say is that Germany should cap spending,” says Mr Fuest. “The concept of fiscal space is troubling. It is as though they are saying, any country that isn’t close to bankruptcy should get there as soon as possible.”

But some think Germany could use part of its budget surplus to address its looming problems. Part of the reason for its bigger-than-expected surplus is the ECB’s quantitative easing programme, under which it is buying around €10bn of German government debt a month.

The German government has been among the fiercest critics of the central bank’s actions. Yet the ECB’s purchases of government debt have lowered borrowing costs for Berlin, cutting its debt burden. Mr Fratzscher says the windfall should be used to repair bridges and invest in education and technology — all measures which could help to raise German growth in the decades ahead.

“The best option is to spend the windfall on public investment. You need to make existing workers more productive if social security payments need to rise significantly because of population ageing,” he says.

Copyright The Financial Times Limited 2017. All rights reserved.
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