epa05093871 German Chancellor and CDU leader Angela Merkel speaks at a press conference after the closed session meeting of the CDU federal executive in Mainz, Germany, 09 January 2016. Merkel said on 09 January that she wants stricter asylum laws, after a series of sexual assaults in Cologne and elsewhere shocked the country. EPA/FREDERIK VON ERICHSEN
German chancellor and CDU leader Angela Merkel © EPA

This is going to be a difficult year for Germany, one in which the policies of the past may turn out to be unsustainable. The most unsustainable of all was Angela Merkel’s invitation to open the doors to Syrian refugees without limitation.

The German chancellor must either have misjudged the effect or acted recklessly — or both. A few months and
1m refugees later, the discontent is growing inside the Christian Democratic Union, her party, and in the country at large.

Gerhard Schröder, her Social Democratic predecessor, last week came out against the policy with exactly the same arguments as the right-wingers in Ms Merkel’s own party: Germany cannot absorb such a large number. More than 1m refugees arrived in the country in 2015. It could be twice as many this year and the same again next — more if you include family members who will eventually follow.

It is tempting to think of refugees and migrants as a new source of labour. But in this case this just is not true, at least not for now. The majority of those who arrive in Germany lack the skills needed in the local labour market. They will enter the low wage sector of the economy, and drive down wages, producing another deflationary shock. This is the last thing Germany and the eurozone need right now.

I expect that this policy will change at some point this year. What I do not see, however, is a successful political coup against Ms Merkel from inside her own party. What protects her is the grand coalition with the Christian Social Union and the SPD. There is no majority to the right of her, or to the left for that matter.

The second challenge is the economic downturn in emerging markets. There are few large countries as dependent on the global economy as Germany, and few where there is so little awareness of that fact, at least in public debate. Germany has a current account surplus of
8 per cent of gross domestic product. A global downturn tends to affect German industrial companies with a delay of one or two years because many operate in sectors like plant and machinery where multiyear contracts are customary. But eventually, the German and the global business cycles begin to synchronise once more. This will be the year when that starts to happen.

The third challenge for Germany in 2016 is the fallout from the Volkswagen emissions scandal. This could be the single biggest shock of all because Germany has been over-reliant on the car industry for far too long. Last week, suspicion fell on Renault, when the offices of the French carmaker were raided by the authorities. This is not the crisis of a single company, therefore, but of a whole industry. Nor is it just a German problem; it is a pan-European one. It appears that VW behaved more recklessly than the others, and it will pay a heavy price for its behaviour. Whether legal action in the US and in Germany will weaken VW or force it into outright bankruptcy is almost irrelevant, given the bigger picture.

The real threat to VW and its European competitors comes not from the US justice system but from consumers who understand much better than before the trade-offs between a car’s performance, its price and emissions. This is a story about an old industry trying desperately to hang on to unsustainable levels of output and market share and of a country unwilling to wean itself off its overreliance on that industry.

Finally, 2016 promises to be the year of backlash against German dominance of the eurozone. That did not happen during the crisis. The leaders of the countries in the eurozone periphery kept their heads down. Under German pressure, they signed up to treaties and legislation, such as the fiscal compact and the new resolution mechanism for banks, that were clearly not in their long-term interest. I am not sure that Matteo Renzi, the Italian prime minister, was particularly well advised to attack Ms Merkel in his interview with the Financial Times in December.

But he is not alone. The Italian media, too, are becoming more hostile towards German dominance of the EU. Even if 2016 does not see another eurozone crisis, it could easily be a year of mutual alienation, which is more dangerous in the long run.

While most of the threats appear to be external, they are caused by domestic policy choices. Germany does not have to rely on a single industry to such an extreme degree. And no country finds itself with an 8 per cent current account surplus by accident. Nor did Ms Merkel need to open up further a border that was already open by making so public a pronouncement. She made a choice.

The chancellor has been in office for 10 years, so her future is a legitimate subject of speculation, and will remain so. But it should not be Germany’s main concern for now. There are more pressing things for it to worry about.


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