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Now is the time to renew the German economy

The coronavirus pandemic struck Germany just as serious challenges were emerging to the industrial and financial model that had served the Federal Republic well for 70 years. Germany was edging towards a mild recession before the virus contributed to the biggest quarterly fall in output since 2009. Now there are indications that Germany will come out of the crisis sooner, and in better overall economic health, than many of its European partners. Should these early trends persist, it will be important for Germany neither to neglect the task of assisting a balanced European recovery, nor to delay reforms that will lay the basis for renewed success.

Germany deserves praise for its vigorous, efficient and level-headed approach to controlling the pandemic. Its health system has shown itself to be robust, well-funded and broadly based enough to protect the great majority of citizens. Pragmatically setting aside its balanced budget rules, the government has injected massive fiscal support into the economy and rolled out measures to limit mass unemployment.

The German social market economy, mixing a competitive private sector and an extensive welfare state, backed by a stable political order and the rule of law, is standing the test of time. However, politicians, industrialists and bankers will need to address vulnerabilities and deficiencies that were showing up before the pandemic. Some are not of Germany’s making, but others have their roots in the excessively cautious fiscal and economic policies of the four coalition governments over which Chancellor Angela Merkel has presided since 2005.

Before the pandemic, disruptions to the world trade order were affecting German exports, the bedrock of the nation’s manufacturing prowess. Much of this was attributable to factors beyond Germany’s control, such as US-Chinese tensions, the Trump administration’s “America first” policies and Brexit. The pandemic is expected to take a severe toll on German exports to non-European markets, at least in the short term. But it may also have the undesirable effect of increasing Germany’s surplus with its EU partners, especially if German companies, for example in the pharmaceutical industry, relocate production back home.

Highly indebted southern European countries are at greater risk of experiencing a weak recovery from the pandemic. It follows that the €500bn recovery fund proposed by France and Germany, and other EU budgetary measures, should be channelled primarily to the hardest-hit European regions and business sectors. Moreover, Germany should not repeat the mistake made after the financial crash a decade ago, when it demanded austerity of other EU countries that came at a heavy social and economic price.

At home, the car industry, so crucial for decades to Germany’s economic strength, was losing its technological edge to rivals such as Tesla. Years of under-investment were exposing the deficiencies of Germany’s digital infrastructure. The transition to a less carbon-based economy was imposing onerous electricity costs on companies and consumers, thanks to distorted subsidies for renewable energy.

It is Ms Merkel’s good fortune that the economy’s generally strong performance owes much to labour market and welfare reforms passed by the government of Gerhard Schröder, her predecessor. Now the task is to modernise infrastructure, focus on new technologies and improve tax and investment conditions for business. Ms Merkel has promised to leave office before next year’s Bundestag elections, but it is never too late to make a start.

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