Germany’s economic upswing set to ‘weaken’

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The German upswing will continue next year “but will clearly weaken”, raising the question of how it first came about, writes Hans-Werner Sinn of the University of Munich.

His 15 November paper outlines six possible causes of the upswing: 

1. It is the work of Chancellor Merkel, a notion that Sinn rejects as “manifestly wrong”, claiming instead that the government curbs the upswing by reducing the budget deficit and choosing not to pursue a supply-side policy. 

2. The trade unions’ reserve has created new jobs. Although labour costs in Germany have lowered, improving the competitiveness of the “still very expensive” German worker, credit for this is due to low inflation and Agenda 2010 rather than the trade unions, he argues. 

3. Germany has had a lower rate of inflation than other euro countries and has thus become more competitive, which Sinn however describes as “the main reason for the slow increase in German unit labour costs”. 

4. Agenda 2010 is working, particularly by reducing expenditure on unemployment benefit. Sinn rejects this hypothesis, saying “we still cannot quantify the effects”, although he concedes that increased employment figures for the over-50s indicate its “correctness”. 

5. Investment replacement cycles drive the economy, which Sinn says as “irrefutable” after examining the trend path of GDP demand, stating “investments are the cycle makers”. 

6. German economic activity parallels world economic activity due to the high number of exports, a hypothesis which Sinn says is “doubtlessly correct” given the global economy’s “unprecedented pace” of expansion. 

Sinn believes that the last two hypotheses “complement themselves very well”, as Germany’s specialisation in capital goods exports means it profits more from upswings in the world economy. 

However, he concludes by warning that this also means Germany may be “more strongly hit” by global downturns than the rest of the euro zone, with the country “particularly vulnerable to cyclical change”. 

Thus it is important to strengthen the Agenda 2010 reforms, as they will contribute to expanding the service-intensive domestic sector and reduce the German economy’s “cyclical dependency”, Sinn adds. 

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