September 12, 2017 / 10:47 AM / 12 days ago

Breakingviews - Merkel’s past omissions will return to haunt her

Martin Schulz, leader of the Social Democrats, and German Chancellor Angela Merkel, on March 17, 2016. Picture taken on March 17, 2016

LONDON (Reuters Breakingviews) - German Chancellor Angela Merkel’s past economic omissions may come back to haunt her if she wins a fourth term. Since taking office in 2005, she has failed to invest enough, tailor the welfare state to an ageing population, or prepare the country for costly climate change targets. The economy will pay the price during the next downturn.

Fault lines are currently hidden by an economic boom. German’s economy grew faster than the euro zone in nine out the past 12 years. The number of people in work has risen by a fifth since 2005, to 32 million. Unemployment is at a record low, and the government expects to run a balanced budget every year until 2021. But these achievements are largely the result of historically low interest rates, labour market reforms enacted by Merkel’s predecessor Gerhard Schroeder, and years of wage restraint.

The German leader has not built on these promising foundations. She failed to use good economic times to invest – think tank DIW Berlin estimates the backlog in private and public investment is equivalent to roughly 75 billion euros a year, or 3 percent of GDP. As a result, many bridges, roads and waterways are in poor shape. And Germany is lagging comparable countries when it comes to fibre broadband connections, which accounted for less than 2 percent of all broadband subscriptions in 2016, compared with an average of 21 percent in developed countries, OECD data shows.

The good times won’t last forever, especially if outside shocks hit the economy. To make matters worse, an ageing population means Germany’s workforce will shrink by 1 million during the next parliament if working patterns such as the labour participation rate remain constant, DIW predicts. That will depress Germany’s growth potential by 2019, according to the country’s central bank.

Instead of giving people incentives to work longer, Merkel’s government has made it more attractive to retire early by lowering the pension age for some. And January’s 4 percent increase in the minimum wage may be harmful for low-skilled jobs, particularly in eastern Germany, where productivity is lower. Moreover, one in 10 industrial jobs are dependent on the internal combustion engine – a technology whose long-term prospects are bleak.

As for Germany’s ambitious climate change targets, past foot-dragging means that the 40 percent reduction in carbon emissions between 1990 and 2020 can only be met if brown coal mines and power plants are phased out quickly. That could put 70,000 jobs on the line, many of them in east German regions that are already poor. Despite fighting myriad fires during the financial crisis, Merkel has so failed to tackle the many smouldering ones at home.

Breakingviews

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