Reinventing Germany's Economy

American streets. But it's worked up very well for the Germans, or it has until recently. Now that famous German model is being questioned inside and outside of Germany. I'm going to talk about it with Bloomberg Star economic columnist Ferdinando Giuliano in a minute. I'm also going to catch up with the Frankfurt team on Germany's chances of running the European Central Bank. But First, Eurozone Economy reporter Catherine Boseley has this report. She starts with a blast from the

past that's going to really irritate President Trump. Have you ever wondered how the man who drives a snowplow drives to the snowplow. This one drives a Volkswagen, so you can stop wondering. That's a classic folks Fang TV commercial from nine. It reminds us that throughout the decades, one thing has remained constant out Germany's economy engineering prowess. After all, it was here that the first combustion engine vehicle was

invented more than a century ago. Today the country is synonymous with famous brands like Poikeswagen, Mercedes and Zemens in manufacturing accounts for over twenty of the economy. Old school engineering for export has been Germany's recipe for success until now, so much so that the country's trade surplus in dollar terms is second only to China's among major economies. Now that model is under threat thanks to today's reality of

protectionism and slowing global growth. Add to that factors like Germany's aging population and creaky infrastructure due to years of under investment, and you've got a big question mark hanging over an economy that for years has been Europe's powerhouse. Yah. These are the sounds of the factory floor at a b M, perhaps a company I recently visited in Wolfing In in the rolling hills of southern Germany. It has got fifteen thousand employees and factories from the Black Forest

region nearby all the way to China. The company makes motors and fans. Some are for building ventilation systems or trains, while others are used to cool the electrical systems in cars or even help keep seats comfortable so you don't sweat when you're driving a b M perhaps. CEO Stefan Brande said his business is doing okay thanks to its focus on energy efficiency, but he's well aware of issues that the whole factory sector is facing, especially if you are living in a kind of a remote area like

we are here in wolfing in Um. Certainly there is a big chair lynch on getting skilled workers for our different manufacturing parts of our business, and then of course also a digitalization if it is concerned. There is also an infrastructure in Germany which in my opinion is absolutely not appropriate. Car makers in particular are in for a big shift because engines are going electric. Folkswagen has hatched

the most aggressive electric car plans in the auto industry. Well, BMW and Diamela are emerging their car sharing services to tackle the likes of Uber. The automotive sector is investing sixty billion euros or about sixty seven billion dollars over the next three years an electric cars and automated driving,

according to v d A and Industry Association. Unfortunately, the most profitable segments and the most profitable models are precisely the ones which will generate the biggest problems in our regulatory sense, because they're going to be high emission petrol

and diesel cars. That's Peter Wells, a professor at Cardiff Business School in the UK who studies global auto manufacturing and the trouble therefore that the industry faces over the next two or three years is the looming threat of government regulation EU regulation on CEO two emissions, which is going to make it very very difficult for them to continue to generate profits whilst investing heavily into these new technologies. YEA,

the strains on the economy are undeniable. Manufacturing and exports play a much greater role for Germany the neighboring France. For example, growth in is forecast to be the weakest in six years. According to Economy Minister Peter Atmeyer, the economy's current soft patch is a wake up car, but the problems are to some degree homemade, with the German government for years focusing on reducing debt rather than investing

in the future. At least that's the view of Adam Posen, who has studied Germany extensively and is president of the Peterson Institute for International Economics in Washington. There's been a complete shortfall of investment, first private sector, but in recent years public investment. And this is marked that an economy which is doing so well in terms of employment, in terms of generating surpluses, is not finding uses for all the capital it throws off, at least not at home.

And the under investment by the public sector is stands out and is a choice, and it's frankly a bad choice. It's showing up now in the power grid, it's showing up now in transportation, it's showing up in the schools. When I lived in Germany in the early nineties and used to go back and forth all the time, you know, one thing you could count on was the punctuality of

German trains and planes, and now that's not there. This past winter is the government in Berlin proposed an industrial strategy in response to fears that Germany will get squeezed by the US and China as the global economy shifts to new technologies. The program calls for defending the country's leadership and key sectors like metals and machinery, and investing in technologies such as artificial intelligence, which the report calls

likely the best important development since the steam engine. In Posen's eyes, this plan is a non starter. Where Germany really needs is better use of available labor, the regulation of its service sector, and infrastructure investment. He says, just invest a few percent more of GDP at home and thanks that matter for German well being and that will live about. My colleague Chris Writer in Berlin spoke to labor union I GAMETI, which has two point two million members.

They say not enough is being done to help retrain older workers for evolving jobs, and have scheduled a demonstration in June to highlight their predicament. Let's hear from board member oven Mine hearts all our members will be affected in the one kind or the other today or tomorrow. Everyone will be affected of this transformation, digitalization, of electrifying in the automotive industry and other transformations. Nothing will rest as it is today, So we have to face these

huge dimension of transformation. So that's the problem that many employees as well as many managers just want circumstances to stay as they are now won't work. Who refuses the change today might be jobless tomorrow. The Union is calling for Germany's notoriously tight fisted government to increase investment in physical and digital infrastructure and training employees for the skills and jobs of tomorrow. Still, Germany has a long track

record of adapting. It emerged from the ashes of World War Two to become Europe's leading economy, and the integration of the Communist East after the fall of the Berlin Wall has largely been successful. Germany's labor forces skilled in its education system includes several institutions of international renown. Ultimately, it may be a question of both economics and politics for the government in Berlin. Germany's industrial sector may simply

be too big to fail. The uncertainty has filtered through to voters already, is one can see from the rise of the populist a f D party and will definitely preoccupy whoever succeeds the active as chancellor. Here's how Peter Wells of Cardiff Business Squad put it. The transition I think has to happen at a manufacturing level first and foremost, and we're beginning to see that companies like Volkswagen are investing heavily in industry four point zero and related themes.

If they can do that, then there's a chance that they can push productivity much much higher, and that will enable them to continue to survive as manufacturers in a high class location. But of course there is a downside, and that downside is reduced jobs. Companies like Volkswagen are already talking about taking headcamp out of their manufacturing operations, and that reduces their bargaining for politically. So it's a

very difficult place to be in right now. And Katherine Boseley for bloomdern this now I'm very glad to say. I'm now joined down the line by Ferdinando Giuliano, the Bloomberg economic columnist. Ferdinando, you and I have been around in economics for long enough to know that there's these We often have rounds of questioning about the German model. You know, I remember in the nineties there was talk of the sick man of Europe being Germany. Do you think this is a real this round of questioning is

really serious or is it just a little bit of angst. Well, I think it is pretty serious. I mean you've mentioned what happened at the end of the nineties. I think that was certainly more serious, and that's why the government of getting shure they introduced a number of very important labor market reforms which really helped growth in the coming decade and more. But I think, and I think at this stage where there are still more question marks than answers.

I mean, as we know, the German economy has been slowing quite sharply at the end of last year, in the second half there was nearly fell into a technical recession. Is now bounced back in the first quarter of this year by growing by not point four percent on a quarterly basis. But I think there are still some questions over really the long term future of the country, and some of the question marks are actually pretty striking. I mean,

one has obviously got to do with trade. The other one is the future of the car industry, and then there is the issue of the banking industry, which is really uh come back to the fore. After the failed merger between Commerce Bank and Deutsche Bank, so a number of question marks there for the politicians, not yet dramatic, but you know they still need to come up. They need to come up with some answers pretty quickly, I think.

And do you see and mean we have a government that's got a little bit different complexion now, at least for those of us looking at the economic policies. We have a finance minister, all of shul Suits has is of a different character from his predecessor, who was what you might call a very characteristic in his economic policies.

You know, he was the one Wolfgang Scheibler who would was didn't really believe in Greece being in the Eurozone and gave it a really tough time during the Eurozone crisis. You know, it was associated with a loss of those policies that we do associate with Germany, you know, tough fiscal policy and still wanting to have that very strong export performance and a reluctance to have a lot more public investment, something that was highlighted by Catherine in that piece.

Do you see with this different finance minister, a slightly different government that we will have there's a more of an openness to this kind of change, like more public investment for example. Well, I think we've seen a little bit of a shift, to be honest, to the fiscal policies turned mildly expansionary over the last a few months.

But there are still, you know, big questions. I mean, if you have a slowing economy and you are running a budget surplus, your debt is very low, and actually investors are willing to give you money at negative nominal rates, why why are you not investing more? I think these questions are still there. What's interesting is that, I think is that debate. The debate is starting to shift a little bit precisely because the economy is not doing so well.

I mean, it's all well and good to kind of run a very tight fiscal policy if the economy is still growing. I mean, of course it could be growing more. Your productivity could be boosted by more public investment. But you know, it's harder to make a public case for more spending at this juncture. I think it's harder to sustain the physical you know, the case for physical discipline at the moment. So I think that that change in

the debate is very very interesting. Now, of course, all of shots on his own does not mean very much because clearly, you know, we need to understand what's going through the mind of a k K, the successor to Angela Merkel, who's going through a difficult period to establish herself, and we don't really know what her economic policy thinking is deep down. So I think there are still a question. I would like to add one more thing. Yes, all of Shorts has been a good shift in terms brought

a good shift in terms of fiscal policy. There is stuff going on in terms of industrial policy and banking policy which I think is a little bit more suspicious. German is going back to the kind of go the old way, you know, to the kind of marrying the French approach to industrial policy, gains competition policy. All of Shorts was a supporter of this national champion idea in

the banking industry. While all of that is something which I think as an economist I'm quite worried about, you know, when you step back from these debates, and obviously we look at what happens to German GDP, you know week to week or months to month, of course to course, but over the years Germany has often been criticized for being a bit too successful exports in not saving too much. It's household save save too much, not taking enough risks, and these all have a field of being pretty long

term characteristics of Germany. Is what's what's the odds of it really changing? I mean, it's always been said. I think that the German people, German households spend more on flowers every year than they do on shares. You know, is that really going to change? Well, I think what's changing is the landscape. I mean you were talking about the trading surpluses which Germany has been recording throughout the years, and the model which is really based on experts. I mean,

what's changing is the landscape. What we have is this now this you know not even not no longer a trade skirmish, but then outright trade war. It would see in between the US and China, the US is being very confrontational with with Europe, threatening to slap tarifts on cars,

which is Germany by the way. So I think in this shifting landscape where globalization is at risk, global commerce is at risk, the model which Germany has um you know, established and which has been you know to be fair very successful over the past few years of rising globalization and you know, strong Boord trade is increasingly at risk.

And so even though you know us as some you know as as economists have been doubtful of this model for some time, but you know, the kind of the man on the street wasn't really seeing the problem with it because you know, after all, unemployment was very low

and the economy is doing fine. But now that these risks are rising and are actually there present and are taking a hit on economic growth, I think politicians will start asking themselves some hard questions because hey, you know, maybe Donald Trump will disappear in a few years and we will go back to the good old days of globalization. But what if we don't, How will Germany keep growing? How will keep giving prosperity to its people. That's a

real question which politicians need to ask themselves. And Germany has been so dominant in Europe, in the Eurozone over

the last ten twenty years. What does it mean for Europe if it's now going through a phase of being on the defensive and a bit insecure and its economic model well, I think, paradoxically, from a certain point of view, and it's slightly weaker, German economy could be interesting from a political point of view, because it may make Germany a little bit more understanding towards some form of expansionary policies, especially fiscal policies, which Germany has traditionally been skeptical of.

I mean, we've heard many times you're confirming some of the paranoia that the Germans themselves have that the other countries are just willing for them to fail. When you say that, oh yes, I mean I think, you know, I was more thinking about their their own domestic policy and the repercussions for the for the EU. In terms of the broader debate, I mean, frankly, it's been stuck for you know, at least a year and a half now.

I mean, after the election of President Emmanuel Mcron and the idea that there would be a grand bargain between France and Germany, there was some enthusiasm about the reform of the Eurozone and making sure that those are the building blocks, especially for example, in setting up some form of joint fiscal capacity or completing the banking union project,

which has been advancing for some time. And then it's tolled where there was hope that this could happen, but at the moment everything has tolled and I suspect that the rise of some populist governments, for example in Italy, which you know, are taking very irresponsible attitude towards economic policy making, is going to make the German public just more defensive. And another big question I think is over

the European Central Bank. Mario Dragging has been and extraordinarily effective, not just in implementing policy, but also in selling it to the German politicians, especially Angela Mercle. But we now his term is coming. We know his term is coming to an end at the end of October. Who will replace him? And will this person be just as effective in terms of making the easyb you know, a powerful tool in fighting slowdowns recessions. Or are we going back

to less effective presidents? This is another big questions And of course you know Yains Vitman, the president of the Bundesbank, is one of the leading candidates. So will we see a more Germanic monetary policy in the Eurozone and what what would that mean for for the currency union? You know, this is this is a big doubt which I think many investors would want to ponder on well. And I'm

very glad you mentioned that. For another because I'm going to be talking about that in a second, getting the latest on that horse race to run the European Central Bank. Just after talking to you, But ferdinandod and thank you very much for sharing your thoughts. Thank you well. I mentioned with Fernando there the battle to see who's going to replace Mario drag the Italian who has been running the European Central Bank for the last eight years, and I wanted to check in with Paul Gordon, who runs

our central bank team out of Frankfurt on it. Paul, the Germany's never had one of its nationals run the European Central Bank. Is this sits moment? Well, the head of the bonders Bank, Ends Viedman, is a contender, but it is very wide open field, wider than we've ever seen. Really.

He's up against, at least according to our surveys to Frenchmen, the head of the French Central Bank and the and one of the executive board members, and two Finns the current ahead of the Finnish Central Bank and form ahead of the Finnish Central Bank. It's very hard at this point to see whether Germany will have what it takes to win the political support to get you inspiber And

into the position. Now, if you're an outsider looking at the Ourizon, particularly if you're in sitting working in the financial markets in New York, say, what you really care about who runs the European Central Bank is whether they'll support growth in Europe and whether they'll be able to

do the right thing in a crisis. Is there any chance that the right person is going to be in the job for either of those things or that is where the German nomination should the inspiber and be That nominee is potentially the problem because Vibraan has been an opponent of a lot of the CBS crisis era measures

in the past. You have to remember that Mario Draggy, although he was something of a controversial candidate when he came in eight years ago, pledged in twenty twelve to do whatever it takes and the market believed him, and he's continued to make these pledges and to come up with fairly original measures in order to try to get him inflation back on track. It's not there yet and

the economy is showing signs of stuttering. So you have to wonder whether the next ECB president, if they haven't supported some of those measures as vibe and hasn't will have the credibility to get the job done. And the credibility matters. It has an impact on the markets, that has an impact on inflation expectations. So that's the biggest challenge for Germany. One has to say, and you've mentioned there some of those sort of key phrases that came out of Marrow drugging. I mean, is that why it

does really matter who runs this organization? It's not you know, some people will say, well, it's just one vote or men of many on the council. It doesn't doesn't matter who's in that job. It matters how the council vote goes goes. But then if we look at something like the FED, we know that, you know, it does matter who's chairman of the Fed, even though technically the FED chair only has one vote. Is that also the case in the European Central Bank? I mean, remember we've got

a lot of countries represented around the table. It's not just those regional banks that you have represented in the US, No, I mean the the the governing council chamber in the European Central Bank is a very crowded place. There are twenty five policy makers, nineteen central bank governors, six board members. But the board does have undue influence, if you like, it has much more influence than the others. Yes, there's one vote per person doesn't normally come to a vote

in the governing Council. A consensus is reached and that consensus is heavily swayed by whatever proposal the executive boarders put on the table for everyone to discuss. So the President, as one of those board members, matters. So does the Chief Economists that currently is Peter Prett, but that changes as well as a first of June Philip Lane of Ireland will come in. And also another influential figure is

Benoir Currey. He's the head of market Operations. He leaves at the end of the year, though as I say, he is potentially one of the contenders to replace Mario Draggy, so it's not really one vote per person. It doesn't quite work that way. Well, and you've mentioned something that I think we're going to come back to in the next few weeks on the podcast, the fact that you've

got so many senior jobs changing hands in Europe. Three of the key European central bank jobs changing hands in twelve months, but also all of the European Commission jobs and everything else. It's a mess. It's at there's a lot of hallse trading going on. I'm gonna put you on the spot, Paul, who do you think it's going to be and when do you think we're going to find out? On just on the ECB president job. Yeah,

it's it's quite a confluence of events. I mean, the political post tend to last for five years, the clans for eight years, so only once every forty years. Any student of maths will tell you do you get that coincidence? So it could take some time. It may not be resolved until shortly before potentially where every the ECB president post expires at the end of October. And as for who it is, well, I'll give you two basic assumptions

most people are making. It's probably going to be a Northern European, although you would have to include France in that mix. Not everybody sees Frances nor the European but it's it's in the shot of the chances been deciding for a while whether it's a Southern European or it still isn't there exactly right, And the second point is it's very very unlikely to be a woman. Well, that is definitely true when you look at who's in leadership

positions across central banks across Europe. Oh for Shane. Thank you very much, Paul. I know what is going to continue. This horse race is going to produce lots of great stories for us, and we do have that ongoing pole you mentioned of economists for who they think is going to replace Mario Druggie, which involves a nice graphic with little bouncy heads, which I gather as quite popular in the corridors of Frankfurt in the Central Bank as well.

Thank you very much, Paul. Thank you, thanks for listening to Stephanomics. Come back next week for more on the ground insights into the global economy. In the meantime, you can find us on the Bloomberg Terminal, website, app or wherever you get your podcast. We'd love if you took the time to rate and review our show so it can reach more people. For more news and analysis from Bloomberg Economics, follow at Economics on Twitter. You can also

find me on at my Stephanomics. The story in this episode was reported and written by Katherine Bosley and Chris writer Helmuth Tromp assisted. It was produced by Magnus Hendrickson and edited by Scott Lamman, who is also the executive producer of Stephanomics. Chris and Katherine's original article on this topic was edited by David Rocks. Special thanks to Ferdinando Giuliano in Milan, Agatha Krantrall in Berlin, and Paul Gordon in Frankfurt. Francesco Leviy is the head of Bloomberg Podcasts.