Germans Do Consume
Is it really true that German workers’ and consumers’ appetite for shopping and consuming is repressed?
- It is true that Germany once had austerity, but it certainly does not have it now. Rather, it was from 2003 to 2007.
- Compared to the United States, which is taking a fiscal hit worth 2% of its annual GDP this year, German austerity was mild.
- Germany, due to the success of its labor market reforms of 2004, has growth in jobs and tax revenues.
- This allows the German government to gradually spend more, while not running significant deficits at the same time.
If only the Germans weren’t so stubbornly masochistic, if only German consumers would open their purses, and if only the German government were to end its obsession with austerity, Europe and the world would be better off.
This standard refrain can be heard at almost every European or global economic summit — and it is trumpeted on the front pages of many a European newspaper. Alas, those who sing that song the loudest rarely bother to check the logic of their arguments — or the facts.
It is true that Germany once had austerity, but it certainly does not have it now. From 2003 to 2007, the country reduced its fiscal deficit, adjusted for the business cycle and interest payments, by 3.3% of its annual GDP. That was equivalent to an average annual tightening of the fiscal reins by 0.65% of GDP.
By the standards of Greece, with a 4.5% annual tightening in the three years to 2012, and the United States, with a fiscal hit worth 2% of its annual GDP this year, German austerity was comparatively mild.
However, it is important for economic scorekeepers and columnists alike to take note of this simple and incontrovertible fact: Since 2008, Germany has not tightened the fiscal reins at all, except for the 2010 expiration of the small post-Lehman stimulus of 2009.
And what about the claim that the German government is caught in a spiral of savings and that German workers and consumers are refused the right to shop and consume? Again, there is no support for such claims in the numbers.
Over the last five years, German government consumption has expanded at an annual average rate of 2%. Hit by the post-Lehman recession, overall GDP increased by merely 0.75% per year at the same time.
To accuse the German government of not spending enough misses the point. The real story is that Germany, due to the success of its labor market reforms of 2004, has the growth in jobs and tax revenues that allows the government to gradually spend more, while not running significant deficits at the same time.
German consumers have a reputation for prudence. To some extent, that is correct. The last time they went on a reckless spending spree was more than 20 years ago. It took place in the immediate aftermath of Germany’s reunification and turned into a real estate bubble that went bust spectacularly.
But the absence of new excesses does not mean that Germans don’t spend money. As tourists, they crowd the beaches of the world. At home, they are spending their rising incomes on new homes. After a long dearth, residential construction orders have risen by a cumulative 40% over the last three years.
By and large, Germans have done it the right way round in the last ten years. They first fixed their labor market with the series of Agenda 2010 reforms which then-Chancellor Gerhard Schröder launched ten years ago, in March 2003.
When the labor market had recovered decisively and the economy had weathered the Lehman storm, Germans started to grant themselves higher wages and to spend the extra money. They can now afford it.
The outlook remains quite positive for German consumption. For example, the public sector trade union Ver.di struck a two-year wage deal for 800,000 workers in Germany’s public sector on March 8 with wage increases of 2.65% for the current year and 2.95% for 2014.
The deal is roughly in line with other recent wage agreements (for instance, a 3% increase for steel workers in 2013). I expect average wage increases per German worker to be just below 3% in 2013 — and a full 3% next year.
With gains in employment of around 1% (in mainly well-paid jobs) and inflation close to 1.5%, the real disposable income of Germans will likely rise by slightly more than 2% in both years. Even if the ever-so-prudent Germans do not reduce their savings rate, they do have plenty of money to spend.
Stronger German demand is one of the key stabilizing factors of the eurozone. Fortunately, 3% wage gains are still modest enough to not undermine the competitiveness of the German economy.