Germany’s demographic challenge

By Fernando Betancor, July 19, 2015

A Mercedes assembly line

A Mercedes assembly line

Germany is not an unstoppable juggernaut. Germany faces both a short-term and long-term demographic challenge: a need for skilled workers and an ageing and declining population.

The recent history of the Greek crisis has conclusively demonstrated that Germany runs Europe. Although the Teutonic nation neither desires nor wields complete and unchallenged mastery, Berlin can impose its will on its European partners when the country feels its vital interests are at stake.

This was the case with Greece: the Germans had worked themselves into a position where no meaningful negotiation with Syriza was possible and so none occurred: not on fiscal easing, not on taxation, not on pension reform, not on privatization and not on debt restructuring. Preventing political contagion while keeping Greece in the Eurozone were considered national security matters. When the IMF admitted that Greek debt was unsustainable, the Germans paid no heed; when the French urged a deal at any cost, including a haircut, they were brushed aside. France was very pointedly and very publicly shown to be a junior partner, a humiliating position for the Fifth Republic, which always considered the European Union as a vehicle for extending French foreign and economic policy across the continent, not being scolded by les Bosches for fiscal imprudence.

This is not at all in Germany’s interests; and the consistent line of foreign policy emanating from Bonn and then Berlin has been that of ‘the good European’: demonstrating humility, self-negation, solidarity, the opposite of arrogant nationalism. For decades, it was almost a sin for one to be proud of being German. That is still an excellent policy: however benign German intentions are and however much Berlin is willing to sacrifice for Europe, there exists a visceral distrust and fear of the Teutonic giant from the Atlantic to the Urals. “Twice was enough” is engraved in the mind of every European, as well as every Russian, and the spectacle of an almost unilateralist Germany crushing a small country like Greece is sure to evoke Munich and the rape of Belgium in some minds. Angela Merkel knows she must avoid this at all costs if Germany is to have any hope of maintaining a stable European Union.

That is a key concern for Germany. The European Union once did serve as a ‘force multiplier’ for the inhabitant of the Elysee Palace, as well as convenient vehicle to complete the rehabilitation of Germany – a reunited Germany after 1991. It still serves the latter purpose, though the velvet glove grows threadbare after 7 years of crisis. In addition to political cover and mechanisms for institutional control, the EU provides Germany with two more, indispensable benefits:

– A common market that permits Germany to export a vast quantity of goods and services to her neighbors. German exports account for fully a third of her considerable GDP; and exports to the European Union are half of that total. So the EU absorbs over 16% of the German economic output, providing a standardized, regulated and barrier free marketplace;

– A common currency that is valued far below a hypothetical Deutschmark and far above the basket of other currencies that used to float about Europe. This reinforces the competitive advantage the hyper-efficient German export machine already enjoys, for her trading partners can no longer devalue their currencies to make German imports 25% or 50% more expensive;

It should be obvious why keeping the European Union together and the Euro indissoluble are fundamental national priorities for Berlin. The re-erection of trade barriers across the continent and a return to a strong Deutschmark would ravage the economy.

Germany is by no means an unstoppable juggernaut; the country faces many challenges. For one thing, the Germans are at least not hypocritical when it comes to austerity, they practice what they preach: but the rigour of that discipline has led to chronic underinvestment in infrastructure. German workers have seen their wages stagnate for over a decade in real terms while income and wealth inequality begin to creep up and become noticeable. Germany is struggling to develop an independent foreign policy position that balances the need for good relations with both the United States and Russia, the jealousy of France, the fractiousness of the UK, and the centrifugal forces threatening to tear Europe apart…   all the while without seeming to have an independent foreign policy at all, since that wouldn’t be keeping in the role of “the good European’.

Germany faces both a short-term and long-term demographic challenge: a need for skilled workers and an ageing and declining population. A great many workers: the economy faces a deficit of perhaps 2 million workers by 2020. Multiple studies suggest that around 400,000 skilled immigrants per year are necessary to keep the Wirtschaft humming. Encouragement for immigration is required, but the country has not proven particularly adept at integrating ethnic minorities, especially those that are of Near Eastern and Asian descent. That may be changing and there are hopeful signs that a new generation of Germans of Turkish ancestry are finding their place in society; but it is almost [1]certain that Germans would prefer their immigrants to be fellow Europeans for any number of sensible reasons: less need for bureaucracy and controls, less risk of terrorism, more cultural and linguistic similarity, more rapid assimilation.

Immigration flows respond to many factors, including ease of obtaining a visa, length and conditions attached to residency and citizenship, culture and openness of a society. But immigration is mainly an economic question; people leave their countries to escape war and persecution or to find jobs, because in their homeland there are none. It is also a ferociously competitive market, for skilled workers don’t grow on trees, and the ones that go to France, Italy or Spain are not available to Germany. But if there are no jobs in France, Italy or Spain, far fewer people are going to go there for economic reasons.

Herein lies the subtle trap for Germany; for while austerity is built into the DNA of the European Union, and Wolfgang Schäuble defends it as if it were the transubstantiation of Christ, it is also a policy whose effects are entirely beneficial to labour-starved German industry. At the very least there is a glaring conflict of interest; at worst, the intention is malicious. With the best will in the world, Spanish unemployment is not going to go below 15% before 2020, if then; Italy is not going to break a decades-long secular decline in GDP growth; and France is not suddenly going to implement the painful reforms she needs to regain competitiveness vís-a-vís the economy across the Rhine. Meanwhile, Goethe Institutes spring up in cities across Europe to teach German; immigration rules are streamlined; state-subsidized language and assimilation programs are launched[2]…I can almost hear the humming of that engine even in Madrid.

I wouldn’t go so far as to accuse Germany of promoting austerity only to drain their neighbours of human capital; there are also other reasons. However, it cannot be lost on policy makers in Berlin that you have to make hay while the sun shines, and this decade looks like one long summer for attracting European immigrants. And thanks to the wonders of a borderless Europe and the Single Euro Payments Area (SEPA), for every young, bright, ambitious Southern European that travels to Hamburg or Düsseldorf, there is a German pensioner who would like to retire in Ibiza or Corfu.

That may be an economically efficient trade-off based on pure Ricardian competitive advantage, but most countries will object to being slowly deindustrialized in this fashion.

Germany continues to win the immigration competition, sucking in vast numbers of highly educated and young Europeans to build her Wunderwirtschaft, the hyper-competitive export economy that is the envy of the world. It is a phenomenon we Americans are well accustomed to, as the best and brightest abandon Detroit or Scranton or Columbus to settle in Menlo Park or Atlanta or Los Angeles. Such internal movements in America don’t stir the embers of nationalism, but in Europe the coals are still hot. Berlin may soon have to decide if it can afford to continue a policy which beggars her neighbors to feed her industries.


Fernando Betancor is an American economist living in Madrid, Spain. He is an active member of Democrats Abroad and an advocate of political and economic liberalism. He publishes articles on his website Common Sense and tweets @fdbetancor

Article courtesy of Open Democracy

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