Angela Merkel has a favourite mantra to offer troubled euro-zone countries: they should copy Germany. As The Economist notes [16], she put it last autumn: "What we have done, everyone else can do." Fifteen years ago, so she says, her country was widely regarded as the sick man of Europe; then it opted for fiscal austerity, cut labour costs and embraced structural reforms, turning it into an economic powerhouse. However, there is another mantra Mrs Merkel likes to repeat to her colleagues: Europe accounts for 7% of the world’s population, 25% of GDP and 50% of social-welfare spending. The Economist [16], and George Soros believe, Germany’s current course will exacerbate that problem as Europe's biggest economy is backsliding on structural reforms (as she preaches pre-growth reforms but implements anti-growth ones).
The gap between Germany and southern countries in the euro zone is indeed wide. Its economy is growing faster than most of theirs; youth unemployment in Germany is at a 20-year low, whereas it remains at record highs in Spain and Greece; and the German budget is in surplus, even as France, Italy and Spain struggle to hit deficit targets fixed in Brussels.
When it comes to fiscal prudence, Mrs Merkel is a paragon. Indeed, this newspaper wishes she were a little less austere, and spent more to boost Europe’s demand. But on structural reform, her record is weak. The credit for Germany’s rebound should really go to the “Agenda 2010” reforms started by her predecessor, Gerhard Schröder, in 2003. Since then Mrs Merkel has had the odd flourish—she bravely raised the normal retirement age to 67 in her first term—but overall Germany comes a lowly 28th out of 34 countries ranked by the OECD in terms of reforms since the financial crisis hit.
The Germans have an obvious riposte to this: southern Europeans had a lot of ground to make up. Less easy to explain is the fact that Mrs Merkel’s “grand coalition” government is now actually heading backwards, increasing the burden on German business.
Three examples illustrate the trend. On pensions, instead of continuing to raise the retirement age, the government is actually cutting it for certain workers to 63 or even, in extreme cases, to 61. Second, it is introducing a national minimum wage at a relatively high level, which is likely to lead to job losses, especially in the east. And finally, Mrs Merkel’s Energiewende (energy change) is not only eating up huge sums in subsidies for renewables, but also saddling German companies with electricity prices nearly three times as high as America’s.
None of these things will cripple the German juggernaut in the short term. You can even make the argument that by pushing up German costs and increasing wages, Mrs Merkel is indirectly helping her euro-zone partners. But there are many less harmful ways for her to do that. If she had wanted to push ahead, plenty of areas—energy, retailing and professional services, where Germany has some of the OECD’s most protectionist regulations—are ripe for reform.
Europe’s biggest economy is backsliding, and that sets a terrible example...
And George Soros is not so positive on what is facing Europe today:
"What is facing Europe, unless there is a more radical change is a long period of stagnation. Nations can survive in that way. Japan is just trying to break-out of 25 years of stagnation, where Europe is just entering. The European Union is not a nation. It’s an incomplete association of nations and it may not survive 25 years of stagnation.
"The financial crisis as such is over. But now we are facing a political crisis, because the Euro crisis has transformed what was meant to be a voluntary association of equal sovereign states that sacrificed part of their sovereignty for the common good into something radically different. It is now a relationship between creditors and debtors, where the debtors have difficulty in paying and servicing their debt and that puts the creditors in charge. And that divides the Eurozone into two classes – the creditors and debtors. The creditors are in charge and unfortunately the policy that Germany in particular is imposing on Europe is counter-productive and is making the condition of the debtor countries worse and worse. So, right now Europe is already growing a little bit, the Eurozone, but that’s only because Germany is forging ahead and more than let’s say Italy and Spain are falling behind. "
Seems entirely sustainable...no wonder yields are at record lows and risk premia almost the same