Will Merkel leave Germany fit for the future? Probably not

FRANKFURT • Angela Merkel’s play-it-safe approach to running Germany’s economy sidelined major initiatives, leaving a growing list of challenges for the next chancellor.

With Annegret Kramp-Karrenbauer winning a hotly contested vote to succeed Merkel as head of the Christian Democratic Party, the chancellor’s transition out of power has begun after 13 years. While Germany’s economy still enjoys record-low unemployment and budget surpluses, cracks — from the auto industry’s electric-car struggles to decaying infrastructure — are becoming increasingly evident.

“Solid stewardship rather than transformative leadership” is how Stefan Schneider, Deutsche Bank AG’s chief international economist, describes her tenure. “Making Germany fit for the future is still up to her successor.”

“Germany’s industrial structure is unparalleled. In the past, that’s been a strength; now, it looks like a weakness.

“But saving — and the huge current-account surpluses that went with it — has been the defining feature of Merkel’s economy. It will be for the next chancellor to discover whether those funds were invested wisely,” said Jamie Murray of Bloomberg Economics.

The disruption rocking the auto industry is a prime example of how Merkel’s cautious pragmatism can backfire. In 2009, the chancellor set a

goal of having one million electric cars on German roads by 2020 but didn’t back it up. Tesla Inc and China have since pulled ahead in electric cars, while Volkswagen AG (VW), Daimler AG and BMW AG play catch up in a technology shift that threatens to eliminate 114,000 German automotive jobs by 2035.

At the time, Merkel maintained tax incentives that promote diesel as the German auto industry dithered on battery-powered vehicles.

But when VW’s cheating scandal hit in 2015, the government was put in a position of having to defend diesel, a technology that German carmakers need to meet increasingly stringent emissions regulations. That put on hold aggressive action to push electric vehicles, as it could risk accelerating diesel’s demise.

Banks

Even though Merkel’s government spent more than €30 billion (RM141.78 billion) on bank bailouts in the aftermath of the debt crisis, the German financial industry continues to struggle with low profitability and strategic missteps.

Deutsche Bank, the country’s biggest lender, has been engulfed in numerous scandals and paid more than US$18 billion (RM75.06 billion) to settle legal disputes. Regional state banks remain vulnerable and some have faired poorly in stress tests. The network of hundreds of

public-sector savings banks, or Sparkassen, could run into trouble if the economy slows and rising interest rates forces them to reprice deposits.

Energy

True to form, Merkel’s energy policy was reactive rather than strategic. In 2011, she moved to phase out nuclear power after an accident at Japan’s Fukushima plant. That increased the use of highly polluting coal and put Germany further away from reaching its ambitious environmental goals even as it pushes a €500 billion shift to renewable power.

The result: Germany has the highest electricity prices in Europe from heavily subsidised solar and wind power, is increasing its dependence on Russia gas and will need to import coal for decades to come after shutting its last deep-shaft mine.

Infrastructure

Germany’s once-envied network of roads, bridges and railways are decaying due to decades of underspending. The country’s municipalities alone are looking at an investment gap of about €159 billion, according to state-owned development bank KfW. And there are high-profile failures like Berlin’s long-delayed new airport and a train station in Stuttgart.

Digital infrastructure isn’t doing any better. Network coverage is among the worst in Europe. Merkel’s coalition appointed a digitalisation czar, but balked at creating a new ministry to prod Germany’s transition away from old-school engineering.

Demographics

Germany’s population is on course to peak next decade, and by 2030, the number of people exiting the workforce through retirement will be double the number of young people entering the labour market. The demographic trend creates potentially disastrous consequences for social security and pension systems.

While Merkel raised the retirement age to 67 in her first term, she’s repeatedly argued against further increases and instead lowered the threshold for some Germans. To bolster the workforce, Germany needs an influx of immigrants, but her open-door policy on refugees has spurred violent protests, making migration policy a political minefield.

Europe

Merkel has been a staunch defender of the euro and of continental integration, and her dogged determination helped the bloc weather the sovereign-debt crisis. But critics counter that German-inspired austerity fuelled the anger that’s fraying European solidarity and threatening the stability of the euro.

While she never stood in the way of European Central Bank president Mario Draghi’s efforts to shore up the common currency, she dragged her feet on a common budget and joint deposit insurance for banks. The incomplete reforms could expose the euro to more drama when the next crisis hits. — Bloomberg