Germany is playing a leadership role to the surrounding 19-member Eurozone countries. The country has the largest economy in Europe and has record low unemployment, optimistic investors, and strong gross domestic product (GDP) growth. But despite this bright outlook, Christine Lagarde, managing director of the International Monetary Fund (IMF), lists three issues of concern for Germany both in terms of its own future and that of other euro nations.
1. Low Wage Growth and Inflation
One challenge Germany faces is improving wage growth for workers. Following the 2008 global financial crisis, German workers accepted low wage growth in return for job security. However, the country has a record low unemployment rate, 3.9% in 2018, along with strong GDP growth. If German workers received wage increases, they might be inclined to spend more and save less, which would boost the German economy. According to Lagarde, an increase in wage growth in Germany would also help other euro area countries because it would bring the inflation rate in the euro area closer to the European Central Bank’s target inflation rate and keep prices stable.
2. An Aging Society and a Budgetary Surplus
Germany has a budget surplus, its public debt ratio is falling rapidly and there is room for the government to increase public spending. However, the government must choose how best to allocate resources to long-term investment initiatives, such as road construction, training programs for the recent influx of refugees, quality childcare and afterschool programs, while also saving money to pay for the pensions and health care of its aging population.
Germany relies heavily on its auto industry and exports to Asian countries, many of which are industrializing. But some economists see a need for Germany to invest more in digital ventures and R&D, and the government is spending more to provide the impetus for venture capital investment in small and mid-size businesses that pursue software and technology innovations.
3. Balanced Savings and Investments
At 8% of GDP, Germany has the highest current account surplus worldwide in dollar terms, which means that the country exports more than it imports. But this implies that German citizens are saving rather than spending, which hampers economic growth. Lagarde considers the current account surplus too large and sees a significant challenge for Germany in terms of reducing the need for the population to save for retirement by encouraging older workers to stay in the workforce.
Europe and Increased Cross-Border Risk
The euro area, in general, is also showing signs of potential strong growth, according to Lagarde. However, Germany and its cohorts need a cushion that can provide relief during the next economic downturn. Lagarde is calling for the advancement of the capital markets union to encourage cross-border sharing of risks. This will require countries with high debt levels to reform their budgets and all countries to increase their productivity, which has been largely stagnant since the global financial crisis.
Germany entered 2019 with a rosy economic outlook. However, the nation will undoubtedly be affected by the speed of reforms in the euro area, which are slower than the country would like, and increasing anti-globalization policies that are emerging worldwide. These could all hinder Germany's growth and that of other European countries.