What makes Germany Europe's number one economy?

 Source:  Nicolas Scheuer  / Wikimedia

Source: Nicolas Scheuer / Wikimedia

Wolfgang Schäuble is probably the happiest finance minister in Europe. Germany is at an economic high. On Thursday, four trusted institutes revised up gross domestic product growth from 1.2% to 2.1%. Exports, which are vital to the economy, are higher than pre-recession levels, unemployment is at its lowest for 24 years and consumers are spending. The stock market index DAX, which charts the top thirty companies, recently reached a record of 12,000 points. 

There's a good economic climate in the European Union right now, but some countries are struggling to take full advantage of it. So what makes Germany so successful?

Defining success

Today, the country runs a balanced budget (a policy dubbed 'the black zero' by the two ruling coalition parties) while much of the rest of Europe is running up a deficit well over the 2% of GDP demanded by the European Central Bank, which oversees the euro. Germany's biggest political partner in the EU, France, is well over that target at 4.2%. This means that, while Germany still has debts totalling over three-quarters of its GDP, it is perfectly capable of paying back creditors.

Some are quick to dismiss deficit reduction as a way of measuring success but growing debt can be a sign of economic troubles. In a recession, when welfare payments to the unemployed go up and tax incomes diminish, a rapidly increasing deficit shows a country struggling to get a grip on its finances. Germany is most certainly in control. 

Debt isn't everything but the nation trounces its neighbours in its current-account balance, too. Since February last year, its balance is up by €270 billion, while other Eurozone nations are seeing only modest increases or even losses. This makes Germany a net lender and shows strong economic health. 

Taking advantage of a healthy climate

There are two factors keeping the German economy strong in the first half of 2015, both of which go for the EU in general: low oil prices and the weak euro. 

Source: Eurostat. Germany (blue) is contributing much to the EU's increasing export total (Green), while france stagnates  and the UK grows slowly

The price of Brent crude oil, a benchmark of world prices, has tumbled from a high of just over $120 per barrel in July last year to just $62 as of this month, after briefly dropping below $50.

This has had the effect of a stimulus package on most countries whose economies are more dependent on the use, rather than the selling, of oil. Consumers spend less on fuel for the daily commute and have more disposable income. At the same time, it is cheaper for companies to transport their goods and, in competitive markets, they pass on those savings to their customers. The Bundesbank, Germany's central bank, said that the fall in energy costs saved the country over €3 billion in the second half of last year. 

In the year to February, the country's exports went up by almost 4%. Almost half of the country's GDP comes from exports. The recent drop in the price of the euro was a boost for business. With the euro close to achieving parity with the dollar, it has become a lot cheaper to buy European this year and Germany is in the best position to take advantage of that. 

Building on solid foundations

Both drops, in oil price and the euro, are recent, temporary and also apply to the rest of the EU. Why is Germany doing so much better than its neighbours? Quite simply, it is building on solid foundations.

The country has many strengths, including good infrastructure serving transport into, out of and through its opportune central location in Europe. Its inhabitants are well-educated, with 86% of adults aged 25-64 having earned the equivalent of a high-school degree according to the OECD. This is more than the average of 75% out of 34 (mostly developed) countries.

The well-educated population supports the pillars of the economy: transport services (€275 billion), information and communication (€234 billion), the car and machine-building industries (together making over €600 billion). The country's influence reaches far out into the world, too. Business consultant Bernd Venohr's much-quoted statistic is that German companies occupy a top-three position in two-thirds of industry sectors worldwide.

Fit for the future?

To borrow a phrase from stockbrokers, past performance is not an indicator of future results. The economy is showing promise into 2016 but there are areas to which experts will be paying special attention. 

In order to maintain growth, the state needs to invest more in its infrastructure (currently languishing at 0.6% of GDP) and government investments overall are expected to make only a small contribution to GDP compared with private consumption. 

While exports are up, industrial output is a little low, down by about 12% compared with 2011, due to an economic malaise in some key export markets. Still, the prognosis is good. The economic sentiment indicator created by the European Commission shows a gradual upturn in industrial businesses' investment confidence, which is, of course, good news for Germany's future.

Both employment and wages have gone up in the past year but the government should be careful of overburdening workers with tax. This stifles growth. It is especially important now that consumer confidence is rising. Those who can afford to spend their earnings pay sales tax on their purchases anyway. Reducing social security payments and shifting taxes to property would help remove the burden here. 

The boost from a weak euro and cheap energy is only temporary but the economy is healthy. The revision in GDP growth will give a reason for Schäuble (above) to celebrate but, as seeds of crisis exist even in the most stable economies, there is never room to be complacent.