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Germany’s Golden Opportunity

The German economy’s enviable combination of strong growth, low unemployment, favorable financing conditions, and large budget surpluses masks long-term vulnerability. To place the economy on a stronger footing – and to help pull Europe out of its malaise – will require substantially higher public and private investment.

BERLIN – The German economy appears unstoppable. Output is expected to grow by more than 2% this year, and wages by 3%, with the current-account surplus set to reach a towering 8.4% of GDP. Unemployment has been halved over the last decade, and now stands at an all-time low. German exporters remain highly innovative and competitive. And the government is recording a sizeable budget surplus. While the rest of Europe remains mired in crisis and self-doubt, Germany’s future seems bright and secure. But appearances can be deceiving.

In fact, today’s rosy macroeconomic data tell only part of the story. Since the euro was established in 1999, Germany’s productivity growth has been no more than average among European countries, real wages have declined for half the workforce, and annual GDP growth has averaged a disappointing 1.2%.

A key reason for this lackluster performance is Germany’s notoriously paltry investment rate, which is among the lowest in the OECD. The result is deteriorating infrastructure, including roads, bridges, and schools. This, together with an inadequate regulatory and business environment, has raised concerns among companies; since 1999, the largest German multinationals have doubled their employee headcounts abroad, while cutting jobs at home.

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