German grand strategy and economics

(Trust me, there is a link between this text and defence, at least in a wider sense.)

Germany's culture produces a birth rate lower than the mortality rate. This has been resistant to political efforts (some of them quite costly) to change it, even to those efforts which copied seemingly successful policies from abroad. This cultural characteristic extends to immigrants; the fertility among Turks in Germany has dropped below 2 per female long ago as well.

Immigration is being kept moderate and insufficient to compensate the shrinking of the population, for more immigration would provoke greater problems than the shrinking population does (we saw that already). Germany also fails to attract a large share of well-qualified immigrants (and even when they arrive we typically dismiss their official job qualification in jobs such as teacher, physician or nurse), as do many countries with substantial immigration.

It's thus a rather safe bet to assume that Germany will experience a moderate shrinking of the population for decades to come. The German population doesn't disappear, of course. Official scenarios predict a reduction from a zenith of about 82.5 million to about 65 or 70 million by 2060.

The change of the working age population is more troublesome. The changes are slow and thus allow us to get used to the future, but there's nevertheless a widespread expectation that the ratio between working and not working people in Germany will deteriorate. (Articles tend to exaggerate a bit by looking at working-to-retiree ratio, neglecting that a small youth  share is a partial counterweight to this.)

So this a long-term background for German policy, and one determinant of a German grand strategy (as it  forms accidentally and incrementally).

One of the concerns caused by the demographic change for decades (began in the 80's) is that the current system of pensions may fail us and not provide enough income to retirees in the future. It is a transfer system with current working population paying for current retirees. This may indeed look ugly by 2040 with fewer people working and more people being retirees, although I expect us to get used to it and to adapt easily, not the least because the rate of technical progress is still well above 1% per annum. Retirees of 2040 will probably live better than today's retirees.

This way of financing pensions is the only approach for a nation as a whole which made sense. Back in the 50's "we" knew that fortunes were destroyed in two world wars, a hyperinflation, a great depression and then again in Nazi disrimination of minorities and political opponents - all in the previous 40 years. A savings-based pension systems wouldn't have survived this.

There's an increased effort to provoke more width of savings in Germany, with the middle class being asked to save for extra pension income in order to improve on their pensions. This seems sensible for middle class families, but how does it make sense on the national level? What could these savings do? The really, really durable investmens are typically investments in public infrastructure. I can tell that I often ride a train along a route which was obviously cleared and fortified more than four generations ago, for example.
Very little but family homes is as durable. But we already have badly scattered settlements in Germany. The lesser efficiency of public services in for scattered settlements in comparison to cities points against the idea that every middle class family buying a family home could make sense. Even if they did; the low income groups in Germany cannot save much, especially not since the Schröder reforms ten years ago.

Nevertheless, the promotion of family savings for retirement - especially based on subsidised plans offered by insurance companies - is an important reaction to the demographic change expectations. Insurance companies and many individual savers don't buy family homes, though: They invest in financial markets.
Now how exactly could this be helpful on the national level? How could savings now reap benefits in 2050?
This is simple, outright trivial, in microeconomics. Meanwhile, it only works in macroeconomics (the nationwide view) if we export capital.
After all, machines built now won't last till 2050, so they won't raise incomes in 2050. Private capital investment now is a very poor substitute for missing workers in 2050.
We can invest now and expect this money to somehow keep working till 2050, then in conjunction with foreign workers. We can invest savings abroad.

This means capital exports now and capital imports in 2030-2060. In fact, it means net capital exports and imports. There's an entity between capital export and goods and services exports in macroeconomics; we can only build up our savings abroad by exporting more goods and services than we do import (save for a couple usually unimportant exceptions such as transfers).

This still doesn't help German low income groups, but at least it kind of makes sense for our middle class. Fact is, much of the saving is actually being done by the rich instead, but that's our very own distribution and allocation issue and not felt by foreigners.

Now with capital exports being the same as goods and services exports and us having a huge net export, there's a lot of criticism about that. Famous Nobel prize winner and columnist/blogger Krugman and now even the EU appear to led a charge against this, demanding a more balanced trade (I would actually like that, but it's not compatible with the grand strategy elements laid out so far). They look at the short term, and at how the export strength requires a depressed wage level (since the other balancing mechanism, the common currency, fixed the exchange rates between Germany and many other European countries). This demand makes a lot of sense in the short term, but it completely fails to appreciate why this behaviour actually makes sense (= is a somewhat promising stratey) for Germany in the long term. Well, if our savings don't evaporate.

The Euro crisis is in part so horrible to Germans because it threatens the idea that we could have our savings work for us abroad and recall them piecemeal only at retirement age. Such investments need to be reliable, low risk, in order to make sense. It's especially pointless to maintain depressed wage levels, work hard, save and export much if this only means you'd be forced to support those who did the opposite in order to balance out your deviation from the average.

So that's the economic policy short / long term conflict between Germany and much of the EU. Notorious short-term-only thinkers such as Krugman don't get this, but now maybe readers of Defence and Freedom get this.

I promised a link to defence. Well, remember what I wrote before; world wars wiped out savings twice. Unreliable foreign governments can decimate savings, too.

The optimum world for this new German grand strategy element (to counter the demographic change's consequences at least for the middle class) is a world of reliability, of the rule of law (the rule of rules), of no wars between great powers, of cooperation instead of confrontation. "We" want stability and reliability. 
Countries with a decade of trade balance deficits as their background may be first and foremost be concerned about trade or political crusades; but countries with a decade of trade balance surpluses as their background may actually be most concerned about the risk to savings abroad.
Assume a country turns into a troublemaker after being a net import of German goods for a decade. This could lead to less trade, and Germany as a whole would lose annual benefits from trade equal to a few per cent of that trade (profits, savings). Meanwhile, losing savings invested in that troublemaker country could easily be twenty times as great and thus be much worse than years of no trade with the country in itself.

The classic post-1945 grand strategy of West Germany was about the integration with the Western world and the industrial pursuit of wealth for the masses. The grand strategy of the 90's was about pulling East Germany up to West Germany's level of prosperity and sensibly remove the shackles and attitude of Cold War's Germany; which was on both sides of the wall coined by limited sovereignty and little freedom of action. The common Euro currency finally led in conjunction with the wages-depressing Schröder reforms to what I described above. It wasn't really figured out by one or two geniuses (as was the Cold War strategy of Adenauer and Erhard) and then enacted, but grew as different actions and outcomes compounded to a whole, not being changed because it seemed to make some sense.



  1. Free movement of people and capital within the EU seems the most obvious answer. Germany can hardly predict non-war states outside Europe.

  2. Now, for bonus points, look at France and its population growth rate. Pretty soon it will be the most populous nation in Europe (and therefore want to call the shots).

    That will have a lot of impact on internal EU politics.

    1. European Russia has a much bigger population and wills stay that way. And your "pretty soon" is more than a generation away if we look at the EU only.

  3. @Ael

    My basic problem with the assumption large population = power is that only a population that produces cash which could be burnt gains power: 77 Million French, each still procucing a trade deficit of 600 EUR per year, do not gain anything when the 60 million Germans reap the benefits.

    BTW: The German population is growing again as net immigration is larger than mortality surplus and even the Austrian government, which has a very German population structure, works now with an increasing population until 2030.


  4. About mercantilism as a great strategy.
    (To set things from the beggining we all know German manufacturing structure produces expensive products with high margins. Due to a spectacularly good marketing it doubles its punching strength. It is very productive financially speaking.)
    The term Germany obscures the fact that the country is not a unified structure.
    Corporate Germany did very well. It sacrificed another " Germany" , the working class one which had to take on the tax burden corporate Germany disliked and accept low incomes and little job stability - temporary and contract jobs.
    We get 2 sides of the coin, 2 countries.
    One with record breaking corporate profits, huge bonuses for management, producing a large trade surplus.
    The other side brings us the workers who can not save or spend money they have not earned. Or which they had to pay in taxes and on utility bills. Corporate Germany by principle does not like to pay taxes and loves the new energy direction the country took as suppliers of equipments. The higher electricity tariffs are for proles to pay of course.

    The end result can be identified using stats.
    Median household wealth—half the households had more, half less. Germany is ... the poorest in the Eurozone, based on household median wealth.
    Germany had a median of € 51400.
    Quoting :"The comparisons are sobering. German household wealth amounted to less than half the Eurozone median of €109,000 and was even below that of former east-bloc countries, the poorest of which was Slovakia at €61,200. West Germans were better off, barely, at €68,000. East Germans were steeped in poverty at €21,000. Their comrades in Slovakia were three times richer."
    Interesting as a strategy. It seems to me it was a strategy of the German elites for the German elites.


  5. And then there is another angle.
    Median wealth we talked about.
    Average wealth is a different matter. There Germany is a wealthy society. 195 000 euro/household.

    So we have a wealthy society which squeezed its working people dry, making them the poorest in the Euro zone.
    There are the surpluses we talked about.
    Because high wealth for the common Germans would mean consumption , even if that is represented by children. Wealth concentrated at the upper echelons of society moves into financial instruments.

    You mentioned many aspects of Germany's status but I could not approach them all.
    I think this is one of the most important and arbitrarily chose it.


  6. "It's especially pointless to maintain depressed wage levels, work hard, save and export much if this only means you'd be forced to support those who did the opposite in order to balance out your deviation from the average."

    The problem is that the targets of this industrial and commercial policy interpret it as being the targets of an economic war.
    And now they have to do the same.
    Depress wage levels and direct all their capital resources towards helping exporters export.
    It is happening right now.
    The degree of success varies of course.

    So now we have a depressed internal market going downwards. And everyone is or will be scrambling to export.
    Corporate Germany is the one to shoot first.
    Now, logically, there will be consequences.
    It could have been predicted from the beginning.
    Talking only about the major cases.
    Neither France nor Italy are going to accept the elimination of their industrial structures and them all being sent to the third world. So they are going to fight back using exactly the same means. Only more of them.
    Germany has some experience with this type of approach.
    And got the same results each time.

    So what we can easily predict for the future ( everything is connected) :
    1. The compression of the European market will continue.
    2. Wage levels will continue to decrease taking down purchase power.
    3. Large structural unemployment will become a feature of the European economic system. ( affecting wage levels and the size of the internal market).
    4. Everyone will try as hard as possible to export.
    5. Inevitably German export economy will be hard hit, by the contraction of the export markets and the increased competition.
    6. In other external markets an increase of German exports in order to compensate is unprobable . Many factors involved, from decreasing purchase power in US to increased competition from China and Japan ( sort of Japan).
    7. The enormous amount of financial instruments floating around are covered in a very small measure by actives in the real world. So math clearly tells us that one way or another - default or inflation - they are going up in smoke.
    Those tens (???) or hundreds (???) of trillions floating in the digital world are closer to a collective hallucination then to anything real.
    Seems to me that German working classes got crushed for nothing. And Germany ( corporate one) started a total economic war against its European partners without any prospective of winning it. The others are gearing up to respond in kind. It won't be pleasant.

    I can not forsee what will happen after.
    We know that Germany hit first. Now the others will strike back. Economically speaking. What will happen next we have no way of knowing.

    I hope that we won't see an escalation to violence. Heinsohn's ideas seem to make sense so we might avoid the worst. We are descending into mass poverty, Europe as a whole becomes a significantly poorer society due to many factors.
    But if we avoid fighting each other maybe we will have a slow decline which would allow us to adjust our economies and lives accordingly.


    1. "I can not forsee what will happen after."

      You cannot foresee anything. You can merely create a scenario.

    2. In a sense you are right.
      Unfortunately the graph is in Italian - I pilfered it from prof. Ugo Bardi's spectacular blog :


      As can be seen there Euro area is no longer a growth economy. And in a constant one or even worse declining one rules change.
      It becomes a zero sum game. Someones gain is inevitable someone else's loss. It is very simple math.
      So the loser has 2 options. Roll over and die or fight back.
      You are right. Maybe France and Italy will roll over and die as modern industrial societies and become poor and subservient colonial dependencies of a another power.
      The fact that they will fight back employing all the economic and administrative means they will be able to use, is just a scenario.
      I understand now.

      I can imagine many other similar scenarios. If you throw a rock upwards, one scenario says that it will fell back. But it is a scenario, it didn't happen yet.
      Maybe the above mentioned rock will fly away to the stars.


  7. About demography.
    The level of immigration to Germany is presently quite high. We can not estimate how it will variate but last year it was almost 1 million.
    In its present form it poses very little problems.
    "965,908 foreigners immigrated into Germany in 2012, mostly from Poland, Romania, Bulgaria and also southern European countries such as Italy, Spain, Portugal and Greece, which have been hard hit by their local banking crises."
    "However 578,759 foreigners also left Germany, leaving net immigration of 387,149."

    If it continues like this Germany will start resembling Austria ( it happened exactly like this in Austria).

    "Turks used to flood into Germany, but last year more Turks left Germany than entered, since the thriving Turkish economy offers opportunities at home. Immigration from Islamic countries has become insignificant."

    No problems on the religious or ethnic front showing up on the horizon.

    Another interesting aspect:
    "Among German nationals, more left the country than returned."
    It is a feature. A significant number of ethnic Germans leaves the country each year.
    So Germany will start resembling Austria sooner rather then later. I am thinking about traditional Austria, the high level of migration from Muslim countries changes the Austrian profile now.

    On the other hand the global numbers for Germany's population will significantly decrease.
    Number of birth in the period 1930s - 1960s was around 1.2 - 1.3 mil/year.
    Now it is under 700 000/year.
    We should add immigrants to the number of old people living in Germany even if they were born elsewhere.
    So in a few years math indicates that number of death will be around 1.3-1.5 mil/year.
    Number of birth will probably decrease. But even if they hold due to a large number of potential mothers immigrating to Germany it won't change the numbers too much.
    So we can expect that Germany will have a population decrease of 6-700 000 per year for decades.

    In theory.

    Because as we can see now, ethnic Germans continuously leave the country. And if economic problems hit the country - this event has a large degree of probability , the immigrants will leave in large numbers.
    Last census showed 1.5 million people less then the estimates. And this happened while Germany can offer plenty of jobs.
    Any economic turbulence would have a significant impact.
    The country seem to be quite unfriendly to people. It appears that both ethnic Germans and immigrants leave if they have the opportunity. Any opportunity.

    So in conclusion we know that Germany will become smaller. We can not predict the impact this will have on Europe as a whole. But there will be large consequences.
    Germany is going to become the 2nd and then the 3rd country population wise in Europe.
    It's young population in already the 3rd.
    If we count Russia it is the 4th.
    So clearly Germany's status will change. And the status of the other large European states.
    We do not know what impact this change of power gradients will have. But we know they will happen and have a significant impact.