REFIRE / 42Theme/Envato
Four years ago, in 2020, a book appeared which had the British chattering classes spluttering in mock indignation, while secretly conceding that the author might have been onto something. The book was called Why The Germans Do It Better: Notes from a Grown-Up Country. It was written by John Kampfner, an experienced British journalist with broad knowledge of Germany, and it tapped into the required polemical framework of post-Brexit, Covid-obsessed Britain.
An avowed admirer of Germany and Angela Merkel, then in her 15th year of power, Kampfner painted a picture of a diligent, industrious, unspectacular—admittedly sometimes smug—country that actually WORKED, in contrast to growing British unease about how their own society and industrial structures were visibly breaking down. It hinted at the corporatism driving the German economy, particularly the influence of the motor and chemical industries, and the dodgy stuff swept under the carpet, while suggesting it might be the price the Grown-Ups pay for a stable democracy and a prospering workforce.
How perspectives have changed since then. This month saw the publication of two books casting a spotlight on Germany’s economic performance under Merkel. The first was Ms. Merkel’s autobiography. We’ve not read it yet, but from the reviews we have read, it might aptly be subtitled ‘Je ne regrette rien’. The second, far more relevant for REFIRE, is Wolfgang Münchau’s KAPUT - The End of the German Miracle. The book, which we HAVE read, is written by a true German insider who has contributed for years to the Financial Times, the New Statesman, and Eurointelligence. Münchau, a founding member of the original FT Deutschland team in 2000, strikes so many true chords in his analysis of Germany’s downfall that the reader cannot but acknowledge its essential accuracy. It’s a very painful read.
And all the more painful as so much of what he predicts is coming to pass, ever more visibly, week by week, in the real German economy. Published on November 7th, the book practically foretells to the day the impossibility of the traffic-light coalition and its imminent collapse. Intel’s scrapping of its Magdeburg plans, mass layoffs at Volkswagen and among automotive suppliers, weekly announcements of hefty job losses, the coming Trump administration with Germany firmly in his crosshairs— these all add up to gloomier prospects for Germany in the coming years.
Münchau believes Germany faces a choice and could make the right policy responses to avoid even further catastrophic decline, but he doubts whether the political will exists, let alone a clear understanding of the transformation required, to prevent the slide continuing. Too many forces line up to block Schumpeterian-style creative destruction needed to sweep out old practices and embrace new thinking, from digitisation to education, from bureaucracy to immigrant integration. Germany’s hostility to technology—apart from incremental improvements in combustion engineering and pharma—is now polluting EU thinking in areas like AI, where it has no proven expertise, he contends.
Real estate, as a reflection of wider economic confidence, is particularly exposed to the systemic uncertainty Münchau warns about. As the German real estate industry scrambles desperately to recover its bearings, it must face the inevitable correlation between the health of the wider economy and the wisdom of owning all those offices, logistics properties, shopping centres, hotels, and even residential real estate—at current price levels. The paralysing of the government until after February’s elections means no legislative consequences until then. Even afterwards, many proposals to inject life back into the real estate market, such as subsidies or regulatory easing, will probably vanish—perhaps forever.
Leaving aside Münchau’s highly credible diagnosis, basic observation tells us a lot about the reality going on in many German businesses, not least those depending on discretionary consumer spending. Investors would be advised not to assume we are all set to return to a “Germany as a safe haven” mindset just because headline residential house prices appear to have hit a floor. New factors—rising unemployment, higher energy costs, a shrinking working-age population, and anti-immigrant sentiment—will act as a damper on growth expectations.
Investors in German residential have got away with it so far. Financing is a problem, with a lot of mispriced debt from the easy years of QE now coming due, replaced at much higher rates. But the supply-demand imbalance is still so great that rents continue their upward trajectory, with no likely reversal in sight.
It’s still the case that the overall quality of German residential buildings—their Bausubstanz—is second to none in Europe. The standard of interior finishings, plumbing, insulation, and electrics is so high that Germans often find others’ housing to be... well, sub-standard. Defending this quality is laudable, and most people support sensible policies to maintain and modernise their dwellings—not at ANY cost, of course, since the economic benefits are exaggerated, but for reasonable outlay. The edge for investors over the coming years will lie in finding opportunities where the cost of energy-efficiency improvements offsets the extra regulatory and social burdens created by an increasingly distorted market. A market which will throw up good opportunities but is unlikely to rebound quickly.
Münchau’s key point is that Germany’s policy failure has been relying on industry and exports for growth, doubling down on this model even as the world outside changes fundamentally. Obsessing over the cost competitiveness of its existing industries, instead of major investment in a digital economy, invites competitors like China to come and eat Germany’s lunch.
There is a recognised culinary phenomenon called crab-in-the-pot syndrome. When you place a bunch of crabs in a pot to boil, you don’t even need a lid. If one crab makes it to the top and is about to flee, another will pull it back, ensuring their collective demise. Germany faces elections in two months. Apart from the centre parties’ proven inertia, two extreme parties on the Left and Right, both opposing major economic renewal, are set to garner more than 30% of the vote. Forces for Germany’s economic renewal will find plenty of crabs willing to pull them back into the pot and thwart their flight to freedom.
Freedom. Wait, wasn’t that the title of Angela Merkel’s new book?
