It is the "comeback of the year". The hitherto "sick man of Europe" is healthier than ever, and is now top of all real estate investors shopping lists - Germany is "in". Figures, headlines and surveys point towards a buoyant economy - businesses, manufacturers, Mittlestand, consumers etc. - everyone is confident about their situation. And there are good reasons to be happy - unemployment is 7.6% (6.3% , according to the Labour Force Survey), the lowest level since 1993. East German regions now boast unemployment close or sometimes even below 10% - Thuringia is now 9.9%. Order books are full - the EU commission new orders survey now lies @ 16%, the highest level since Dec 2006 (and the second highest level since 1985). Labour shortages are beginning to be felt, as well as some calls for increased skilled immigration.

One of the key reasons for this buoyancy has been the German government policy during the crisis. The government decided to support employment by partly subsidising jobs at a time where order books where empty. As a result, businesses kept their workforces instead of laying them off. This implies that now, with the recovery, German Mittelstand has its skilled and competitive workforce ready to boost production at short notice - thus the rapid growth in 2010. Logistics, offices and retail are feeling the boost.

But not all is buoyancy and success. Germany's own traumas are coming back with a vengeance. Indeed, every nation has its economic trauma, and Germany's traumatic experience happened in 1923. Unable to pay its WW1 debts which it was compelled to pay at the infamous Versailles Treaty, the Weimar republic reverted to printing money. And, boy, money was printed. Suffice to say that an ounce of gold in early 1919 was DM170. By November 1923 the price of that same ounce had gone up to DM 87 trillion - an annual inflation rate of 845%.

Even three generations later, Germans still dislike inflation as a result. Volatility and market booms are also to be feared (as they can also potentially wipe out people's savings). Consequently, Germans tend to distrust (and sometimes become dismissive of) reckless Mediterranean / Celtic or Anglosaxon nations that are at ease with volatility and the inevitable booms and busts that tend to come along - particularly if the bill has to be paid by Germans.

Consequently, while corporate Germany is undergoing a renaissance, the average German is worried because inflation was 2.2% yoy in February. And this captures headlines. It is not the record GDP growth in 2010 and the low unemployment. It is inflation that lies in Germans' minds.

The second important fear is the possibility of bailing out Portugal, Greece, Ireland and (maybe) Spain. Indeed - Germany's contribution to the eventual bailout could amount to €135bn under a worst case scenario. Plainly, it is German taxpayers' money that is used to fund other governments' and foreign banks' exuberance. This is the kind of stuff that makes Germans lose confidence in their future.

Despite the above, consumer and retailer confidence remains high (low unemployment clearly helps). Consumers are still willing to make a "major" purchase over the next twelve months (this index is also at its highest since reunification), but the global EU commission consumer confidence index peaked in November and has been falling (very very gradually) since, as news of Portugal's government collapse, or Ireland's bank test are reaching German ears.

If the average German worries, the German chancellor, Angela Merkel, should well be worried, as proven by recent election results. If Ms Merkel worries so do Mr Van Rumpuy, Mr Barroso and Mr Trichet - their jobs become far easier if Ms Merkel is happy. Trichet's worry was quite clear in a recent press conference of the ECB, where he clearly hinted that an interest rate rise could be expected very soon. On the more complex political arena, Merkel has been pressing for the EMU treaties to be changed so that there be a legal obligation to keep budgets balanced, within some measure.

In other words, Germany's solution to Mediterranean / Anglo Saxon consumer and lending exuberance is simple - "just become like us". We have our "peccadilloes" - Hypo Real estate - but we are mostly prudent in our approach, that's the way you all need to be.

Germany spent the 2000s slowly gaining competitiveness through low inflation and low wage growth (labour costs rose by barely 6.4% between Q1 98 and Q3 10, while in the UK, they did so by 37.5%). Partly as a result Germany is now an export powerhouse.

The process of fiscal consolidation, slight monetary austerity, regulated banking sector, prudent lending and (possibly) wage moderation will probably bring us a decade of low growth in the European periphery, as they adapt to a new reality of becoming more like Germany. In the meantime, as German fears dissipate, low unemployment and a healthy corporate sector will maintain confidence high, and, at last, make Germans spend their hard earned euros. European prosperity as usual depends upon Germany.

José-Luis Pellicer, Rockspring Property Investment Management

 

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