The country can survive and even prosper if a Green-led government surfaces in September, but Germany is not without other risks and uncertainties.
Germany’s country risk score improved in Q1 2021, but like the proverbial dead-cat bounce, it was a modest revival considering how far the country has fallen in recent years.
Not that Germany is a high-risk option. It remains the 11th safest country globally in Euromoney’s risk table of 174 countries, split into five categories of risk.
Nevertheless, Germany is 14 points adrift of top-ranking Switzerland and it is no longer a tier-1, lowest-risk option, sitting less than a point above Ireland in tier 2.
The economy will improve, and unemployment is characteristically low, plus Germany has few external economic risk problems given its current-account surplus and adherence to the single currency.
Its low political and institutional risk, especially compared with other similar European countries, is a key strength, says sovereign risk expert and Euromoney survey contributor Norbert Gaillard, of NG Consulting.
Yet the country is still struggling to vaccinate the population quickly enough while battling a second wave of Covid-19, with daily new cases rising since mid-March.
Despite an initial success controlling the spread last spring, more than 3.5 million German citizens have registered Covid-positive since the crisis began, and almost 85,500 have died from the coronavirus.
Germany’s risk score has deteriorated more than any other G10 member state during the past year, except for the UK. Brexit is one factor to consider, but according to analysts taking part in Euromoney’s global risk survey, there are several other concerns potentially affecting returns.
Michael Melvin, executive director at the Pacific Center for Asset Management, at UC San Diego’s Rady School of Management, is a well-known professor of economics contributing to Euromoney’s risk survey.
He gives one example of a structural flaw: that the pandemic has really brought to the fore how behind Germany is in the digital world – a risk that could affect its growth potential.
“The poor quality of the vaccine registration system and lack of access to good broadband capability across the country is long overdue for government attention,” says Melvin.
“Many families with children at home in the early days of the pandemic were unable to have their kids participate in e-learning from their school. If investments are made in this area, it can only benefit the country as a whole.”
As for the political risks, Melvin thinks the governing Christian Democratic Union (CDU) made a mistake not supporting Markus Söder, the leader of its sister party in Bavaria, as their candidate to replace chancellor Angela Merkel.
The successful candidate of the Christian Social Union is lawyer and journalist Armin Laschet. According to Melvin, he “is not a winner … [but] the Greens have a good shot at winning and forming a coalition” in the September parliamentary election.
The Greens are polling well and could even outdo the Union, having moderated over the years and are more mainstream than they used to be, Melvin notes.
“Still, one would expect a big push on climate change,” he says. “Also, ESG [environmental, social and governance] investing is likely to be even more important in Germany following such an election outcome.”
Melvin, however, doesn’t see a potential Green victory as changing the dynamic for investors that much. He believes Germany will remain the industrial powerhouse of Europe.
For Gaillard, there are pluses and minuses to note.
Positively, Annalena Baerbock, leader of the Greens and candidate for the chancellery, has recently promoted the creation of a venture capital fund financed by the state to support sustainable innovation.
Germany’s commitment to a rapid return to normalcy creates considerable macroeconomic risk in Europe- German Council on Foreign Relations
“The Greens have also strengthened their ties with business circles,” says Gaillard.
“A few years ago, they created a platform with major industrialists. So, we can consider that the party has, roughly speaking, adopted and updated ordoliberal values, ie free market plus regulation to preserve competition.”
However, Gaillard also notes that several points of their programme are likely to hinder entrepreneurship, such as the minimum wage increase and the reduction of the working week.
Even so, he seems to agree with Melvin in that the participation of the Greens in the next German government should not worry international investors.
“This could be a catalyst to accelerate industrial modernization and stimulate infrastructure investments, not only in Germany but also in Europe,” he says.
Johan Krijgsman, of Krijgsman & Associates – another risk expert contributing to the survey – believes Germany’s risks have not lessened and sees the current political and economic situation as unpredictable.
“The stepping down of a steady hand [Merkel] in a turbulent time raises considerable risks,” he says.
“A black-green coalition [of the Union and Greens] seems probable at this stage, but we have not heard the Green platform. Will it be realistic/popular/impossible? No one can tell right now.”
According to Krijgsman, other factors influencing Germany’s risk profile include its unsatisfactory experiences with immigration, dissatisfaction with the vaccine roll-out, rising debt and climate sensitivities.
“All these could prove to be disruptive electoral forces,” he says.
As for its economy, Germany has been remarkably resilient since the Covid-19 crisis erupted, says Gaillard.
“In 2020, its GDP growth declined by only 5%, and by the end of 2021 its unemployment rate should not exceed 5%, which remains low,” he says.
The fiscal metrics have deteriorated, though, due to the pandemic, forcing the government to spend more while receiving less in revenue. Consequently, the gross debt burden (EU measure) rose from 59.7% of GDP in Q4 2019 to 69.8% of GDP in Q4 2020, according to Eurostat.
Germany is not alone. Virtually every country is experiencing the same problem.
Yet, the plan to return to the constitutionally determined fiscal brake – temporarily abandoned to deal with the Covid crisis – runs the risk of premature fiscal tightening, according to the German Council on Foreign Relations.
“Germany’s commitment to a rapid return to normalcy creates considerable macroeconomic risk in Europe," it states. "Its plan to consolidate 2% of GDP in 2022 would translate into a negative fiscal impulse for the euro area of 0.6% of GDP.”
This “would stifle recovery and undermine efforts to rebuild transatlantic ties in trade and macroeconomic cooperation”, given the fact Germany accounts for almost one-third of the economy of the euro area.
The survey contributors also point to several other considerations, such as managing energy imports from Russia “while supporting Nato allies’ views that Russia should be castigated”, according to Krijgsman, who also mentions Germany’s trade with China in an environment of less globalization and more protectionist policies that will not help Germany grow.
Gaillard echoes this by stating that, in the medium term, Germany’s main challenges will be to cut its excessive dependence on Russian oil and gas, and Chinese electrical and electronic components.
Krijgsman also refers to the old problems of demographics and the absence of UK support for the EU budget putting a heavier burden on Germany, as well as the ineffectiveness of eurozone monetary policy to generate investment.
“One aspect of the pandemic felt by Germany and elsewhere [given the build-up of debt] is a sense of loss of control,” he says.
That suggests Germany must find a new way. The Green revolution could be a risky but potentially rewarding solution.