There are more people employed in Germany than at any time since World War II. Wage levels continue to rise. Exports are booming due to the devalued Euro. And yet, Chancellor Angela Merkel’s favorability ratings have declined from 71 percent to 46 percent. The New AfD party, with a far-right ideology, has about 15 percent support nationally and up to 25 percent in some parts of Eastern Germany, attracting those who have been apathetic about politics and others disaffected from the left-wing parties. If everything is so wonderful, why does it seem like the country feels so terrible?
I have spent the past three days in Berlin, speaking with politicians, business leaders and intellectuals. Here are a few observations on Europe’s leading economy:
1. Upcoming Election in September, 2017 — The likely opponents are Mrs. Merkel for the Christian Democrats and Sigmar Gabriel for the Social Democrats. There are four other parties, most importantly the AfD (Alternative for Germany) and Greens. At present, the polls sit at 50/50 for the two top candidates. It is possible to conceive of a coalition of the Socialists, Greens and Social Democrats or a coalition of the Christian Democrats and Social Democrats. Merkel’s biggest risk is the general alienation from institutions, in part caused by bizarre opinions expressed online, then spread peer-to-peer, substituting for mainstream media opinion.
2. Brexit — The freedom of movement is a non-negotiable for the EU. Whatever affection is evident for the free market attitude of the UK, this is a bright orange line that will cause Britain to lose its advantages in free flow of money and thereby threaten London’s position as the financial center of Europe. In fact, the Mayor of Frankfurt has had 1,000 inquiries from City-based firms about relocating staff to that city.
3. Recent Business Scandals Take a Toll — Centerpiece companies in the Germany economy are stunning the public, causing a general diminution of trust in the business community. The mortal struggle between Deutsche Bank and the U.S. Justice Department over a proposed $14 billion fine for mortgage fraud in 2005-7 and the embrace of genetic modification inherent in the Bayer acquisition of Monsanto are causing diminished confidence in the private sector.
4. Energy Policy — The “Energiewende” is the German version of America’s Apollo program. The country has moved a dispersed energy production model from 600 power plants to 1.5 million plants, of which 80 percent are for solar. The goal is to create a competitive advantage for German companies such as Siemens, which can develop products at home that can be sold abroad in Asia and Africa. The question is whether the country can manage the transition in a way that will avoid cost disadvantage for manufacturing, which accounts for 20 percent of GDP.
5. Changing Demographics — Germany is graying in much the same way as Japan, with two times as many people going into retirement as entering grade school. This is one of the rationales for immigration. Note that the country has absorbed between 300,000 and 400,000 immigrants for each of the past ten years, with a bump last year to 1 million immigrants due to the conflict in Syria.
6. The G-20 in Berlin Next September — Currently there are four stated goals on the agenda: A need for a compact for Africa; provide more resilience to shocks to the global economy to keep 2008 from happening again; a discussion of the process and implications of digitalization; and a debate on inclusive capitalism.
7. The Changing Marketing Services Scene — The hottest ad agencies are local ones, such as Jung von Matt or Heimat, as MNCs such as Ogilvy fall behind. There are now publisher-owned agencies, notably Territory, owned by Gruner + Jahr, with 1,000 staff; and C3, owned by Burda. Media agencies are leveraging their $28 billion spend on content creation, while companies like Mercedes are doing their own advertising with their agency Antoni.
8. Start-ups Threaten the Giants — Mainstays of the economy, such as Schindler Elevator, are concerned about those buzzing around their highly profitable service and maintenance business. As one tech entrepreneur told me, Germany lags in the software game and will lose its dominant position in manufacturing unless it has a new attitude toward transformation. “You have to be willing to kill yourself, kill your legacy business. Cisco and Amazon have each done it four times.” He cited Tesla as a software-oriented threat to German carmakers.
9. Trade — The failure of the EU to reach a deal with Canada last week was deeply disappointing to the Germans, who rely heavily on exports. Germany wants to avoid a situation where every country is forced to go alone on trade deals. Agriculture remains the big stumbling block, most recently the Walloon area in Belgium, which has a big dairy industry that would be threatened by Canadian competition.
10. The DDR Museum — My favorite stop on the trip was a journey back in time to the German Democratic Republic, which lasted from 1946-1989. I was fortunate to go with Susanne Marell, CEO of Edelman Germany, who grew up in East Germany. She laughed as she saw the Trabant, a popular car from that era, as well as the blouse and blue tie mandatory for school once a week to show socialist solidarity. She showed me the standard telephone and said that she had to dial for three hours each Sunday to get an available line in order to touch base with her grandparents on the other side of the Berlin Wall.
Berlin is rising in a figurative and literal sense. Construction cranes are everywhere, building the Humboldt Institute on the site of the former City Palace of the Kaisers and the former DDR Parliament, as a place for debate and community. Restrictions are coming off on building height as the city is running out of space. It is the place for start-ups, spawned by Hasso Plattner’s technology incubator.
There is more confidence in the country’s dealings with Russia, as defense spending has moved up to 1.3 percent of GDP and public criticism is leveled at aggressive moves in Georgia and Ukraine. And yet there is fear of the speed of innovation (Uber is banned in Germany), concern about Islam and the new immigrants, and about the long-term effects of Brexit as the most free-market partner in the EU has opted to leave. Populism is rearing its ugly head.
In this context, government cannot carry all of the burden of proof that the future will be safe for German families. Business needs to make the case that it acts in the interests of society and that change is necessary. Smart CEOs from Daimler and Deutsche Post have begun to do this. If the Trans-Atlantic trade pact is to have a chance, the voters must believe that it will yield better standards and sustainable economic growth.
Richard Edelman is president and CEO.