(Repeats without changes from Friday)
* Europe's largest economy shrank unexpectedly in second
* Russian standoff could hit harder in latter half of year
* Energy policy, reform roll-back contributing to
* Government looks at ways to tackle investment crisis
By Noah Barkin
BERLIN, Aug 15 The German soccer team's romp to
victory in last month's World Cup was hailed at home as a symbol
of the country's emergence as a confident global economic power.
But in an ironic twist, the feel-good triumph in Brazil may
have come at a time when Germany's new "Wirtschaftswunder", or
economic miracle, is coming to an end.
In recent weeks, the economy that proud German politicians
have taken to describing as a "growth locomotive" and "stability
anchor" for Europe, has been hit by a barrage of bad news that
has surprised even the most ardent Germany sceptics.
The big shocker came on Thursday, when the Federal
Statistics Office revealed that gross domestic product (GDP) had
contracted by 0.2 percent in the second quarter.
"The euphoria that we've seen, the perception that the
German economy is booming is simply misplaced," said Marcel
Fratzscher, director of the DIW economic institute in Berlin.
So why is Germany suddenly ailing?
The standoff with Russia over Ukraine has received its fair
share of blame in the German media. But that conflict may not
hit the economy with full force until the third quarter. It was
only last month that Europe stung Moscow with economic
sanctions, prompting a tit-for-tat response from Russian
President Vladimir Putin.
In reality, economists and some government officials
acknowledge, there are deeper reasons for the recent downturn.
And they have little to do with the spike in geopolitical
tensions in eastern Europe or the Middle East.
They start at home, where Chancellor Angela Merkel's abrupt
exit from nuclear energy after the Fukushima disaster in Japan
and aggressive push into renewables has unnerved German
industry. A recent overhaul of the country's complex renewable
energy law has done little to alleviate uncertainty over future
policy or assuage fears about German energy competitiveness.
"Energy intensive industries in particular have lost
confidence in the future of Germany as a business location,"
said Thomas Mayer, a former chief economist at Deutsche Bank who
now runs the Cologne-based Flossbach von Storch Research
Institute. "I think this is a major issue that will burden
German industry for years to come."
Further souring the mood among businesses has been a
roll-back of economic reforms that Merkel's predecessor Gerhard
Schroeder introduced a decade ago, and which many credit with
fuelling a sharp drop in German unemployment and a rebound in
growth that began in 2006 - when Germany itself hosted (but
failed to win) the World Cup.
Since coming to power in late December, Germany's left-right
"grand coalition" government has pushed through a reduction in
the retirement age for some workers and won parliamentary
approval for a nationwide minimum wage of 8.50 euros($11.40) an
hour. Next on the agenda are stricter limits on temporary
The pension reform, which allows longtime workers to retire
four years early at 63, risks aggravating a skilled labour
shortage in some sectors of the economy. Ratings agency Moody's
said this week that it undermined the sustainability of the
German pension system.
The unintended effect of the policies has been to discourage
firms from investing at home. Corporate investment in machinery
and equipment, for example, hit an all-time low of 6.2 percent
of GDP last year, Elga Bartsch of Morgan Stanley points out,
despite solid domestic demand dynamics, low lending rates and
still-upbeat business sentiment.
Compounding the problem has been pronounced weakness in
public investment. A study by the DIHK Chambers of Commerce and
Industry last month said Germany was suffering from an overall
investment gap amounting to 3 percent of GDP, or 80 billion
At roughly 17 percent of GDP, total annual investment levels
in Germany lie below those of other industrialised countries,
which average over 21 percent. In Germany's southern neighbour
Austria, for example, the level is 27 percent.
Pointing to these figures, DIHK President Eric Schweitzer
likens the current mood in Germany to that on the Titanic:
"Everyone is partying and no one sees the threat of the looming
In private, government officials also admit to concern. The
Economy Ministry has been examining ways to tackle Germany's
investment problem and Minister Sigmar Gabriel has invited
outside experts to discuss the matter later this month.
After his Social Democrats (SPD) pushed through the pension
and minimum wage legislation, Gabriel is trying hard to show the
business community that he is listening. Earlier this month he
spent nearly a week touring small-to-medium-sized Mittelstand
companies in eastern Germany.
"There have been periods, for example in the late 1990s,
when Germany lost its economic edge," said one government
official, who requested anonymity due to the sensitivity of the
growth debate. "Are we heading into another of these periods?
There are people who are concerned that we are."
RUSSIA GAME CHANGER
Germany still looks good compared to European partners such
as Italy, whose economy also contracted by 0.2 percent in the
second quarter, and France, which admitted this week it would
miss its deficit targets for this year after its economy
stagnated in the period.
Part of Germany's second quarter weakness can be explained
by weather effects: the mild winter led construction firms to
invest more heavily in the first three months of the year, at
the expense of the recent quarter.
German unemployment, at a rate of 6.7 percent, is near
post-reunification lows and wages are on the rise, supporting
domestic demand, which has taken over from trade as the
economy's main growth pillar.
In contrast to some of its European counterparts, Germany's
finances are also in excellent shape.
Data released on Thursday showed total public debt -
combining federal and state governments, local authorities and
the social security system - fell last year for the first time
in the post-war era. The government's 2015 budget contains no
net new borrowing for the first time since 1969.
"It doesn't look like we're on the brink of disaster," said
Andreas Woergoetter, head of division at the economics
department of the Paris-based Organisation for Economic
Cooperation and Development (OECD).
Still, economists including DIW's Fratzscher believe the
economy will continue to shrink in the third quarter, putting
Germany into recession, and deepening concerns about the broader
Woergoetter says it would be foolish to dismiss the
long-term impact of the Russia conflict, which he believes could
be far bigger than bilateral trade ties - Russia makes up only
about 3 percent of total German exports - would suggest.
"Whatever comes out of this crisis, it is a game changer
because the framework for German-Russian economic cooperation
has been seriously damaged," he said.
"Russia was an extremely profitable market. It was an
investment opportunity for which there is no replacement and now
the strategic plans of many companies will have to be rethought.
That too will contribute to the uncertainty in Germany."
(1 US dollar = 0.7469 euro)
(Editing by Jeremy Gaunt)