“You’d be speaking German if it wasn’t for us’”
The retort is a hackneyed American assertion of superiority to any non-German from Europe. When George W Bush was arm twisting Europeans into his ‘coalition of the willing’ to invade Iraq, the phrase got plenty of outings on Fox News and other likeminded media outlets. Whilst they might be right about the low desirability of being forced to speak German back then. Maybe Germany and speaking German deserves a re-evaluation.
Churchill famously said of Russia ‘ It is a riddle wrapped in a mystery inside an enigma’. Not sure about Russia. The ethos of brute strength and centralism is straightforward to understand. Of any country that air of contradiction belongs to Germany.
What a conundrum the country is. This year, German President, Frank-Walter Steinmeier, on the 75th anniversary of VE day made an incredibly moving speech that signaled a permanent break with the past. In it, he said "this country can only be loved with a broken heart". More than any other country, Germany can be said ‘to have a past’. It took a couple of decades for Germans to come to terms with its recent history. That process has only recently come full circle where Germans can see and acknowledge what was done. You see the titans of German industry that drove the post second war miracle overlapped uncomfortably with the titans of industry that financed the Nazi war machine and provided its tools of war. The ‘Volk’ in Volkswagen resonates in different ways to different ears in different eras. Bayer, the modern chemical giant was once part of the infamous IG Farben conglomerate and run in the 1950s by a number of men charged with war crimes. Post war Germans sniffed at any mention of culpability or remorse until their children started asking them hard questions in the 1960s. Despite the contradictions, amidst the cold war, West Germany thundered on, an economic giant and a political dwarf. Meanwhile, the East survived rather than thrived.
In 1990, Germany, West and East was re-unified after the collapse of the Soviet Union. Margaret Thatcher, then UK prime minister vigorously opposed letting Germany re-unify, fearing a resurgent Teutonic super state . Helmut Kohl the grand old man of German politics, cultivated relationships with the US, the old USSR and other European leaders that allowed him to bring the two Germanies together. Very suddenly, Germany stood again, as one, a hulking nation, insecure and uncertain of its place in the world.
The re-unification process was difficult. The East was woefully unprepared for exposure to a market economy. Eye watering government transfers from the productive West to the economically backward East were needed to maintain social cohesion. ‘Solidarity’ taxes were raised and are paid by Germans to this day. Unemployment across Germany became stubbornly and structurally high. By the early part of this century, Germany was much poorer on a relative basis than the old West Germany had been. The Economist ran a cover story calling Germany ‘the sick man of Europe’.
The then Chancellor, Gerhard Schroeder initiated, sweeping but painful labour market reforms from 2002 to 2005. The harsh reforms politically crippled his party, the centre left SPD, for a generation but kickstarted an enduring economic boom based on sound finances and hyper productivity. It also paved the way for the arrival of an unlikely new Chancellor, quietly spoken, with an exceptional temperament named Angela Merkel. Known as ‘Mutti’, or mother, Merkel was a prodigy of Kohl but ruthlessly dispatched him from leadership of the Christian Democrats.
She has proven to be a masterful Chancellor. Amidst recent political madness her political gravitas and judgement stands out. German leadership has become global leadership.
What of Germany now? Quite simply, the country has become the greatest country in the world. Big statement yes. Difficult to defend, no. It has the most extraordinary mix of enlightenment values, domestic social solidarity, financial muscle and global influence. This is all blended with a unique national humility rarely evident in any big nation. No country comes close. Perhaps the US might relearn leadership and earn trust quickly and sit alongside Germany but it has enormous work to do to persuade others that it cannot drift back to populism.
The world is comprised of three economic and power blocs that will dominate this century, the US, China and the EU. How the three blocs relate, economically, politically and militarily, will have enormous influence on how we all live. As Donald Trump plumbs new depths in the US, kicking and screaming as he is pulled out the door, the Biden administration are busily but quietly constructing an alliance of nations to contain China. The US is back on the multilateral train First on the list to call? Germany. Merkel. Germany quietly leads Europe, spiritually leads the EU, relates well to China and Russia and has good relations with almost all countries. The new world order has Germany at its core.
The rebirth of Germany as a benign global power is important for everyone. The UK is fumbling over a pretty pathetic trade deal with the EU. It gained sovereignty and irrelevance in one fell swoop. The UK formed a critical piece of the European bloc and its absence from the EU will further concentrate German influence just as Thatcher feared. Along with France, the UK was the critical military partner in Europe. Germany despite being much more economically powerful previously wanted no military influence. In 2020, Germany has upped its military spending by 10%, the biggest increase amongst global powers. This is significant. In addition, London was and is Europe’s financial hub. That will change too. A lot of financial services are slowly but surely going back to the EU but specifically Germany. Within the EU, Germany has the biggest population, the most powerful economy and effectively funds the European Central Bank. Last year, an extraordinary thing happened. Germany agreed to share its credit rating with the ECB for the first time, something it had opposed since the single currency came into being. The cost of borrowing across the EU plunged and European governments can get lots of cheap money to plug holes in budgets. Germany largesse through the EU budget and ECB backstop makes the rest of Europe more and more reliant on Germany. He who pays the piper always calls the tune. This arrangement will be no different.
A rising Germany is a more confident and secure country than ever before. Against the backdrop of populism it remained a rock of sound market economics, high minded political leadership and supportive of the international rule of law. Within the EU, Germany’s values are becoming European values and now that it is picking up even more of the tab, Germany is less shy about insisting on those that violate those values being called to account. The Poles and Hungarians going rogue? No euros for you. The pattern is revealing itself to anyone who will see.
Trying to work out what is going on in the world right now, never mind what it is going to look like, is hard to do. But one thing looks increasingly likely, Germany will dominate the 21st century. And whilst it became fashionable for a period to extol the Chinese century, from where we sit in Western Europe it is going to look a whole lot more like the German century.
A cliched aphorism goes, that at the end of successful business negotiation between American and German businessmen, in which the Americans signed a massive contract to buy German goods, the American impressed by the incredible English of the German, turned and said to him, “Your English is amazing, it’s hard to believe its not your first language. Do you do all your sales negotiations in English? “. The German, aided now by a glass of wine, turned to him and said “yes of course” paused then said, “but we do all our buying in German”. True or not it speaks a little to the gap between German exports and imports. Germany runs huge surpluses with all its trading partners, (helped in part by being in a single currency with its economically weaker neighbours). Germans speak English magnificently but very few people with English as a first language, speak German. If you do not, you won’t be selling much to Germans because it is unlikely you understand German business culture. The engine of the German economy is the Mittlestaand, the highly technical family businesses that are renowned for their specialist manufacturing products or detailed process. The companies are unquoted and largely funded by family saving or bank lending. They mostly buy from each other and sell abroad driving German export numbers. Each has their own unique culture. Think Aldi. Think Lidl. Both are former Mittlestaand companies that have outgrown their status to become global super retailers but maintain the very German ethos that helped them grow that big.
How do you invest in Germany? The easiest way is through the DAX, the German stock market index. It is comprised of the 30 leading German public companies. The DAX is soon to be joined by 10 more in 2021 making 40. The MDAX is made up of the companies sized 80 to 30. Both can be bought through an exchange traded funds (ETF). Cyclically adjusted price earning (CAPE) metrics smooth out earnings, and on a 15.5 CAPE number Germany looks good value versus the US at 29.8 but on a regular forward PE of 29.7 equity valuations in Germany, like global valuations, look stretched. German bund yields are negative, illustrating the strength of Germany inc’s ‘sleep at night’ value that investors have been prepared to pay to have their money minded by the German ministry of Finance. Property? Not as easy as you might have been told. German protections make investment fraught with difficulty as investors from less tenant friendly markets have discovered. Yields in major cities run from 2.5% residential to over 4% for some commercial. REITs (Real Estate Investment Trusts) are an efficient way to capture German property returns without have to learn the German legal and property system.
How do you sell into Germany? Learn German. If you don’t speak the language, ask your children to learn German and at very least insist your grandchildren can. They will prosper from having done so for the German century to come.
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