After years as Europe's economic lame duck, Germany is back in business and feeling like a winner, writes Derek Scallyin Berlin.
For nearly 10 years, Germany has been the zombie of Europe. Not quite alive and not quite dead, it cut a pitiful figure wandering around from the Baltic Sea to the Alps in an economic stupor.
Enlightened minds gave detailed diagnoses over recent years, none flattering. Some called Germany the sick man of Europe, with vital signs that would make even an opponent of euthanasia reach for the morphine. Opposition politicians delighted in telling voters how their country, once the locomotive of Europe, was now ignominiously bringing up the rear like the smelly end of a pantomime horse. The greatest schadenfreude could be observed in Britain, where politicians and journalists spoke with relish of the "German patient" as the economic basket case of Europe.
But just when the rest of Europe was getting used to having a zombie in the family, a healthy glow is returning to the patient's cheeks.
So, what has turned Germany around? Having a Bavarian in the Vatican probably did no harm, but popular opinion says the recovery kicked off with the World Cup. Two million people descended on a country they might never otherwise have visited and enjoyed a month of great weather and beer, okay if not outstanding football and the kind of 24/7 party atmosphere that took everyone by surprise; the Germans most of all.
"That World Cup atmosphere isn't gone. It belongs to the collective memory of a people and that can be recalled at any time," the chancellor, Angela Merkel, said on a recent talk show. "For a long time we thought that the German unification feeling, the enthusiasm, was gone. But a feeling of confidence has emerged from the World Cup, something which has been granted to us even if we don't wear it for show every day."
That modest confidence is likely to take hold in 2007 with several spheres of German life - political, economic and social - all lining up like a rare astronomical phenomenon for what could be a very interesting year.
Berlin's Alexanderplatz is an ideal place to observe the fall and rise in Germany's fortunes. The economic downturn of the 1990s turned the former showcase plaza of East Berlin into a seedy mess where Berliners hurrying to change trains were harassed by ageing punks with scruffy dogs. Now Alexanderplatz is undergoing a complete revitalisation, the heart of which is the overhaul of the former state-run Central Department Store, since 1991 the Galeria Kaufhof department store. A €110 million makeover has nearly doubled the trading space on each floor to the size of a football field. The store's 1970s socialist facade - barbed wire fantasia over concrete block - has been replaced with a light travertine stone cladding.
Inside, the East Bloc feel - cheap clothes, cheaper beer and abrupt East German sales staff - has given way to high-quality goods, an upbeat sales team and a retail reinvention that gives the famous KaDeWe department store in the west of the city a run for its money. Just as the scaffolding was coming down, the first data came in showing a recovery in German consumer confidence, making Kaufhof's general manager Detlef Steffen increasingly optimistic about the year ahead.
"I've always been an optimist, otherwise I wouldn't work in this business," he says. "We saw the trend was moving away from cheap goods. People are spending more in the store since we left behind the cheaper range."
AS WELL AS the outdoor areas getting a complete facelift, Portuguese investors are building a new shopping centre adjacent to Alexanderplatz, and American investors are creating a huge new stadium complex down the road at Ostbahnhof train station.
Foreign investors have piled into the country in the last two years after deciding that it is well worth taking a bet on property that hasn't increased much in value for a decade. Where Germans once flocked to buy houses in Kerry and West Cork, now it is the Irish who are flocking to snap up property in Germany, flying here daily on cheap flights one Berlin magazine has dubbed the "investment bombers".
The gambles of domestic and foreign investors in the last 18 months seems to have paid off: the German economic upswing has been a long time coming but the year ended with an avalanche of good economic news.
After years of flatlining, economic growth in 2006 is likely to be around 2.5 per cent, with around 2.1 per cent forecast for 2007. As the rebound gains strength and breadth, the so-called "German disease" of mass unemployment will next year retreat to the right side of the four million/10 per cent mark - a red line in German politics.
After a peak of 10,000 company insolvencies last year, a new study forecasts that insolvencies will drop by more than 10 per cent next year and continue to fall. Germany's benchmark Dax index of shares hit a five-year high earlier this month while the Ifo index, Germany's gold standard of economic indicators that gauges manager confidence and expectations, has reached a 15-year high.
"Naturally it's nicer to be the bearer of good news," laughs Gernot Nerb, chief economist at the Ifo institute in Munich. "We have been saying for quite a while that the boom was here but only since the labour market figures have improved has the normal person on the street had something tangible."
The cranes on the skyline around Alexanderplatz are a tangible sign of the most welcome and overdue upswing - in Germany's construction industry. The sector has been a ball and chain, dragging down the German economy for a decade since an artificial post-unification building boom led to a spectacular bust. After a decade of false dawns, chastened industry observers say Germany's next building boom is still some way off. But, compared to the meagre returns of recent years, the moderate growth in 2006 has been strong enough to take the industry by surprise.
"Things just picked up in the autumn and now there's so much work that it's incredibly difficult to get building materials - you have to wait up to a month now," says Berlin architect Felix Nibbes.
Over the last lean decade, many construction companies vanished, consolidated or restructured and, like their own customers, placed a new focus on foreign markets. "Construction is definitely a measure of confidence in a location and for years investors made a detour around Germany," said Dr Heiko Stiepelmann, spokesman for Germany's Construction Industry Federation. "But now, after years of moderate wage rises here, the cost difference between us and foreign competitors has grown smaller, making Germany a more competitive business location."
That's an argument you hear a lot in German business circles these days: as wages in Ireland and elsewhere rocket, German workers suddenly don't seem such an expensive lot after all.
THE FLIPSIDE IS that years of extreme wage restraint has driven down the average German worker's purchasing power to a 15-year low. Combine that with a real fear of unemployment and it's easy enough to understand the complaint of one retail analyst last year: "German consumers turn a euro coin around three times in their hand before putting it back in their pocket." But Germany's consumer confidence index reached a five-year high in December as Christmas markets buzzed and holiday retail sales exceeded expectations. Chancellor-watchers noted with approval how even Angela Merkel, who has spent the last year wearing several variations of the same trouser suit, finally splashed out on some new outfits.
The key to Germany's fortunes in 2007 is whether the recovery reaches workers in the form of higher wages. At the end of 2006, only a third of Germans believe that it will, according to a survey by the Dimap polling agency.
"The employment situation has only begun to improve in the last months but nothing much has changed in a worker's pay packet. The attitude to developments will only come with new wage agreements in the coming months," says Dr Alfred Boss, chief economist at the Institute for World Economics in Kiel. But, like many economists, he warns that too-high wage agreements could stop the recovery. Despite warnings like that, even the Cassandras have to admit that things are looking better for Germany in 2007. The icing on the cake could well be the double-header presidency of the EU and the G8 that begin next Monday.
Chancellor Merkel and her government may be in office for little more than a year, but, looking around the political map of Europe, they seem like models of stability and reliability.
"Tony Blair and Jacques Chirac are lame duck leaders. Poland, Czech Republic and Hungary have lame duck governments. No one knows how long Prodi's government will hold in Italy and neither Austria nor Holland have a government," says Jan Techau, European analyst at the German Council on Foreign Relations (DGAP).
It remains to be seen whether Germany can leave its mark on important EU and G8 policy questions, but the double presidency offers Germany an unprecendented chance to complete its comeback in style.
"Angela Merkel gave a speech appealing to all MPs in the Bundestag to help make the dual presidency a national effort," says Techau. "To speak like that of a national effort would not have been possible before, it would have been highly suspicious. The fact that Chancellor Merkel can speak like that now - and be praised from all sides for doing so - shows a new confidence in Germany that wasn't there before."