Germany passes for Europe’s economic strongman. It may in fact be weaker than it looks. For years, the low level of corporate capital expenditure has undermined the country’s industrial future. While real GDP is already 1.3 percent above the pre-crisis peak of early 2008, real equipment investment is 16.5 percent below what it was then. Moreover, it has been falling for six quarters in a row.

There are many reasons. The collapse of investment immediately after the Lehman bankruptcy points to cyclical factors. Then the euro crisis added major uncertainties, making companies ultra-cautious.

Ironically, the sustained weakness might be the flip side of Germany’s sterling employment performance. A looming shortage of skilled workers as well as policy incentives may have kept companies from sacking temporarily unneeded workers. Reining in capital expenditure could have been a way to compensate for payrolls being kept higher than has been strictly needed.

Cyclical factors are only one part of the story, though. The investment slump has in fact been bigger than historic patterns suggest. Its magnitude and duration has repeatedly surprised forecasters. Domestic demand and overall exports have been up most of the time since early 2010, cheap credit is readily available, and unit labour costs are under control.

Furthermore, the current capex freeze reinforces an unsettling long-term trend. German investment has been well below the European average for more than a decade. Gross capital formation has fallen from 23 percent of GDP in the early 1990s to 17 percent today.

The euro crisis will peter out at some point. Pent-up demand should then trigger a temporary investment boom. However, in the past two decades, cyclical recoveries have never been strong enough to reverse the long-term downward trend. It is hard to see why it should be different next time around.

For a country with an above-average industrial sector and an aging population, this is worrisome. A cutting-edge industrial base can only be sustained by continuous modernisation of the capital stock. Germany’s disappointing investment performance raises questions about its real economic strength – and most importantly about its future prospects.

This article was initially  published as a Reuters Breakingviews comment on 5 June 2013.

For centuries, economists have argued that nothing beats a free market for efficiency. Unfettered competition leads to lower prices and better products, more innovation and greater choice. But market forces may also make people less ethical and more selfish.

There is no shortage of speculation on the topic by philosophers and social scientists. But the supply of empirical evidence on the topic has not kept up with the demand. Armin Falk and Nora Szech, two behavioural economists from Germany, have made a contribution.

In a series of experiments, a group of German volunteers were offered a choice between saving the life of a mouse or receiving a cash payment and having the mouse killed. When asked in private, 54 percent chose to forego 10 euros to keep the creature alive. But when the value of the murine life was negotiated by two volunteers in a marketplace, only a quarter of the people chose mercy. And when multiple buyers and sellers were around, the monetary value of a mouse’s life quickly fell far below 10 euros. For people deciding on their own, the experimenters had to offer 47 euros to induce a similar willingness to accept a mouse-death.

The economists used so-called “surplus” mice for their experiment, which would ordinarily have been killed because they cannot be used for research. They noted in an article entitled “Morals and Markets” in the magazine Science that, “as a consequence of our experiment, many mice that would have otherwise have been killed right away were allowed to live for roughly two years.”

The experimental economists drew the stark conclusion: “Market interaction displays a tendency to lower moral values, relative to individually stated preferences.” It seems that the impersonal market diminishes the feeling of personal responsibility. Guilt is divided when trading takes the place of explicit individual decisions. The observation of others engaging in ethically questionable behaviour might increase the willingness to follow suit.

The disconnect between conscience and price can be seen outside of the behaviour economists’ laboratory. The same people who are privately appalled by the horrific working conditions of textile workers in poor countries are quite happy to search for bargains on the latest fashions.

The mice saved in the Falk and Szech experiment lived an additional two years. The sociological lesson could last much longer. Even if free market forces can make activities such as education and health care more efficient, bargaining and competition bring with them a significant hidden moral cost.

This article was initially  published as a Reuters Breakingviews comment on 31 May 2013.

For years, German wage policies were bad for the euro zone. The latest wage deal at Volkswagen, announced on Tuesday, confirms that era is over.

Until the crisis, average pay in Germany increased slowly, in many years less than consumer prices and productivity. The very slow progress of real wages was great for the cost competitiveness of German exports, but decreased demand for imports from other members of the single currency.

The carmaker’s deal fits with a national pattern. It mirrors an earlier agreement for the country’s metal workers, an important bellwether sector. And that already followed the trend of the preceding two years, when economy-wide wages rose at the fastest pace since 1993.

Salaries of Volkswagen’s 102,000 German workers are set to outpace inflation in both 2013 and 2014. The inflation rate is not expected to rise above 2 percent, while the workers will receive 3.4 percent and 2.2 percent annual increases. The wage trend, along with lower social security contributions, should lead to higher private consumption in Germany. Leading economic think-tanks now forecast increases in real consumer spending of 0.8 percent in 2013 and 1.2 percent in 2014.

Some pundits have called for more aggressive pay rises. Fortunately, the unions have been clever enough not to try to make up for past restraint. The current wage deals, which give workers most of the spoils of increased productivity, will neither destroy nor create employment. Anything more generous could start to price some workers out of their jobs and hurt Volkswagen in the highly competitive global car market.

Increased German unemployment would damage domestic demand. Benefit payments are much lower than wages and the fear of firing drives up precautionary savings. Moreover, the unions would have to use aggressive tactics, quite possibly including long strikes, to win much more generous deals. For the German economy, that would cause significant collateral damage.

Instead, swift negotiations and minimal warning strikes have produced untypically long contracts. German companies and workers seem to have found the right balance between decent pay rises and protecting industrial employment. The rest of the euro zone should be grateful.

In the European car industry, history does repeat itself. The lesson: ignore industry pleading.

Carmakers don’t like emission limits. In the run up to the first set in 2008, they claimed the proposed standard was all but impossible to meet. Up to 2008, carbon emissions of new cars were falling by just 1 percent per year. Then, wonderful to recount, the rate of progress quadrupled. Today, new cars’ carbon emissions are 20 percent lower than a decade ago and the 2020 targets are looking plausible.

What should future targets look like? The European Parliament wants carmakers to reduce average fuel consumption from the already agreed 3.9 litres per 100 kilometers in 2020 to about 3 litres in 2025. And once again carmakers, especially Germany’s premium manufacturers, are bristling. They have asked the German government to shoot down the parliamentary initiative.

As in 2007, the resistance is misguided. Sure, fuel efficiency is expensive and, yes, German luxury car makers have a problem because bigger and faster cars use more fuel. They have to work harder, but they are especially well positioned to cope with this shift.

BMW, Audi and Daimler are significantly more profitable than pure volume manufacturers. They also boast a long track record of successful innovation. Along with financial clout and engineering expertise, they have strong brands and up-market customers who are more willing to pay up. An extra few thousand euros on the sticker price will not destroy the luxury carmakers’ business models.

Progress on fuel efficiency after 2020 probably requires a bigger market share of electric cars, a technology that is still in its infancy. However, this argues in favour of setting ambitious targets right away, not against doing so. Tougher guidelines encourage more research and development and create planning certainty. Long product cycles of six to eight years make early guidelines especially helpful.

The only real argument against tighter emission targets is that they lower profit in the short term. Delay slows investment and lengthens the life expectancy of existing, already paid-for technologies. Myopic shareholders love such a strategy. Policymakers should not.

This article was initially  published as a Reuters Breakingviews comment on 27 May 2013.

In 2000, Germany was the sick man of Europe. Not only was the economy stumbling, but the national football team was knocked out of the European Championship without winning a single game. That failure was reflected in UEFA’s Champions League, a grouping of leading European sides. From 2002 to 2009, no German club made it past the quarter-finals.

Fortunes have changed. Not only has Germany regained a reputation for economic uber-efficiency, but the German national team has reached at least the semi-final in every international tournament since 2006. And the Champions League’s final last Saturday was be the first ever all-German match: In a staggering game, Bayern Munich beat  Borussia Dortmund 2:1.

The sport resurgence and the economic renaissance have a lot in common.

Start with the social market economy. When it works, this heavily trammelled capitalism – fair competition and long-term thinking mixed with social responsibility – can lead to very strong results. Fans have majority control of all German football clubs, so glamour-seeking oligarchs and sheiks are kept out. TV revenue is distributed relatively evenly and debts are limited. Solidarity rules. Bayern Munich secretly lent money to Borussia Dortmund in 2005, when the latter side faced bankruptcy.

Restrained competition has its downsides. At the end of the 1990s, both the German economy and its soccer league were all too willing to tolerate underperformance, and to lose competitiveness against foreign rivals.

The dual turnarounds highlight another national strength: a remarkable ability to respond to shocks and fix problems. Germany’s structural reforms, which kicked off in 2003, are today seen as a role model for ailing economies. The soccer reforms were launched three years earlier. Fearing humiliation in the 2006 World Cup, to be held in Germany, the Football Association completely reformed the youth system.

Each club in the top three leagues now has to have a youth academy. In addition, the Football Association runs more than 300 “youth bases”, scouting for talented footballers as young as 11 years old. The result is a steady supply of world-class young players. Some of them were on display on Saturday night.

This article was initially  published as a Reuters Breakingviews comment on 24 May 2013.

Daimler launched its new Mercedes S class on Wednesday. Much depends on the luxury sedan. Its predecessor generated 5.6 percent of car sales but – according to a Breakingviews estimate – created at least twice as much in terms of operating profit. If the new S class is as successful as earlier versions, Daimler’s profit could be boosted by several hundred million euros in 2014.

The current incarnation of the Mercedes S class, sold since 2005, has reached the end of the road. The car sells in the only segment of the market where Mercedes is still ahead of BMW and Audi but sales in 2012 were 25 percent below peak years. Overall, the company trails its rivals in terms of total unit sales and profitability. If the new S class flops, Daimler’s goal to regain leadership in the premium segment by 2020 will become a pipe dream.

Initial reviews of the new S class by motor journalists are positive. Mercedes is ranked as the most innovative brand in 2012 by the Center of Automotive Management, and its models are stuffed with safety- and comfort-enhancing new technology.

If historic patterns hold, S class sales should rise to about 110,000 units by 2014. The worry is that the popularity of large SUVs has dented the market for luxury sedans. Even more problematic is that Daimler has failed to nail a key market for the S class: China. A patchwork distribution network has hobbled sales. A revamp of the structure, kicked off in December 2012, has yet to convince: in the first quarter, Daimler’s sales in China fell while rivals continued to grow. In a letter to its Chinese dealers leaked to a trade journal a few weeks ago, Daimler’s top management snubbed openly accusing them of sloth.

Daimler could do with some good news. In April, it took down a profit outlook given only three months earlier. Daimler’s new van, the Citan, received the worst crash test results in the company’s history. The Mercedes S class may be the spur the company needs and if it performs the shares, now trading on a 8.5 times forward earnings multiple, could prove reasonably priced. If it goes the other way, Daimler may find itself needing an altogether more comprehensive overhaul.

This article was initially  published as a Reuters Breakingviews comment on 14 May 2013.

For once, Evonik was favoured by fortune. On the eve of its fourth attempt to list on the German stock exchange, Borussia Dortmund, the soccer club sponsored by the speciality chemical group, thrashed Real Madrid 4-1 in the Champions League semi-final. The morning after, Evonik’s stock market debut was also successful, if less demonstrable.

With annual sales of 13.6 billion euros, Evonik is one of the world’s leading companies in the sector. Its diverse product range encompasses additives that go into coatings for pills to compounds deployed in car tyres, batteries and wind turbines. Every fourth nappy in the world uses Evonik’s super-absorbent material, while its amino-acids help feed 45 billion chickens a year.

The company looks fundamentally healthy. It earns three- quarters of its revenue outside Germany and is investing with conviction in Asian growth markets. Evonik boasts a solid history of rising sales and profit: it enjoys an EBITDA margin of 19 percent. At 1.5 billion euros, net debt stands at 0.6 times of EBITDA, lower than most European peers.

This strength hardly comes cheap, however. The company’s enterprise value is the equivalent of seven times EBITDA and the shares trade at about 13 times forward-looking earnings’ estimates. These are in line with, or perhaps a little ahead of, the average for the pan-European DJ Stoxx index and peers in the diversified chemicals sector.

The difficult macroeconomic environment will dent profitability. In the current year, management expects rising sales but stagnating profit. Moreover, there’s a problem with the potential over-supply of Evonik shares. Both of the pre-IPO owners want to reduce their stakes in the company. The RAG Foundation, which holds around 68 percent, has a long-term ambition to reduce its share to 25.1 percent. British private equity group CVC, which currently owns 18 percent, wants to get out completely.

New shareholders must hope these intentions are pursued in a measured way. Until the stock overhang issue is resolved, however, Evonik’s share price performance is unlikely to score as impressively as the Dortmund soccer team it sponsors.

When Germans embark on an engineering project, they usually get it done properly. The country must hope that this proves true for the biggest technical challenge the nation has taken on in generations: revamping the entire energy system. Phasing out nuclear power by 2022 is the relatively easy part. The real challenge is to get rid of fossil fuels almost completely by 2050.

“Energiewende” (energy transition) enjoys broad support in Germany. Despite some pitfalls, it is a brave and farsighted endeavour that the world should watch closely. So far, it seems to be on track. In 2012 the share of power generation from renewable sources jumped to 23 percent, from 20 percent in 2011. The government’s intermediate goal of at least 35 percent by 2020 may even be met prematurely.

The main problem with wind, solar and other environmentally helpful power sources is that they’re expensive to build. Germany’s energy-intensive industries have been exempted from paying, but households are facing significantly higher energy prices. The subsidies for renewables already constitute 16 billion euros a year – almost a fifth of households’ total electricity bills – and are poised to rise further. The byzantine and inefficient subsidy system urgently needs an overhaul, but the issue won’t be addressed before the federal election in September.

The remaining work includes an upgrade to the transmission grid and maintaining enough conventional power capacities as a backup for cloudy and windless days. Fossil fuel power stations, representing a quarter of Germany’s total production capacity, will only be used a few hours per year as soon as 2020, Agora Energiewende, a think tank, forecasts.

Agora reckons that this conventional capacity will cost a manageable 700 million to 1.4 billion euros annually. Unfortunately, the current electricity pricing system offers no incentives to provide that reserve capacity. Something should be done in the next few years to ensure security of supply.

If done the right way, Energiewende need not be too expensive. The industry lobby group BDI estimates 200 billion euros of total additional investment up to 2030, in addition to the 150 billion euros the old system would have needed. Stretched over two decades, that comes to less than 0.8 percent of GDP each year. In the short to medium term, consumers will have to pay a bit more for their electricity.

In return, however, Germany gets a nearly emission-free electricity system with near-zero marginal costs. That doesn’t look like a bad deal.

Angela Merkel narrowly stifled a mutiny among MPs who wanted to force women quotas on corporate boards. She had to promise a softer reform in return. The fight against quotas is as desperate in Germany as it is in the rest of Europe. Companies should adjust to that reality.

The rise of the Internet has already forced change in the way the music industry and the print media do business. Television could be next in line. New media consumption patterns, as well as fierce competition for advertising revenue from Google, among others, are likely to shake up traditional business models.

RTL’s majority owner Bertelsmann insists its decision to reduce its stake from 92.3 percent to slightly more than 75 percent has nothing to do with such worries. Bertelsmann says it is determined to retain control but wants to free up some cash for investments in other growth opportunities.

For the time being, the digital threat to RTL is largely hypothetical. Traditional television is still the most influential mass media. Indeed, data by market researcher Screen Digest show that people are spending seven minutes more time per day in front of the telly than in 2008. Web-based on-demand services have yet to dent traditional TV consumption. The industry’s share on the advertising market is stable.

Moreover, RTL is well-placed to serve the market as it currently exists. It is the leading broadcaster in Germany, the Netherlands and Belgium and is a strong number two in France. It also owns Fremantle Media, a globally successful production company responsible for X-Factor and American Idol. Generating a third of RTL’s revenue, Fremantle mitigates the dependency on advertisement.

The broadcaster boasts a decent profit history, even if Europe’s economic woes leave scars. Revenue was up 4 percent in 2012 while earnings before interest and taxes shrank by a fifth. Underline the economic uncertainty, the management has not yet issued guidance for 2013.

At the current share price, which sits in the middle of the range given as part of Bertelsmann’s decision to sell down its stake, the stock trades at 12.6 times the Starmine estimates of next year’s earnings. That represents a modest discount to the average of European media companies, though the gap to direct peers like Italy’s MediaSet and Germany’s ProSiebenSat1 is bigger.

If RTL has what it takes to thrive in the digital environment, shares may prove a bargain at the current price. At present, the market seems to be expressing doubt that RTL can rise to meet the challenges posed by a digital future.

This article was initially  published as a Reuters Breakingviews comment on 17 April 2013.