andreas dombret : germany and the euro area – beware complacency speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at a joint seminar of the central bank of the republic of turkey and the deutsche bundesbank, istanbul, 5 july 2014. * * * introduction ladies and gentlemen as i pointed out in my opening remarks yesterday, i am happy to be here in istanbul to attend this joint seminar of the central bank of the republic of turkey and the deutsche bundesbank. over the past two days we have shared ideas about macroprudential policy, and we have improved these ideas through discussion. at this point, i wish to change the perspective and take a closer look at the real economy and the macroeconomic situation in germany. and as germany is part of a monetary union, my presentation would be incomplete without discussing the situation of the euro area as well. germany : no time for complacency looking to the past, the german economy has shown a remarkable development. as late as 2004, the economist magazine dubbed germany “ the sick man of europe ”. plagued by high unemployment and a lack of competitiveness, germany undertook structural reforms that were as painful as they were successful. germany left the sick - bed and took bold steps towards recovery – only to be hit full - force by the fall - out of the financial crisis. in 2009, amidst a global recession, german gdp dropped by 5. 1 %. for germany this was by far the biggest downturn in post - war history. however, the economy recovered quickly and in 2011, german gdp had returned to its pre - crisis level – sooner than in any other country in the euro area. what is the story behind this v - shaped recovery, the big drop and the quick rebound? from a general point of view, it was the structural reforms i mentioned before that prepared the ground for the strong recovery following the crisis. nevertheless, the distinctive pattern of a severe drop and a rapid recovery highlights a specific feature of the german economy : its pronounced export orientation. when the global economy faltered in 2009, germany was hit far worse than other countries. but when the global economy began to recover in 2010, germany followed suit. exports were the major driving force behind the upturn in the german economy. this strong influence of international trade worried some observers. many felt that germany ’ s reliance on exports was risky, as it exposed germany to the ups and downs of the

global economy. thus, suggestions have been voiced to adapt the german “ business model ” and reduce reliance on exports. however, these arguments neglect the fact that germany is not a company with a business model that management can change at will. in the end, it is the decisions of thousands of individual companies that determine the structure of an economy. in any case, i have doubts that turning away from global markets would strengthen the german economy. facing global competition ensures that german companies keep up with technological progress and retain their high productivity. this might come at the price of higher volatility, but to me this seems like a price worth paying. having said that, the german economy would certainly profit from strengthening competition in the domestic market as well. take the services sector as an example. for the last 20 years, total factor productivity growth in services has been markedly lower than in bis central bankers ’ speeches manufacturing. in fact, while total factor productivity in manufacturing has grown by more than 30 %, growth in services has barely budged. what is behind this phenomenon? the data point to a higher degree of competition in the manufacturing sector following the launch of the common market : mark - ups, an indicator of the pricing power of firms, have gone down since then. by contrast, mark - ups on services have stayed high in germany, higher even than in many other european countries. thus, there is room to improve the functioning of the services sector by promoting competition : opening up closed professions, cutting red tape, and improving financing conditions for nascent digital firms would be options to achieve this objective. but still, over the last two years or so, domestic drivers of growth have strengthened in germany. this is certainly good news, as the basis for growth has become broader. the good shape of the german economy is also reflected in more recent developments. last year, the economy regained momentum after a brief dip in late 2012 and early 2013. and in the first quarter of this year, the economy grew by 0. 8 %, while the euro area as a whole grew by 0. 2 %. however, the strong growth in the first quarter was boosted by favourable weather conditions. consequently, we expect growth to be weaker in the second quarter. overall, the german economy is back within the normal range of capacity utilisation. against this backdrop, what can we expect from the future? well, the internal drivers of growth i mentioned will remain in place while foreign demand is likely to pick up again. as