As the euro zone’s biggest economy, and one of its most successful in recent years, Germany has shouldered the burden of helping to bail out more troubled euro zone nations.
This can only last for another few years, as the country’s aging population will need to be looked after, Norbert Walter, chief economist emeritus for Deutsche Bank and managing director of Walter & Daughters Consulting, told CNBC Monday.
“Germany is considered to be the paymaster of Europe forever, whereas it will probably only be in that position for the next 3-4 years. Thereafter, that help has to come from other sources, and that’s not understood at all by the German taxpayers or the international community,” he said.
German statistics body Destatis predicts one-third of the population will be pensioners by 2060, and there will be nearly as many people over 80 as there are under 20 at the same time.
Germany has Europe’s lowest birth rate, with just 8.3 babies per 1,000 people – in contrast, troubled Ireland has 16.5 babies per 1,000 people.
Walter believes that Germany will have “an old age poverty problem” close to 10 years from now.
“At that point, Germany will not have very high savings. It will look like Japan today, with a savings rate of close to zero. The current account surpluses of today will have melted away,” he said. “We don’t have a sufficiently financed old age provision or health insurance system.”
The cost of caring for elderly patients with dementia was one example cited by Walter.
“If you do implicit debt level calculation for Germany, if you consider the debt obligation versus old age, Germany’s debt-to-GDP ratio looks more like Japan’s than today’s around 80 percent,” he said.
Japan has the highest debt-to-GDP ratio in the developed world – over 220 percent according to the International Monetary Fund. However, its debt is overwhelmingly owned by Japanese residents, which means that it is less expensive to pay back.
Walter advised investors to avoid long-term bonds, and diversify their currency portfolio because of uncertainty in the US and Europe. He is “very unhappy” at the prospect of more quantitative easing in the US.
He recommended buying raw materials and real estate, as well as small and medium-sized businesses with a good business model.
The market needs to make more distinctions between the peripheral euro zone economies, according to Walter.
“Italy, for example is a rich country which can afford to pay its debt. Spain has the same crazy real estate bubble the US had and has to shrink the construction sector for a decade,” he said.
“Contagion is a real effect because speculators aren’t willing to invest a lot of research to understand European countries.