Germany's economy still 'wunderbar' after VW

Up until three weeks ago, it was all "wunderbar" in the German economy. The Finance Ministry forecast 1.8 percent growth in 2015, despite the headwinds from a slowdown in China and emerging markets. German finance ministry officials even told me last month they were surprised how resilient the economy was in the face of these challenges.

The feel-good factor also came from the humanitarian front.The country's international standing received admiration due to Angela Merkel's openness to migrants fleeing war-torn countries including Syria.

And then came that Friday that few in Germany would like to forget. The U.S. Environmental Protection Agency made public its claim that the German corporate prodigy Volkswagen had manipulated its diesel emissions software. We now know this affected 11 million cars worldwide. Heads rolled and the share price plummeted.

Germany is reeling from that crisis. It has shaken its corporate and political elite to the core. Is "Made in Germany" no longer a trademark to rely on?

Read MoreVW scandal: Germany's reputation on the line

Volkswagen Phaeton automobiles pass along a conveyor on the assembly line at the Volkswagen AG factory in Dresden, Germany.
Kristian Bocsi | Bloomberg | Getty Images
Volkswagen Phaeton automobiles pass along a conveyor on the assembly line at the Volkswagen AG factory in Dresden, Germany.

Needless to say that cars and components constitute Germany's most successful export – accounting for a fifth of total German exports worth more than 200 billion euros ($226 billion) in 2014. One in six people in Germany are employed in the auto industry, whether directly or indirectly.

Last week, the German Chancellor Angela Merkel tried to assess the damage to the Germany economy. "It is of course a dramatic event which is not good," Mrs Merkel said.

"But I think the reputation of German industry... is not so shaken that we are no longer considered a good place to do business." She added.

Let's look at the bigger picture here..

The most serious threat to Germany is not whether two engineers at VW have initiated manipulation of diesel engines. As unfortunate as this nightmare might have been for VW, it is really just a blip on the German radar.

What would be more detrimental to the German economy would be if all VW workers dropped their tools and let the assembly line run idle, demanded greater unionization and fewer working hours.

So far we are not seeing signs of that. Service sector productivity may not look too rosy, according to the European Commission but in its March 2015 report, the Commission pointed out that "from an international perspective, Germany stands out as having moved from very weak unit labour cost developments before the crisis to nominal wages growing above productivity from 2008 to 2013, which is a sign of ongoing rebalancing."

Read MoreExports slide as Germany faces 'unprecedented' challenge

Apart from declining productivity, what would be even worse for the German economy is if the likes of VW and BMW were scrambling for talent to fill their vacant slots with both high-and low-skilled labor. The country's August unemployment rate is 4.5 percent. That is another post-reunification low, nearing what many might bravely call full employment.

And that's where Angela Merkel comes in, a woman who has seemingly secured our labor supply for the coming decades by allowing thousands of refugees to enter the country, many from Syria in the Middle East.

Integrating them will be an ongoing challenge, but the economic and social benefits far outweigh the costs as Germany has a demographic problem and needs skilled workers. After all, the much-touted German "economic miracle" witnessed in the sixties would not have been possible without migrant workers.

Let's not dwell too much on VW. This is a short-sighted view. With Angela Merkel's courage, even though it is not rewarded in the most recent polls which show a loss of momentum for her popularity, the German economy will fire on all cylinders -- even in the future. No diesel engine needed for that.

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