Since it was coined by Tsar Nicholas I of Russia in the mid-19th century, there has been a title that, like a boxing belt, has changed hands over the years: “The Sick Man of Europe.” Originally used to highlight the decline of the Ottoman Empire, this adjective has become the most popular adjective indicating a major economy that is in decline. And if the UK has had the dubious honor of holding the prize in recent years, the war in Ukraine and its aftermath have revealed a new contender: Germany. The world’s fourth-largest economy and the largest in Europe is in turbulent times and facing structural problems that could spell the end of nearly two decades of prosperity for the Old Continent’s economic engine. It will be the only developed economy not to grow this year, according to the International Monetary Fund (IMF).
To figure out the last time Germany sought the title, we have to go back to the early 2000s, when the economy was deflated – GDP posted two consecutive declines in 2002 and 2003 – had weak external demand and had an unemployment rate in the double digits. Gerhard Schröder, Chancellor from 1998 to 2005, then initiated a series of reforms that fostered a jobs miracle and, together with strong foreign demand from thriving economies such as China, strengthened the pillar of the German economy: a competitive manufacturing sector, thanks to which a large part goes to cheap Russian gas and Eastern European workers. These factors have sustained the German country for almost two decades and made it the first sword of Europe. But some experts warn that the success may have made Berlin overconfident.
The German economy is now a long way from the goldmine of the last decade: GDP remained stable in the second quarter (0.1%) after falling into recession at the beginning of the year, and since September 2022 there has been no real progress beyond that In addition, inflation, the trend plague of the last few months, is proving to be particularly resistant in the German country most affected by the energy crisis. High inflation and economic downturn: stagflation. Of course, it has the lowest unemployment rate in the eurozone and for economists like Clemens Fuest, director of the Leibniz Institute for Economic Research (IFO), the term “sick man” is therefore an exaggeration.
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On the budget side, the signs are in line with the German austerity mentality: while salaries rose at the highest historical rate in the second quarter (6.6%), fueling fears of worsening inflation, private consumption and indicators for consumer confidence fell. The index, created by market analysis company GfK, recorded another decline this month, recording a negative reading of 25.5 points at the beginning of September. However, Marcel Fratzscher, president of the economic research institute DIW Berlin, argues that there are currently no signs of second-round effects – when wage increases to cushion the impact of inflation would ultimately lead to a further rise in prices – and trusts that they can boost consumption.
The change in the geopolitical order interrupted by the invasion of Ukraine has exposed the weaknesses of the German model. Wolfgang Münchau points out in one of his analyzes for Eurointelligence that this depends on three factors: cost competitiveness, technological leadership in the industry and geopolitical stability, and “all of these are gone,” he emphasizes. On the one hand, the blockage of Russian gas – which accounted for more than 50% of gas consumption in Germany – has hit electricity-intensive industries, forcing companies such as chemical company Lanxess to reorganize their businesses and close plants. Furthermore, given the slowdown in China, the over-dependence on trade with the Asian giant is clear: in July, exports to China, which account for 3% of German GDP, fell further by 6%, according to the German statistics office. in the interim price.
“The world around Germany has changed,” defends Münchau, “what has emerged is a crisis in energy prices, new geopolitical divisions and technological disputes that raise existential questions about the future of the model.” For Fuest, Germany is still on one a high level of exports and imports, “but the industries that have been successful in the last two decades, especially chemicals and automobiles, will no longer play the same role in the future.” The business climate indicator determined by the institute he heads recorded in August fourth negative month, and the perception of German business people is at the level of August 2020.
Chancellor Olaf Scholz (center) with German astronauts Alexander Gerst and Matthias Maurer during a visit to the European Space Agency in Cologne last Friday.FlashPic / POOL (EFE)
Berlin has few options to change the situation in the short term, and the political situation – a three-party coalition in the executive branch – is not helping. At the end of 2021, social democrats, liberals and environmentalists signed the agreement, which ushered in the era of Olaf Scholz as Chancellor after 16 years under Angela Merkel. Two major measures were proposed within the traffic light government: the introduction of a uniform energy price for electricity-intensive industry under the leadership of Economics Minister Robert Habeck of the Greens and the adoption of an ambitious economic stimulus package. proposed by the most liberal part of the coalition, led by Finance Minister Christian Lindner. In the first executive session after the holidays, differences between liberals and environmentalists prevented the implementation of the measure that was finally passed this Tuesday: a tax aid package worth 32 billion euros for the next four years.
Structural problems
“The big challenge facing the German economy is of a structural nature,” defends Fratzscher from DIW. The challenges are not small. Unemployment is at a minimum, but hides something more worrying: according to Eurostat, the number of job vacancies in the second quarter was 4.1%, one point above the euro zone average. With almost no unemployment, this means the workforce is unable to fill the jobs the economy needs. And like many other developed economies, this is due to aging.
The problem is not new: Ten years ago, the Institute for Labor Market and Occupational Research warned that between 2008 and 2050 the working population would decline by 18 million people for demographic reasons alone. At the end of June, the German Bundestag approved a plan to recruit skilled workers.
Added to the shrinking workforce and over-reliance on exports are several shocks that point directly to the heart of the German economy: its industry. The most important is the energy transition, in which the executive branch is investing billions of dollars and which it estimates will take at least until 2027 to reduce energy prices for the industry. Therefore, almost a third of companies support the energy transition investments outside Germany, according to the Energy Transition Barometer of the Chamber of Commerce and Industry. In addition, ING head for Germany and the Eurozone, Carsten Brzeski, emphasizes that the incentives of the US Inflation Reduction Act attract European companies and “structurally weaken the industry”.
The strong automotive industry in particular is suffering from all these blows, to which is added one that analyst Patrick Artus points out in a report from the investment bank Natixis: competition from thriving Chinese brands in the electronics market. The Asian giant’s lead for Germany is therefore twice as high. On the one hand, its weakness in recent months is affecting exports; On the other hand, the advance of brands like BYD threatens the industry. “China has become a more structural company because it is no longer limited to buying German products, but has become a competitor,” says Brzeski.
Underneath the excessive dependence on exports, the challenge of the energy transition or an aging population lies an endemic evil of the German economy that the good economic results have (so far) been able to mask: underinvestment. “The pandemic and the war in Ukraine changed the world, but Germany also forgot to invest and implement new reforms,” says Brzeski, pointing to the need to “set an example” in the austerity phase of the financial crisis. In a stable environment, the deficits in public investment – with their consequences for the country’s infrastructure – go unnoticed, but when the balance is disturbed, urgency arises.
A Volkswagen operator at the Dresden plant.picture Alliance (dpa/picture Alliance via Getty I)
For Fratzscher, the industry is “lagging behind in international comparison” and must cope with a three-fold transformation: First, it must accelerate the ecological transformation; On the other hand, it has “one of the worst digital infrastructures in Europe” and many of its medium-sized companies have taken too long to digitize production, which is why they have fallen behind in productivity. Finally, it must reduce its dependence on China. In line with Brussels’ plans, the German executive is trying to attract large technology companies with a flood of money: with a subsidy of 10,000 million, Intel is investing a further 30,000 in the construction of two chip production facilities in the city of Magdeburg. Taiwan’s TMSC will do the same in Dresden with 5,000 million in executive support.
The transformation will come through a combination of public and private investment, say economists, who warn it could clash with another endemic evil of the German system: excessive bureaucracy. “These investments are slowed down by overly complex planning procedures, restrictive regulations and bureaucracy,” criticizes Fuest from the IFO. “The federal government must embrace change and promote its implementation instead of trying to consolidate the status quo,” says Fratzscher: “This requires massive public investments in infrastructure and education as well as a simplification of regulations and bureaucracy.”
All experts interviewed agree that this process will involve considerable financial outlay. For ING’s Brzeski, reversing the country’s investment passivity is only possible if Germany changes its own budget rules – the constitutional debt brake that was suspended in the Corona crisis. In addition, European Union fiscal rules will be reintroduced next year, which could pose another obstacle for the country, which for years served as the Old Continent’s financial police, to take the step demanded by its economists. All this was toned down when part of the executive branch resumed austerity discourse and the German extreme right reared its head. It will not be easy to cure the “sick man of Europe”. Not cheap.
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