Germany, the traditional economic engine of Europe, is slowing down, and the other countries observe the phenomenon with a mixture of strangeness and perplexity, perhaps also with a bit of Schadenfreude, a German word that can be translated as ‘joy at the misfortune of others’. Its growth stalled in the second quarter after the winter recession of two consecutive quarters of falling GDP, and forecasts for the end of 2023 are far from encouraging.
All international organizations predict a negative year-end for Germany, with a fall of 0.4% (European Commission) or 0.3% (International Monetary Fund), and also the main German economic institutes they are pessimistic and estimate decreases of between 0.2% and 0.4%.
Everything indicates that Germany, the fourth largest economy in the world, will be the only one among the developed ones that does not grow at all this year, well below the average growth of the Eurozone (0.8%), growth than stagnation German helps to slow down.
Looking back sheds some light on the present. Something of similar economic significance happened to Germany in the early 2000s, when GDP fell for two consecutive years (2002 and 2003), lowering foreign demand for its products – a real horror for an eminently exporting nation – and unemployment grew.
The then chancellor, the social democrat Gerhard Schröder – he was from 1998 to 2005 – launched with his environmental partners the labor market reform package known as Agenda 2010, a bittersweet memory for German society. If, on the one hand, the package spurred employment and production, it also accentuated certain social inequalities. But the result was an economic boom that has lasted twenty years, also thanks to the increase in foreign demand from emerging economies such as China.
Political scientists and economists agree that this cushion underpinned the four terms (2005-2021) of conservative Chancellor Angela Merkel, the true political beneficiary of Schröder’s reforms.
The social democrat – now disgraced for his proximity to Russian President Vladimir Putin – also facilitated the supply of Russian natural gas at a good price to German industry and households when he promoted the Baltic gas pipeline Nord Stream, a ratified geostrategic bet by Merkel, who, in addition, fostered relations with China, an immense nation seen as a paradise for sales of German brand products. Two dangerous dependencies – energy and exporting – were consolidating.
What has happened that the happy times in which Germany was growing are coming to an end? During these years its economic strategy has been divorced from geopolitics and has focused on the principle of Wandel durch Handel (change through trade), that is, having commercial relations with authoritarian countries with the belief that it would generate changes politicians This has not been the case, and the world has experienced new upheavals.
“In the space of three years a perfect storm created by a global pandemic, Russia’s war against Ukraine with the resulting energy crisis and growing tensions between China and the United States has laid bare the risks that this type of dependence becomes a weapon”, diagnose the economists Sander Tordoir and Xahin Vallée, analysts of the think tank Center for European Reform (CER), based in Berlin, Brussels and London.
Big industry in general has suffered as much as the Mittelstand – the famous German business fabric of small and medium-sized companies – from the supply chain distortions caused by covid between 2020 and 2021. The complacent look towards Russia of Putin was a serious strategic mistake with economic repercussions. The Russian invasion of Ukraine, which began a year and a half ago, suddenly revealed Germany’s energy dependence on Russian gas, which at the time was 55%, and which it had to correct -successfully, it must be admitted- in forced marches.
The orientation towards China, which represents 3% of German GDP, is proving to be catastrophic because the economic slowdown of the Chinese giant, with a global impact, particularly penalizes German industry. German exports to China fell by 11.3% between January and April this year compared to the same period in 2022.
Example: the automotive sector – from BMW to Volkswagen and even Mercedes-Benz -, with a third of its turnover and profits established in China, feels threatened, and for the moment has not been able to optimize the efforts in the field of the electric car. The sector has also accused scandals such as that of Volkswagen’s fake diesel engines ( dieselgate ), with great financial and reputational costs.
“For modern Germany, the current major structural shocks are geopolitical and technological,” argues economic journalist Wolfgang Münchau in an analysis for the EuroIntelligence portal. “The German economy is a beast of the analog era. Its main industries are fuel-driven automobiles, mechanical engineering, and chemistry. The country has excellent scientists and engineers, but unfortunately they are too specialized in pre-digital technologies and are not good at turning scientific innovation into commercial success”, summarizes Münchau.
Indeed, during the boom years, several internal structural problems grew or took hold in Germany, which are now contributing to the crisis of the model. There is the aging of the population and the lack of manpower, which the Social Democrats, Greens and Liberals Government of Chancellor Olaf Scholz is trying to fix by attracting qualified foreign workers by making it easier to obtain citizenship.
There is the absence of infrastructure reforms. And it is also still pending to address the deficiencies in digitization and to solve the failed transfer of the remarkable German R&D investments to practical application.
“Berlin must thoroughly modify its growth strategy, instead of clinging to a failed model of export industrial corporatism”, say CER experts Tordoir and Vallée. Be that as it may, for the current tripartite Government it is a colossal challenge, and the recipe chosen will be very difficult to implement and, at the same time, satisfy everyone.