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The German Malaise: Olaf, schaffen wir das?

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Once a high-performer, always a high-performer? – The German economy is in a state of malaise. Ever since war befell Ukraine, its status quo has been both dreary and depressing. 

As the long list of crises relentlessly continues to grow, fears of economic decay and deindustrialisation are haunting Germany. 

To find out why Germany finds itself in a dire situation, and why the German economy lacks a long-term vision to sustain, tap the link in our bio. 

Once a high-performer, always a high-performer?  

Ever since the war befell Ukraine, the status quo of the German economy has been dreary and depressing: a geopolitical crisis, an energy crisis, an economic crisis, and soon, a social crisis. 

As the long list of upheavals relentlessly continues to grow, fears of economic decay are haunting Germany. 

Enter recession 

Today, Germany is subjected to one of the most severe stress-tests of the past decades: the energy crunch weaponised by Vladimir Putin, accompanied by scarce endogenous energy production, is prompting legitimate anxiety about deindustrialisation. Along with it, the Kiel Institute for the World Economy expects GDP to contract towards the end of 2022 and at the beginning of next year. Much like in its European counterparts, the odds of an economic recession in Germany are high. 

The German malaise 

In this climate, nothing more than the very foundation of welfare in the world’s 4th largest economy is imperilled. The diagnosis? Almost every crisis thus far either caught Germany by surprise or impinged upon one of its weaknesses. Ideally, both.  

The picture is clear: the German economy is in a state of malaise. And a lengthy list of economic woes is impatiently awaiting indications – to reimagine the German industrial base for the future. 

For the one-year-old government under Olaf Scholz, that is not an easy task. – Olaf, schaffen wir das?  

Enter economic dependence (a bad one) 

While Germany usually counts as one of the tough and resilient players in European economic crises – take the 2010 Eurozone crisis or the Covid-19 pandemic – scholars agree: this time is different, and complacency is a false friend. Indeed, the good old days of the EU export-led growth model are over, as Professor Altomonte proclaimed in his guest article for Tra i Leoni. That demands structural change. 

Related:  Monday Briefing 01/05/2023

Two premises of Germany’s conventional economic (mal-)practice have been ruthlessly scrapped from its equation: first, Germany delegated any matter pertaining to security and defence to its allies and partners. In the meantime, it enacted a fallacious foreign policy doctrine of Wandel durch Handel (“change through trade”) with the Russian Federation. Doing so, it became the second-most dependent EU member state on Russian gas. 

Time to internalise externalities 

But Germany, the world’s third-largest exporter of goods, did not only build the prosperity of its industrial base upon cheap energy supplies by one autocracy – it also made sure to rely upon the demand for goods of another one. In 2021, China was Germany’s most relevant foreign trade partner – for the sixth time in a row.  

For the past decades, the idea of externalising the costs that should have been borne by industrials has been a dominant strategy. Today, its implications are manifest. Hindsight biases aside, this economic model now proves irresilient, vulnerable, if not impotent to provide a credible path towards long-term competitive advantages in its key industries. 

What now? 

To mitigate the comprehensive effects of the energy crisis, Germany is sluggishly drifting from one energy relief package to the next one – and rightly so: observers caution against widespread impoverishment of the middle class and a vanishing German industrial base. Purchasing power has plunged to the levels prevailing during the German reunification. And indeed, over 90% of German industrial companies have expressed that they have facing “strong” to “existential” challenges in a recent survey conducted by the Federation of German Industries (BDI). 

Yet, Scholz’s government seems to miss that protecting social and industrial welfare is not a viable economic policy, but a temporary emergency measure. 

No foresight in sight 

As of now, industrials in Germany are paying up to six times as much as their competitors in the US – and energy prices are expected to remain high, as the country envisages costly LNG procurements as alternative supplies in the short- and midterm. According to the Economist Intelligence Unit (EIU), the global LNG market will remain “tight until at least 2024 providing little relief on price”. 

“The substance of our industry is under threat” 

These menaces place the German industrial base – the prominent Deutsche Mittelstand – in a dire situation. As the ifo business climate index continues to decline, so does the propensity to invest in long-term projects. Yet funds in Germany’s key industries, that are machinery, automobile, and chemistry, must not stagnate in the preparation for its carbon-emissions-free future. Bear in mind: the marvellous story of the German post-war industry is also one of (now obsolete?) fossil fuels.  

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Tapering with tantrum 

If research and development in digitalisation and decarbonisation taper, Germany runs the risk to miss out, not only on first-mover advantages, but also on essential transformations.  

Data provided by medium-sized companies in Germany sends a warning signal to policymakers: 40% responded in a survey that they are deferring investments in emissions-reducing production methods. Yet, innovation by small and medium-sized enterprises (SMEs) constitutes one of Germany’s most notable assets in the EU. International competition should push in the opposite direction. But with a looming recession, that remains in vain.  

Auf Wiedersehen, SMEs? 

Instead, SMEs are cutting output to face high input costs. Meanwhile, 25% of respondents in a survey have stated that they are considering relocating parts or their entire production to another country.  

That value-addition in supply chains is shifting away from Germany can be partially offset with cheaper imports of intermediate goods – but then, auf Wiedersehen to Germany’s infamous streak of trade surpluses. 

In the mid and long term, the picture looks even gloomier: as the crisis continues to unfold, the anticipated length of Germany’s competitive disadvantage makes threats of entrenchment more imminent every day. 

Fiscal and monetary policy coordination 

Finally, if for some, the “peace-time” levels of debt in Europe were already a cause for concern, the war levels of indebtedness are even more so. As the European Central Bank proceeds with monetary tightening, worries about debt sustainability have amplified – even in Germany!  

In the same vein, lessons ought to be learned from the British debacle: that monetary and fiscal policy require careful coordination to work in tandem. Capital markets place budgetary decisions under close scrutiny, and they manifestly have no inhibitions to act punitively. 

That is, if and since Germany’s fiscal resources are shrinking, it is inevitable that long-term viable economic policy goes beyond relief packages. 

Wir schaffen das! – if… 

Identifying, containing, and mitigating self-amplifying crises before they alert the political machine has become an utmost urgency, not only in defence, but in economics, too. Much like German foreign policy is undergoing a watershed moment – the Zeitenwende – following Russia’s invasion of Ukraine, so does the German economy need a tidal change. 

Related:  Monday Briefing 08/05/2023

So far, Germany had proved proficient in lurching from crisis to crisis. It has been a beacon of stability. In 2015, as Europe faced one of its most threatening internal upheavals – the refugee crisis –, then-chancellor Angela Merkel heroically vowed: “Wir haben so vieles geschafft – wir schaffen das,” that is, we have managed so many things — we will also manage this situation.  

Where is this spirit now, Olaf? 

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Chief Editor

I am a Franco-German BIEF-Economics student, passionate about European politics and classical music.

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