Germany is struggling. Its economy has shown no growth in the best part of two years. Its infrastructure is badly in need of modernisation. There are strikes on the railways. Protesting farmers have brought Berlin to a standstill. Deutsche Bank is cutting thousands of jobs. School standards are slipping. There is growing support for parties of the hard left and hard right. For the second time in a quarter of a century it is being labelled the sick man of Europe.
Germany has a history of economic problems breeding political extremism but talk of a return to the Weimar Republic is wildly overblown. The economy is flatlining, not collapsing. There is nothing to match the hyperinflation of 1923 or the mass unemployment of the early 1930s.
That said, the ruling coalition led by the chancellor, Olaf Scholz, is in serious trouble, staggering from crisis to crisis. Late last year, the country’s constitutional court ruled against a plan that allowed money intended for pandemic emergency measures to be spent on the transition to a carbon net zero economy. That blew a €60bn (£52bn) hole in the budget that had to be filled by unpopular austerity measures. As in many other European countries, immigration is a toxic political issue.
Last time, the “sick man of Europe” label didn’t stick. Germany bounced back from its problems and quickly re-established itself as Europe’s powerhouse economy. Its strong manufacturing base meant it was ideally placed to sell to the fast-growing Chinese market. Joining the euro at a competitive exchange rate and securing supplies of cheap energy from Russia boosted corporate profits and generated a colossal trade surplus.
When southern European countries ran into severe financial difficulties during the eurozone crisis, they could expect lectures on the importance of running a tight ship from politicians in Berlin. The blunt message to Spain, Italy, Portugal and Greece was that they should follow Germany’s example and make themselves leaner and more competitive.
While Germany remains the eurozone’s largest economy it is now one of the worst performing. It contracted by 0.3% in the final three months of 2023 and – somewhat ironically – it was only the better-than-expected performance of Portugal, Italy and Spain that spared the eurozone from tipping into a technical recession.
Peter Bofinger, professor of economics at Würzburg University, says the German economy has structural problems, and that what were once considered strengths of the country’s business model have become weaknesses. Germany is much more export-focused than other developed nations, manufacturing accounts for a bigger share of the economy and the car sector became too reliant on China and has been slow to adapt to the growing demand for electric vehicles. The German economy, Bofinger says, is facing a fundamental challenge to its business model that cannot be addressed by removing regulations and cutting taxes.
Writing for Social Europe, Bofinger, says: “Germany has become sick. But it could be cured if it were willing to change its lifestyle and take the medicine needed to regain its health.
“The medicine is public debt deployed as an engine of growth – not by reducing taxes and accompanying transfers but by increasing public investment to stimulate domestic demand and the emergence and deployment of new technologies.”
Holger Schmieding, economist at Berenberg Bank, is far more upbeat about Germany’s prospects and is convinced that the economy will bounce back.
“Germany is not the sick man of Europe. It has one of the strongest labour markets in Europe and a fiscal position that is the envy of other advanced economies. It has problems but they are mainly temporary.”
Schmieding says Germany is temporarily suffering because China is no longer the engine of global growth and because it had to wean itself off cheap Russian energy.
“Germany is very dependent on global trade. When global trade is booming everybody marvels at how well Germany is doing. When global trade is weak Germany becomes the sick man of Europe.”
But China’s demand for German industrial goods is set to be permanently weaker as a result of the Asian giant’s pivot to a more service sector-oriented economy and the drift to greater protectionism. Meanwhile, the dangers of being over-dependent on Russian gas have become clear over the past two years and exposed weaknesses in Germany’s growth model.
Timo Wollmershäuser, head of forecasting at the Ifo institute, one of Germany’s leading thinktanks, says: “Germany has become noticeably less competitive as a business location in recent years. In addition to higher energy costs, a number of other factors have contributed to this: an unchanged high tax burden, increasing bureaucratic costs, sluggish progress in digitalisation and a growing shortage of skilled workers.”
The good news for Germany is that it has shown in the past a determination to work through its problems. As with the US, those who write off Germany do so at their peril. This is a country, after all, that spent €2tn over 30 years on levelling up the eastern Länder following reunification.
The bad news is that the way out of the country’s difficulties will be hard, and is not going to be helped by government cuts and the ingrained aversion to public debt.
Carsten Brzeski, global head of macro at ING bank, says Germany was facing similar problems to other eurozone economies – higher interest rates and the war in Ukraine – but with some additional issues of its own that will take time to solve and will require Germany’s companies to adapt in order to survive.
Broadband coverage is poor, infrastructure is crumbling, there are delays and strikes affecting the railways, the country is falling down the international league table for educational achievement. Brzeski adds: “These are all structural issues that are harming the German economy. They didn’t fall out of a blue sky.”
