Germany has once again become Europe's weak man
All Western countries are experiencing low growth and Germany is at the bottom. The centre parties are not coming up with dynamic and creative solutions
04.09.2023
Hugo Gaarden
A few decades ago, Germany was the "sick man of Europe" with a stagnant economy, and this term is reappearing as Germany is experiencing weak minus growth.
There is very low growth in most of Europe, and even the US is growing at less than 2 per cent. But Germany is definitely the weak link. The OECD and the IMF expect Germany to perform the worst this year among the leading countries. This is not only due to high energy prices, but first and foremost due to extremely weak political vigour, even though the country has done reasonably well by cutting off gas and oil supplies from Russia.
This has consequences for the whole of Europe. There is no prospect of the far-reaching reforms that economists are calling for, despite the fact that Europe is facing two huge economic burdens: Helping Ukraine's defence and subsequent reconstruction, and the costly green transition. Both will be shaking the foundations of the economy and business.
The latest opinion poll in Germany shows that 80 per cent of the population is dissatisfied with the policies of the three-party government, dominated by the Social Democrats and the Greens. But this has not yet led to significant changes in the political picture. Voters remember the centre-right government led by the CDU during the 16 Merkel years, and even then, no reforms were implemented that improved the situation of the citizens. Now, too, there are no creative and far-reaching reform proposals.
The public sector is at rock bottom and a barrier to change. Property prices and rents continue to rise despite stagnating incomes during the zero rent and the inflation of recent years.
The biggest criticism is the rapid conversion of heating in private homes - away from (Russian) oil and gas. This was done as a diktat on the specific technical solutions, which has greatly annoyed voters because they are not necessarily the right solutions. At the same time, there has been no increase in solar and wind energy.
Last time Germany was down, Chancellor Gerhard Schröder created a recovery with sweeping labour market reforms, and Germany was moving forward with high export figures. But it's not that easy today, say all economists. Reforms need to be deeper and broader, and special interests need to be tackled.
The new head of the Kiel Institute for the World EconomyEconomy, Moritz Schularick, has put it dramatically by saying that the biggest problem for Germany is not Putin or China, but the German bureaucracy. In the last 10-15 years, far too few improvements have been made in society. Digitalization is far behind, especially in the public sector. The private car industry has been extremely slow to adapt to electric cars and risks being overtaken by the Chinese. A study shows that Germany is at the top with patents on everything in electric car production, but the Chinese are much faster at translating new knowledge into production and sales. The green transition is happening extremely slowly, while Germany could have been a front-runner. Now it's the US and China.
The main problem, according to Schularick, is that Germany has not created a "narrative" of what the future society should be like: with green energy and housing that everyone can afford, even in the cities.
Schularick's colleague from the Ifo Institute, Clemens Fuest, says that history is full of failed industrial policies, and the German government is repeating this with billions in subsidies for chip production. It's the framework for business that needs to be improved so that everything can go faster, so that power becomes cheaper and so that there is more investment. "We need to reinvent ourselves and reorient ourselves to a new energy and geopolitical world," he says.
Some housing experts have come up with specific suggestions: The rigid building regulations must be dropped so that owners of large houses and multi-family houses can easily build owner-occupied apartments, possibly as terraced houses. Then the housing need of one million homes over three years can be met without building new, separate houses and at much lower prices than new construction.
The borders must be opened to foreigners, as 400,000 employees are needed annually for the business community. The entire education system must be improved and business taxes must be lowered from 28 per cent to the EU level of 18 per cent. Citizens' living costs must be reduced, especially housing costs. This is only possible if the economy becomes much more efficient. This does not necessarily require a massive increase in public debt, economists suggest.
The alternative is that dissatisfaction in society increases. A series of public sector strikes in Germany have raised a warning signal for politicians, and strike waves in the UK show that there is growing dissatisfaction with public sector cuts. The yellow vest protests in France are perhaps only a foretaste of what may happen if conditions for the general population do not improve and if the public sector, from the internet to train services to hospitals, does not improve.
Nowhere are there demands for massive redistribution of the enormous increase in value that has benefited only a few per cent of the population during the zero-interest-rate society and the corona crisis with online shopping. But if the demands do materialize, how will governments deal with them? Only after turmoil and crises? What's remarkable is that while dissatisfaction with governments' failure to solve acute problems is growing, there is little support for extremist parties. The centre is where the political battle is being fought. However, there is no political debate on radical reforms, and national and EU budgets do not take into account the reconstruction of Ukraine and the green transition.
Carsten Brzeski, chief economist at the Dutch ING Bank, says that the necessary reforms and public investments are a long way off. The weak man will have a long sickbed, and the entire European sick room will feel it.