Germany’s economy has stalled amid falling production and political strife

Germany's economy has stalled amid falling production and political strife


Germany started the year with tractors filling the streets of Berlin and farmers honking their horns in furious protest over proposed budget cuts. Then train engineers walked off the job demanding better pay, leaving passenger and freight vehicles stranded and the country mired in anger and gridlock.

The same can be said about the state of the German economy. It shrank 0.3 percent last year, official data showed this week, making it not only the largest economy but also the slowest-growing among the 20 countries that use the euro. Has been. Industrial production has fallen for five consecutive months.

“The economy in Germany is at a standstill,” said Siegfried Russworm, president of the Federation of German Industries. “We see no prospects for a rapid recovery in 2024.”

Since it was rebuilt after World War II, Germany has been the main driver of Europe’s economic growth, becoming an industrial superpower known for huge factories and fine engineering.

But now its automakers must compete with China’s relatively cheap electric cars, and it is competing with the United States to attract tech giants. There is a growing realization that Germany has not succeeded in updating its industry with sufficient flexibility and digital know-how to remain competitive.

As the economy faltered last year, the government was nearly paralyzed by infighting among members of the three parties that make up Chancellor Olaf Scholz’s ruling coalition. Then came the budget crisis in November, causing the government’s popularity in the polls to collapse.

Many of those disputes were over how to fill a 17 billion euro ($18.5 billion) budget gap after the country’s highest court rejected a previous spending plan in November. The decision was motivated by the country’s so-called debt brake, a law enshrined in its constitution to keep the public deficit low.

But geopolitical crises and new industrial rivalries in China and the United States have weakened demand for German-made products abroad. In recent decades Germany has prospered by selling its goods to the world, accumulating trade surpluses that have helped President Donald J. Relations with the United States have been strained under Trump.

Restrictions on borrowing are preventing the government from making much-needed investments in public infrastructure, from schools and public administration to railways and energy networks.

When debt soared after reunification with East Germany and spending increased after the financial crisis in 2008, Monica Schnitzer, a government adviser, said, “Writing it into the constitution gave it the binding effect that was intended at the time.” Told the podcast “Heissicher Rundfunk”. “But no one thought until the end about what it might mean in a serious crisis, that there is not enough room for maneuver.”

Ms Schnitzer, who heads the German Council of Economic Experts, is among the economists urging lawmakers to adjust the mechanism. But this would mean changing the constitution, which requires a two-thirds majority in Parliament, which would mean a level of cooperation between the opposition and the government that is unimaginable in the current political climate.

This means that, this year and next, Germans will face cuts in government spending, affecting subsidies to farmers and film producers alike. Travelers will face new taxes on airline tickets. Incentives for solar energy and electric vehicles will be cut. The money for improving rail connectivity will also be cut.

Economists have warned that taking the red pen to spending rather than raising taxes – a move strongly opposed by the fiscal libertarian Free Democrats, the smallest party in Mr Scholz’s coalition but which controls the finance ministry. Does this – this will put further pressure on taxes. economy.

Spending cuts could not have come at a worse time for Germany’s struggling economy. They have prompted the country’s three major economic institutions to cut their economic growth forecasts for 2024 to between 0.6 and 0.9 percent from the range of 1.1 to 1.4 percent projected in September.

Among the Group of 20 countries, which includes developed and developing economies from around the world, Germany is expected to rank lowest, with only Argentina seeing weaker growth projected for the year. Organization for Economic Cooperation and Development,

Slow growth in China has also affected Germany. Although China’s economy is expected to grow 5.2 percent in 2023, it is undergoing significant transformation as the country’s leaders try to shift it away from property and manufacturing, long pillars of growth.

Economists say not everything is negative. Double-digit inflation fell to 3.8 percent in December and higher interest rates are expected to ease later this year. This, combined with increased wages achieved following labor actions such as the train engineers’ strike, may encourage German consumers to spend more, although there is a risk of further increasing inflation.

But this will not be enough to fix Germany’s structural problems. One is the lack of domestic energy sources: the country is dependent on imports to maintain the industries that have been the backbone of its economy for decades. These include the car manufacturing, steel and chemical industries, which reported an 11 percent decline in output last year.

Overall, Germany’s industrial sector is struggling not only to cope with the high price of energy, but also to transition to a future that is more agile and more digital. A plan to digitize the country’s prized but papery bureaucracy, which has its roots in 19th-century Prussia, largely stalled last year, according to an official index.

The country failed to reach its target set in 2017 of requiring all public offices to provide digital services by the end of 2022. This infrastructure is miles behind the rest of the EU, where an average of 56 percent of homes are connected to fiber. -optic cable, compared to 19 percent of German homes.

In the private sector, companies complain that the amount of paperwork required for construction or expansion hinders growth.

Germany has recently shown that it can move quickly when it has no choice. After Russia stopped flowing natural gas in 2022, the government approved the purchase and construction of several terminals to bring liquefied natural gas.

Within a few months, Germany was able to completely fill natural gas storage facilities, while it encouraged companies and consumers to conserve fuel.

“Germans are so reluctant to take risks, it’s almost a psychological thing,” said Sander Tordoir, an economist at the Center for European Reform, a Berlin-based think tank.

He pointed to the country’s growing green tech sector as a bright spot in the economy, industries that develop technology for environmental protection, renewable energy and efficient use of resources.

Semiconductor manufacturers are another source of investment. Intel and Taiwan Semiconductor Manufacturing Co plan to build factories in East Germany, helped by €20 billion in subsidies that have escaped government budget cuts.

Economists have debated the wisdom of spending so much to attract such deep-pocketed companies, worth billions in their own right. But the idea that such firms are needed to help bring German industry into the 21st century is not in doubt.

“Germans need to think about what kind of economy they want,” Mr. Tordoir said. “But once they make the leap to deregulation and remove fiscal constraints, the German economy has great potential. “It is just not being used.”



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