2024-01-16 10:34:07
Germany fell into recession in 2023. The model euro student became the sick man of Europe last year. How can Berlin regain its momentum?
Three years after the big recession caused by Covid-19, the German economy is drinking again. GDP fell by 0.3%. This is the worst performance of the G7, as predicted by the International Monetary Fund (IMF). Inflation has eroded the purchasing power of households and therefore broken the engine of consumption.
The other engine of German growth, an export-oriented industry, is also stranded because demand is running out of steam. And because the war in Ukraine deprived German industrialists of one of the assets of their competitiveness, cheap energy, in this case, Russian gas. Highly energy-intensive, German chemicals and metallurgy have seen their production fall by 20% in two years.
Solid model
Despite this gap after two years of robust recovery, the German model is still solid. Mid-sized companies, which constitute the strength of German industry, are renowned for their ability to adapt. And thanks to their past performance, large companies have massively increased their employees. This could benefit household consumption.
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But there is no defense against the spread of protectionism, nor against the slump in demand, particularly from China, the biggest outlet for Germany after the United States. To maintain their cost advantage, and therefore their customers, German manufacturers are considering leaving their country. For example, chemists invest where energy is now cheap, and where the State financially supports the construction of new factories, that is to say in the United States.
Budgetary orthodoxy
The limitation of the deficit is enshrined in the fundamental law, which is why in November the constitutional court reversed 17 billion euros of public spending planned for 2024 to restart the machine. The chancellor had to backtrack with a mini austerity plan. Hence the current social discontent, that of farmers who have just lost tax advantages.
According to economist Peter Bofinger, these savings measures are totally counterproductive in a crisis situation. This former advisor to the German government wonders: has his country, once again described as the sick man of Europe, not also become completely stupid by forbidding itself from going into debt?
It’s not just the United States that massively supports the industry. This is also what China is doing on a large scale to recover its economy. If Germany wants to remain among the leading industrial nations, it must regain the capacity to borrow to invest in the restructuring of its economy. This is the conviction of Chancellor Olaf Scholz and the Green Minister of the Economy. But not that of the other coalition partner, the Liberal Party, and even less that of the voters, the vast majority of whom are in favor of the debt brake.
Also read: German companies in need of labor
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