The world’s growing geo-economic fragmentation worsens the situation of a country heavily focused on exports, while Scholz is paralyzed by infighting within the majority. Germany at its worst in recent history.
What a difference two months make! In June, on the eve of the European Football Championship, the central topic of discussion in Germany and Europe was whether the tournament would bring sporting and organizational successes capable of restoring optimism to the country and giving new impetus to its struggling economy.
It’s early August and things have taken a very different turn. The Mannschaft, despite playing well, went out in the quarter-finals of Euro2024. The chaos of the German railways left an indelible mark on the memory of everyone – journalists, spectators and even footballers – who had anything to do with the event.
Above all, however, the economic indicators of the second quarter and July say that the Europe’s largest economy is stagnating again, indeed shrinking, while the business world is in a bad mood. And to stick to sports, the mediocre (by usual standards) tally of German athletes at the Paris Olympics almost sounds like a metaphor for this situation, where Germany was “relegated” to tenth place on the medal table.
Shrinking continuity
In the second quarter of this year the German economy started to shrink again: -0.1% compared to the same period in 2023. And even if the June figures are only based on forecasts and the coming weeks could hold surprises, it is clear that the optimism with which Germany started the year, when GDP grew by 0.2% in the first quarter, has faded.
This is confirmed by Ifo data, the index measuring business confidence and expectations for six months, which fell to 87% in July from 88.6% in June, and by the increase in unemployment, which last year month had more than 82,000 people losing their jobs, the second worst number in the last 20 years. Germany currently has 2.8 million unemployed, equal to 6% of the working population. Overall, the size of its economy is smaller than it was two years ago.
The question is not so much whether Germany, as it was in the late 1990s, is again the “big sick man of Europe”. The real issue is that in the absence of significant structural adjustments, as well as mindset, the country is destined to oscillate between hopes and disappointments, small signs of recovery and sudden falls, on a development path that is at best very tenuous. Nothing like what Europe needs, which, despite the current fog, continues to see Berlin as an economic engine and political beacon.
Negative factors
Germany is actually suffering the impact of five negative factors.
The shrinking of its workforce, i.e. the number of people aged between 15 and 64. The tiny percentage of public investment compared to GDP between 2018 and 2022: according to OECD – IMF data, among the sixteen countries with the highest income, Germany is second to last with 2.5%. Only Spain did worse, with 2.4%, but Italy is not doing well either, third from the bottom with 2.6%. Third factor, German per capita income compared to the US has decreased from 89% in 2017 to 80% in 2023. Fourth, Germany is still seriously behind in the digital economy, where in the Angela Merkel years it did not exist and was not never in strategic investments. Finally, the growing geo-economic fragmentation of the world, characterized by protectionist policies of the various blocs, has more serious consequences for a fully export-oriented economy and therefore dependent on world trade like Germany’s. Furthermore, with the US economy… freezing and the Chinese economy slowing, there is little or no prospect of a strong export-led German restart.
Instability is a catalyst
More serious is the catalyst, which is instability, which has gripped the political scene in Berlin for months, where the government led by Chancellor Olaf Solz has been paralyzed by infighting. Irene Soave said everyone was surprised by the story of liberal Transport Minister Volker Wissing’s letter to Ursula von der Leyen, where she called for changes to the rules on diesel emission limits, which risk putting 8 million vehicles out of service in Germany. However, it is far from clear whether Wissing is speaking for the entire government, while his green allies have opposing positions on the green transition. It wouldn’t be the first time in Brussels, where it’s a fashionable joke that if you talk to three German ministers, you feel like you’re talking to ministers from three different countries.
Ultimately, what tears the Berlin coalition apart is the budget issue, which contains the mother of all issues: namely whether or not to keep the Schuldenbremse, the fiscal brake that sets a limit on annual debt, which is considered anachronistic and harmful by all the economists. It is strongly defended only by liberals, for whom it is almost a matter of identity and survival. In June there appeared to be agreement on the maneuver, without touching the mechanism. After the summer holidays, in the light of what will happen in September, in the regional elections of Thuringia, Saxony and Brandenburg, the budget issue will explode again. And this time it could be very serious…
Source: TA NEA print edition
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