Twenty years ago, many considered Germany the sick man of Europe. Weighed down by the budgetary costs of a poorly managed reunification, it recorded sluggish growth and a high unemployment rate. The economic malaise was so severe that it eventually generated a political consensus around the need for structural reforms. Chancellor Gerhard Schröder’s Agenda 2010 significantly reduced unemployment benefits and was accompanied by wage moderation measures. The boom in capital goods exports to a booming China did the rest: the German economy recovered and became the benchmark for sound economic management in Europe.
Since then, the economic dunce stick has passed to other countries. First to Greece, then to Italy, and more recently to the post-Brexit UK. However, according to the ongoing debate across the Rhine, Germany is once again sick of its economy.
Cherished and often admired, the industrial sector has been showing signs of running out of steam for some time, while the European economies which are more service-oriented are doing better. Economic growth is weaker and inflation higher in Germany than in other European countries. And not many people believe that this is a simple coincidence. The German economy is at the crossroads of profound changes in the global economy, each of which represents a major challenge to an economic model that has worked very well so far.
First of all, the growth model driven by exports is now faltering. Globalization has not ended, but it has stopped progressing. Most major economies tend to close in on themselves. Growth in China, one of Germany’s best customers, has slowed, most likely permanently.
Second, the simultaneous end of cheap Russian gas imports and nuclear power generation means that the country must quickly transition to renewable energy sources in order to meet the energy needs of its industry. Germany must come to terms with the fact that it wants to remain an industrial hub, but can no longer rely on cheap fossil fuels to do so.
Third, a powerful new competitor from the post-fossil industrial era, backed by a government with ample resources, has entered the scene: the United States. German Economy Minister Robert Habeck recently said that the Biden administration’s Inflation Reduction Act (IRA), with the generous subsidies it provides for the reindustrialization of America, is nothing less than only one “declaration of economic war”.
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