Berlin has shown great resilience in the past in dealing with crises – now things have changed
For decades, Germany has been the steam engine of the European economy, and not only a few times – with compensation, of course – managed to prevent various crises, but also to get out of difficult situations unscathed. However, this dynamic appears to be collapsing, posing risks to the entire continent.
The country faces its greatest threat since reunification at a very different time than the 1990s: decades of misguided energy policy, a powerful auto industry built on internal combustion engines, and a slow transition to new technologies that are decimating the country’s competitiveness.
“We were naive as a community because everything looked so good,” Martin Brodermüller, CEO of BASF SE, told Bloomberg. “These problems that we face in Germany are piling up. We have a period of change ahead of us. I don’t know if everyone realizes that.”
While Berlin has shown in the past an ability to weather crises, the question now is whether it can pursue a sustainable strategy.
The possibility seems remote. Chancellor Olaf Solz’s diverse coalition is consumed with petty infighting over everything from debt and spending to heat pumps and speed limits.
But the warning signs are hard to ignore. Although Scholz himself told Bloomberg in January that Germany would weather Russia’s energy squeeze without a recession this year, data released Thursday showed the economy has already contracted since October and has only grown twice in the past five quarters.
Economists see German growth falling behind the rest of the region for years to come, and the International Monetary Fund estimates that Germany will be the worst economy in the G7 this year. However, Schultz remains optimistic: “The outlook for the German economy is very good,” he told reporters in Berlin after the latest economic data. By unleashing market forces and cutting red tape, we “solve our challenges”.
Hard days are coming
As Bloomberg points out, the main danger right now is that the data coming to light is not a one-off, but a harbinger of things to come.
At the moment, Berlin appears unable to sustainably meet the energy needs of its industrial base. In fact, there are not a few who would accuse it of relying too heavily on old-school mechanics. It lacks the political and commercial flexibility to transform into fast-growing sectors.
To its credit, industrial giants such as Volkswagen AG, Siemens AG and Bayer AG are surrounded by thousands of smaller companies, and the country’s conservative spending habits put them on a stronger financial footing than their peers to support future transformation. But he has very little time to lose.
The most pressing issue for Germany is to begin the energy transition. Affordable energy is a prerequisite for industrial competitiveness, and even before the end of Russian gas supplies, Germany had some of the highest electricity costs in Europe.
Berlin is responding to the concerns by seeking to cap electricity prices for some energy-intensive industries such as chemicals by 2030 — a plan that could cost taxpayers up to 30 billion euros ($32 billion). But this would be a temporary measure, a “band-aid” and show the desperate state of supplies in Germany.
After shutting down the last of its nuclear reactors this spring and pledging to phase out coal by 2030, the country installed about 10 gigawatts of wind and solar power last year — half the speed it needs to meet its climate goals.
The Solz government also aims to have about 625 million solar panels and 19,000 wind turbines connected by 2030.
The harsh reality is that the resources needed to produce such clean energy are limited in Germany due to its relatively small coastline and lack of sun. In response, the country is seeking to build a massive hydrogen import infrastructure from countries like Australia, Canada and Saudi Arabia – drawing on technology that has not been tested on this scale.
high voltage networks
At the same time, Germany should speed up the construction of high-voltage networks that connect wind farms on the northern coast to power-hungry factories and cities in the south. And there is little in the way of stocking up to ensure the country can withstand the holidays.
“Germany needs a multilateral agreement on the pace of expansion of renewable energy infrastructure,” said Claudia Kempfert, professor of energy economics at the DIW Research Institute in Berlin. After the next national elections in 2025, “other political formations could once again disrupt the energy transition. This will not be beneficial for Germany as a place to do business.”
The European economy appears to have a well-funded and well-established system for generating ideas to keep its economy ahead of the curve. Spending on research and development is the fourth highest in the world after the United States, China and Japan. According to the World Patent Office, about a third of patents filed in Europe come from Germany.
However, much of the innovation power is embedded in large companies such as Siemens and Volkswagen and is concentrated in existing industries. While small manufacturers are still thriving, the number of new start-ups is declining in Germany – in contrast to the growth seen in other advanced economies, according to the Organization for Economic Co-operation and Development.
Reasons include excessive bureaucracy and cultural risk aversion. Funding is also an issue. Venture capital investment in Germany totaled $11.7 billion in 2022 compared to $234.5 billion in the United States, according to DealRoom. Germany also operates under a heavy academic system and does not have a single university in the top 25 of the most recent Times Higher Education rankings.
Patent data shows that Germany’s ability to stay ahead is weakening. In 2000, the country was in the top three for global patents in 43 of 58 major technology categories, but in 2019 it achieved that ranking in less than half of the sectors, according to a recent study by Bertelsmann Stiftung.
The real picture in the automotive industry
The weakness of Germany’s technological advantage is particularly evident in the automotive sector. While brands like Porsche and BMW defined the era of internal combustion engines, German electric cars suffered. BYD overtook Volkswagen to become the best-selling auto brand in China last quarter. Key to its propulsion has been the electric model, which costs about a third of Volkswagen’s ID3 but offers greater range and connectivity with third-party apps.
Much of Germany’s wealth and social class is based on a vibrant industrial sector that provides well-paying jobs. But this strength led to a dangerous dependence on foreign markets for orders and raw materials – especially China. Like other democracies in the aftermath of the Russian invasion of Ukraine, Berlin is now trying to ease its dependence on the Asian superpower, but Germany’s largest corporations are not paying attention.
Economy and technology
Much of Germans’ money is kept in a network of around 360 public sector savings banks, called Sparkassen. These institutions are controlled by local communities, causing potential conflicts of interest while simultaneously limiting the country’s economic power.
Germany’s two largest publicly listed banks – Deutsche Bank AG and Commerzbank AG – have been mired in controversy for years, and while they are on the mend, they are still dwarfed by their peers on Wall Street. Its combined market capitalization is less than a tenth of JPMorgan Chase & Co.’s market capitalization.
In technology, Germany’s biggest player is SAP SE, which dates back to the 1970s and makes complex software that helps companies manage their operations. There are few obstacles for the new national champions. Digital payments company Wirecard AG briefly filled that role before collapsing in a horrific accounting scandal.
The lack of investment in Germany is particularly acute in the field of digital technology. Despite its infrastructure ranking it 51st in the world for fixed-line internet speeds, it had the fourth-lowest spending among OECD countries relative to the size of the economy.
“Years of underinvestment have left Germany behind,” said Jimmy Rush, chief economist at Bloomberg Economics. “Berlin will need to spend more and facilitate the start-up of infrastructure projects.”
To speed up the long-awaited development, the government has unveiled a plan to reform the planning process for the installation of optical fiber cables and mobile communications infrastructure.
pressures and stagnation
The largest economy in Europe has been under great pressure, especially after the Russian invasion of Ukraine and the subsequent decision of European leaders to sever economic and trade relations with Moscow in a broad and major field of activity for European economies, as part of the imposition of sanctions. to intervene in Ukraine.
According to analysts at Commerzbank, a recession in the second half now seems more likely than a recovery.
According to Germany’s statistical office, households spent much less in the first quarter, with final consumption spending declining 1.2% over the period as consumers cut back on purchases of clothing, furniture, cars and more.
“Germany entered a recession late last year, after all, as the energy price shock weighed on consumer spending,” Klaus Vistesen, chief eurozone economist at Pantheon, said in a note.
According to him, German GDP is unlikely to continue declining in the coming quarters, but he added, “We don’t see a strong recovery either.”
The latest figures for Germany are part of the broader context of high inflation and high interest rates across the Eurozone. The European Central Bank is expected to raise interest rates again at its next meeting on June 15th.
As the head of the Bundesbank, Joachim Nagel, one of the ECB’s hawks, stated just yesterday, the bank will have to push forward with increasing interest rates.
In a recent report, the OECD put the scale of the challenges in stark terms: “No large industrial economy has ever had a foundation of competitiveness and resilience that is systemically challenged by changing social, environmental, and regulatory pressures.”
This, in turn, will have ramifications across the continent, according to Dana Allen, a professor at SAIS Europe. “The health of the German economy is vital to the broader European economy and to the bloc’s harmony and solidarity,” he stressed.
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