Of all the “sick men” of Europe filling up the ward in various stages of economic malaise, it is Germany’s symptoms that look the most visible, as automaker Volkswagen AG attests. Yet Germany also has the best shot at self-medicating — provided it wakes up to the fact that its failures are as much fiscal as industrial.
A perfect storm of competitiveness seems to be battering German industry, which accounts for about one-fifth of economic output. Key firms are suffering from tougher global competition, pricier energy and a lack of innovation: Volkswagen, the country’s biggest employer, plans to shutter German factories for the first time, while chemical sector jewel Covestro AG is being acquired by Abu Dhabi investors after two straight years of losses. The onshoring of critical technology such as semiconductors and batteries, fueled by ambitious industrial policy and gobs of state aid, is hitting stumbling blocks from Intel Corp to Northvolt AB.
This storm has been brewing a while. Despite having effectively sailed through the euro crisis years and set the policy tone for the rest of the region to follow, Germany’s anemic economy now stands in contrast to the likes of one-time laggards Italy and Spain since 2019. This euro underperformance is on par with the mid-2000s when Germany was last stuck in the sick bay, although its jobless rate mercifully remains well below that era’s. With France — the other half of Europe’s historical power couple — struggling to contain the fallout from its spiraling budget deficit, the outlook does not bode well for the continent’s ability to rise to the challenge of a potential Donald Trump 2.0 presidency.
However, unlike France, Germany has a choice between a deeper crisis or a real remedy. German debt-to-GDP is lower than all its peers, borrowing costs are cheap and savings are high — so you would expect domestic spending to pick up the slack and drive growth as the planks of Germany’s export-driven model fall away, from Russian gas to China trade.
However, German private consumption and investment are lower than before the COVID-19 pandemic, in contrast to the rest of the euro area and the US, where Americans are buying 20 percent more cars, fridges, TVs and foods than in 2019, Citigroup Inc economist Christian Schulz said.
It is not just the impact of high interest rates: German public investment is also going into reverse and on a net basis has been dismal from 1995 to last year, driven by a strict interpretation of the constitutionally enshrined “debt brake” that limits annual net new borrowing. This is self-imposed pain: While France pays for fiscal murder, Germany pays for fiscal masochism.
As Germany’s increasingly hobbled coalition casts around for ideas, talk of sweeping reforms should be accompanied by discussion of investment, spending and a softening of the debt brake (which can only be changed with support from a two-thirds majority in parliament). The old recipe of driving down labor costs at home and relying on exports to accelerate growth worked in 2005, but it is unlikely to be enough this time. China is increasingly a fierce competitor in goods such as cars and machinery. A Trump administration would also bring more trade barriers.
Meanwhile, more investment at home could reduce costs for investors and improve productivity. Add to that the needs of the energy transition, innovation and defense — which could add US$2.8 trillion in extra spending for European countries — and it is clear that an economic reboot would bring gains.
Germany is part of Europe’s growth problem and should be part of the solution, Jacques Delors Center deputy director Nils Redeker said.
This is all obviously a long shot for the current coalition. However, next year is an election year in Germany, and diplomats in several European countries are quietly wondering if frontrunner candidate Friedrich Merz, leader of the main opposition conservatives, would be faced with a crisis deep enough to break long-standing taboos. A one-time BlackRock Inc executive, he may shake up German ideas about wealth, as my colleague Chris Bryant writes — and his future coalition might have little choice, but to also shake up ideas about spending. It would be more likely shrouded in “Germany First” rhetoric than Draghi’s “Make Europe Great Again.” Right now, any German path to recovery beats a euro road to nowhere.
Lionel Laurent is a Bloomberg Opinion columnist writing about the future of money and the future of Europe. Previously, he was a reporter for Reuters and Forbes.
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