‘Deep-rooted’ and ‘knotty’ issues raise the specter of the’sick man’ label making a comeback.
The darkness that has descended upon the most important economy in Europe is a direct result of recent projections that indicate it will be the only G7 nation to see economic contraction in 2018.
According to projections made by the International Monetary Fund (IMF), the economy of Germany would contract by 0.3%, whilst the economies of the other 20 nations that use the euro currency are expected to grow by an overall average of 0.9%. According to the global market writer for CNN, Anna Cooban, “the phrase is making a comeback” after Germany “shrugged off its’sick man of Europe’ label” over 25 years ago.
What did the newspaper report?
Cooban wrote that “sticky inflation” and “three consecutive quarters of falling or stagnant output” have left the German economy “in the doldrums.” German inflation is “running hotter” than in most of its European neighbors, eroding the purchasing power of Germans.
As a result, declines in private and public expenditure were the “primary causes” of Germany’s entry into recession last winter, she continued, and higher interest rates have “devastated Germany’s residential construction industry.”
Klaus Wohlrabe, deputy director of the Institute for Economic Research in Munich, told the broadcaster that a sharp increase in construction costs was “choking off new business”.
Cooban reported that the broader industrial sector has also “taken a hit.” Official estimates indicate that industrial output decreased 1.7% annually in June.
And the most recent survey results indicate that German business activity, including both services and manufacturing, declined at the quickest rate since May 2020 in August.
Emerging rival economies such as China now “pose a significant threat” to automakers, according to The Economist. German “famous old brands” such as BMW, Mercedes, Porsche, and Volkswagen “risk being left behind” as consumers shift to electric vehicles.
The paper continued by stating that the combined market capitalization of the four behemoths is now “less than half that of Tesla.” “Similar to the German economy as a whole,” their business model “worked too well to adapt” until it didn’t.
Where everything went awry is a subject of much conjecture. Although the pandemic “tangled supply chains” and the conflict in Ukraine caused “much of Germany’s current predicament,” according to CNN’s Cooban, “many of its problems run deeper and are self-inflicted,” according to experts.
Carsten Brzeski, global director of macroeconomic research at ING, stated that Germany has “simply not implemented any economic reforms over the past decade” and has “fallen behind” in “all international rankings when it comes to digitalisation, infrastructure, and international competitiveness.”
He added that Berlin is now “waking up to this reality.”
Critics also refer to the bureaucracy that is “a way of life in Germany,” according to Szu Ping Chan, economics editor of The Telegraph. Germans “spend hours completing forms to obtain permission for everything from getting a passport to driving machinery along the autobahn” and “most of it has to be done in person”.
According to Ulrich Hopper, general director of the German-British Chamber of Industry and Commerce, this reliance on antiquated paperwork “hinders businesses” and has become a significant barrier to economic development. “We need too many permits for so many different things,” he told the newspaper.
According to The Economist, Germany’s issues are “rooted” and “tangled.” And they exhibit “few indications of being repaired.” The nation faces the “triple whammy” of an industry that “appears vulnerable to foreign competition and geopolitical strife”, a “difficult journey to net-zero emissions”, and a “unusually elderly” workforce. Adding insult to injury, the state appears “ill-prepared” for the upcoming challenges.
The pessimism that results has political implications. Due to the “struggling” economy and “important” economic indicators “pointing in the wrong direction,” Deutsche Welle reported that ordinary Germans are “concerned,” resulting in a “loss of faith in the country’s traditional parties.”
What comes next?
According to the Financial Times, business groups and economists are urging the German government to assist the “crisis-stricken” construction industry. The cabinet of Chancellor Olaf Scholz has approved a €7bn package of corporate tax relief, which includes new rules on the depreciation of investment costs for builders, as a “wave of insolvencies” claims an increasing number of prominent real estate developers.
The German Minister of Construction, Klara Geywitz, has insisted that the measures will “really rev up” housing construction. The director of the German association of independent real estate and housing companies, Dirk Salewski, dismissed the rule change as a “drop in the ocean”
However, some are more optimistic regarding the long-term outlook. Holger Schmieding, the economist who originated the term “sick man of Europe” in 1998, recently argued in a research paper that the “current wave of pessimism” is excessive.
Schmieding, now chief economist at Berenberg, said Germany was in a “much stronger position” than the late 1990s. Today, the nation enjoys record levels of employment and robust public finances, which make “adapting to [economic] shocks” much simpler, he wrote.
The Economist was not persuaded. In the 1990s, according to the article, German politicians “undertook painful reforms, which were aided by favorable global economic conditions, including a boom in emerging markets.” However, “there is no sign of such a boom now.”