Almost twenty-five years ago, this paper called Germany the euro patient. A combination of reunification, a sluggish labor market and slowing export demand weighed on the economy, leading to double-digit unemployment. Then a series of reforms in the early 2000s led to a golden age, when Germany was the envy of the world. Not only did the trains run on time, but the country, thanks to its world-renowned engineering achievements, also stood out as an export power. However, while Germany prospered, the world continued to turn. As a result, Germany began to fall behind again.
Europe's largest economy has gone from a leader in growth to a laggard. Between 2006 and 2017, it surpassed its major competitors and kept pace with America. However, it just experienced its third quarter of decline or stagnation and could be the only major economy to shrink in 2023. According to the estimate of the International Monetary Fund, Germany will grow more slowly than America, Great Britain, France and Spain in the next five years.
The situation is not as worrying as it was in 1999. Today, unemployment is around three percent, the country is richer and more open. But Germans are increasingly complaining that their country is not functioning as it should. Four out of five respondents say that Germany is not a good place to live. Trains are now so late that Switzerland has banned evening trains from running on its network. After being stranded abroad for the second time this summer due to the breakdown of her old official plane, Foreign Affairs Minister Analena Burbock has canceled a trip to Australia.
For years, Germany's outstanding performance in old industries masked a lack of investment in new ones. Complacency and an obsession with fiscal prudence have led to too little public investment, not least in the state's railways and military. Overall, the country's investment in information technology as a share of GDP is less than half that of America and France. Bureaucratic conservatism is also an obstacle. Obtaining a business license takes 120 days - twice as long as the OECD average. There are also deteriorating geopolitical conditions, difficulties in eliminating carbon emissions and the problems of an aging population.
According to the IMF's assessment, Germany will grow more slowly than America, Great Britain, France and Spain in the next five years as well
Geopolitics means that production may no longer be as lucrative as it used to be. Of all major Western economies, Germany is most exposed to China. Trade between the two countries last year amounted to 314 billion dollars. That relationship used to be motivated by profit, while now the situation is more complex. German automakers are losing the battle with domestic competitors for market share in China. And in more sensitive areas, as the West "de-risks" its ties with China, some relationships may be severed forever. Meanwhile, the race for advanced manufacturing and robust supply chains is triggering a flood of subsidies to boost domestic industry, which will either threaten German firms or require subsidies within the European Union.
Another difficulty comes from the energy transition. Germany's industrial sector uses almost twice as much energy as the next largest in Europe, and its consumers have a much larger carbon footprint than those in France or Italy. Cheap Russian gas is no longer an option and the country, in a spectacular own goal, gave up on nuclear energy. A lack of investment in networks and a slow permitting procedure are hindering the transition to cheap renewable energy, jeopardizing the competitiveness of producers.
Germany is also increasingly short of talent. The post-World War II baby boom means two million workers will retire in the next five years. Although the country has taken in nearly 1,1 million Ukrainian refugees, many are children and women who are not working and could soon return home. Already, two fifths of employers say they are having a hard time finding skilled workers. The federal state of Berlin cannot even fill half of the vacancies in education with qualified staff.
For Germany to prosper in a world that is increasingly divided, greener and older, its economic model will have to adapt. However, while high unemployment forced Gerhard Schroeder's coalition into action in the 1990s, the alarm bells are easier to ignore this time. Few in today's government, which consists of the Social Democrats, the liberal Free Democrats and the Greens, acknowledge the difficulty of the task. In addition, the coalition is so divided that the parties would have trouble agreeing on measures to improve the situation. In addition, Alternative for Germany, a far-right populist party, has 20 percent support nationally and could win some provincial elections next year. Few in the government will propose radical changes for fear that they will not work in the hands of that party.
Germany has liberalized immigration rules, but the visa process is still slow and it welcomes refugees more than professionals
Therefore, one might be tempted to keep the old ways of doing things. But it would not return Germany to its golden age. Nor would it stem the tide of challenges to the status quo. China will continue to develop and compete, and de-risking, decarbonisation and demographics cannot simply be ignored.
Instead of running away from it, politicians need to look ahead by encouraging new firms, infrastructure and talent. Embracing the technology would be a boon to new firms and industries. A digitized bureaucracy would greatly help smaller firms that do not have the capacity to fill out tons of paperwork. Further permit reform would help build infrastructure quickly and on budget. Money is also important. Too often infrastructure has suffered because the government has made a fetish out of balanced budget rules. Although Germany cannot spend as freely as it could in the 2010s, when interest rates were low, abandoning investment as a way to curb excessive spending is a false economy.
Attracting new talent will be equally important. Germany has liberalized its immigration rules, but the visa process is still slow and it welcomes refugees more than professionals. Attracting more skilled immigrants could even nurture homegrown talent if it helped address the chronic teacher shortage. In a country with a coalition government and cautious bureaucrats, none of this will be easy. But two decades ago, Germany carried out a remarkable transformation with remarkable effect. It's time to visit the health center one more time.
Translation: A. Šofranac
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