News about Germany

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Europe’s growth engine is sputtering. Can Germany’s economy be revived?

The world’s fourth-largest economy has got off to a bumpy start this year. A strike by Lufthansa ground crew on Wednesday was just the latest industrial action to cause travel chaos in recent weeks, after train drivers walked off the job in January over a wage dispute and farmers blocked roads in protest against planned cuts to subsidies.

Widespread walkouts in a country famed for strong legal protections for workers’ interests point to the depth of the malaise gripping Germany.

Europe’s biggest economy shrank last year for the first time since the onset of the Covid-19 pandemic. And the outlook isn’t much brighter: the International Monetary Fund predicts that Germany will be the slowest-growing major economy in 2024, eking out an increase of just 0.5%.

More pessimistic forecasters see an outright decline in output for the second consecutive year, as the economy grapples with an extended spell of high energy prices, steep borrowing costs and weak demand for German goods at home and abroad.

The lingering impact of the energy crisis sparked by Russia’s war in Ukraine was highlighted Wednesday, with official data showing that Germany’s industrial production fell for the seventh consecutive month in December, its longest-ever slump.

But Germany’s problems are also structural, ranging from labor shortages and red tape to outdated physical and digital infrastructure that weighs on productivity.

To use just one example of low digitalization: only 19% of households are connected to high-speed internet via fibre-optic cables, compared with an average of 56% across the European Union, according to a recent European Commission report.

What’s needed, say economists, is nothing short of an economic overhaul.

“Germany needs a fundamental economic transformation,” Marcel Fratzcher, president of the German Institute for Economic Research in Berlin, told CNN. “The biggest challenge for Germany is not the next two years, it’s the next 10 years… it needs to reshape its industry.”

The government has taken tentative steps in that direction. It has moved to incentivize investment, boost funding for start-ups, speed up approvals for infrastructure projects and ease immigration rules for skilled workers to help plug labor shortages.

But much more is needed to set the economy on a new course. Politicians have limited power, however, not least because of tight constraints on government borrowing, enshrined in Germany’s constitution, that could derail big spending programs. Those limits were reinstated in this year’s budget, after a temporary suspension through the twin shocks of the pandemic and Ukraine war.

“Any overhaul of the economy will be almost impossible as long as fiscal austerity remains the dominant tune,” said Carsten Brzeski, global head of macroeconomics at Dutch bank ING. “That means structural changes will rather have to come from the corporate world.”

Broken business model?
Germany has overcome much greater challenges in the past. In the aftermath of its devastating defeat in World War II, the country faced food rationing, price controls, a collapse in industrial production and a shrunken workforce following the deaths of millions of working-age men.

Yet so spectacular was West Germany’s recovery during the 1950s and 1960s that it became known as the “Wirtschaftswunder,” or economic miracle.

The good times lasted mostly uninterrupted until the 1990s when Germany came to be known as the “sick man of Europe,” as its economy faltered and unemployment soared largely due to the costs of reunification following the fall of the Berlin Wall.

Germany went on to cast off that moniker, partly by introducing labor market reforms, and its exports and economy boomed in the decade following the 2008 global financial crisis — fueled by cheap Russian gas and red-hot growth in China.

The country has long been one of the world’s leading manufacturing nations, making everything from cars, washing machines and power tools to medical devices and pharmaceuticals.

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