Germany: When the economic model falters

A recession seems inevitable in the coming months. But beyond the economic air cushion, it is the economic model of the first European power that is beginning to falter, say the experts.

The German economy stagnated in the second quarter, according to estimates released on Friday, raising fears of a recession in the coming months.

But beyond the economic air cushion, according to experts, the model of the leading European economy is weakening.

No more cheap energy

“The war in Ukraine puts an end to the German economic model as we knew it,” observe analysts at ING Bank, pointing to “cheap energy imports and industrial exports in an increasingly globalized world.”

The gas bought from Russia is cheaper to produce and transport and has for decades contributed to the prosperity of German industry, which consumes 30% of the gas burned in Germany.

Before the war in Ukraine, more than half of the imported gas came from Russia. This proportion has now risen to 35%.

To completely rid itself of Russian gas – a goal Berlin has set for mid-2024 – Germany will resort to more expensive energy sources – gas from Norway, the Netherlands, liquefied natural gas from the States or Qatar – or more irregularly to solar or wind power.

Globalization has taken hold

“As an export nation, Germany benefits more than others from free trade. But that is exactly what is in danger,” the daily newspaper Süddeutsche Zeitung worried in July.

The pandemic and war in Ukraine have exposed the vulnerability of economies when supply chains falter and important components such as semiconductors can no longer be imported.

German industry was particularly affected, especially the automotive sector.

After the devastating disappointment with Russia, Berlin’s dependence on China is worrying: “It’s not healthy either,” admitted the finance minister, the very liberal Christian Lindner.

China has become Germany’s largest trading partner. Trade between the two countries continued to increase by 15.1% in 2021 compared to the previous year.

“It’s possibly a new risk,” economist Claudia Kemfert told AFP. Not as important as for Russia, she said, “but we need to rely more on a national economy and build resilience.”

___ Desperately looking for employees

Overshadowed by the effects of the war in Ukraine, the number one problem for many companies in a country with an aging population is the lack of staff.

In addition to the millions of job vacancies, “Germany will need an additional 500,000 workers a year over the next ten years,” says Marcel Fratzscher, President of the Institute for Economic Research (DIW). The expert sees this as “a threat to the country’s competitiveness and prosperity”.

The outfitter Continental sounded the alarm in July: Germany “urgently needs controlled immigration”.

inflation shock

The fear of inflation, which has surprisingly returned after years of flagging prices, has not spared any EU country.

But in Germany, the trauma of the hyperinflation of the 1920s continues to shape public debate.

The obsession with price stability is also related to “maintaining a competitive industry and a nation of savers,” two OFCE economists recently recalled.

In the land of wage restraint, demands are piling up: in July there was the longest social movement in German ports for 40 years.

The IG Metall trade union is demanding 8 percent wage increases for 3.8 million employees in the industry, the highest since 2008.

And the magazine mirror to ask: “Is there a threat of a yellow vest movement in Germany?”. “If the middle class collapses, everything can collapse,” fears the magazine.

Fata Morgana of severity

Return to household orthodoxy, the pillar of the German model, next year? The goal formulated by the finance minister is “just as surprising as it is unrealistic”, warn the economists at ING.

After breaking the taboo during the Corona pandemic, Germany is again spending billions to support households and companies in the energy crisis, while the accelerated energy transition involves colossal investments.

“Germany will need time and money,” warns ING, “to implement investments and structural changes with the determination that other euro countries have demanded in the past.”

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