How Germany blew up its economy #NewsGerman

At the turn of the century, labour market reforms helped give Germany a much more flexible jobs market, making the economy more competitive and pushing unemployment down.

Much of Germany’s power is based on its Mittelstand, the widespread network of highly productive small and medium-sized businesses that typically specialise in high-end manufacturing and are world leaders in their niches.

This strong backbone of businesses powered export-led growth, enabled in part by a political willingness to trade heavily with China and to rely on cheap Russian gas.

However, shifting geopolitics have derailed this economic model. The Mittelstand were left at the mercy of autocratic regimes that sought to use trade as leverage over Berlin – Vladimir Putin, for instance, thought his stranglehold over energy supplies would force European Governments to stand aside when he invaded Ukraine.

Instead, Berlin rowed behind the rest of the West and dumped Russian oil and gas, sacrificing the Mittelstand in the protest.

At the same time, these businesses have also been stung by a slump in China.

“China’s slowdown has led to a decline in demand for the sort of goods Germany is very good at exporting,” says Chris Williamson, chief business economist at S&P Global.

However, it is not simply geopolitics that are punishing the German economy.

“Germany has been adversely affected by the transition to electric vehicles,” says Williamson. “We saw a slump in demand for combustion engine vehicles before the pandemic – there was a lot of uncertainty about whether to buy one or to wait to buy an EV.”

The auto industry has long been a powerhouse in Germany, which is home to Volkswagen, Mercedes-Benz and Porsche.

“Car manufacturers are making some adjustments now, but they are not winning the war on EVs, which is why the European Commission is looking at tariffs,” says Williamson. “That has hurt the automobile sector, which is a big driver of the German economy. There are lots of associated industries which have been dragged down with it.”

Today, the Mittelstand has found itself in a long stagnation.

Few expect China to return to its pre-Covid growth rates and Russian gas will not return anytime soon.

Combined with poor demographics and a widespread unwillingness to put in extra hours, “German potential growth is not that high any more”, says Salomon Fiedler, economist at Berenberg Bank.

Earlier this year Christian Lindner, the finance minister, sought to allay fears of a long-term slump.

“Germany is not the sick man,” he told the World Economic Forum in Davos. “After a very successful period since 2012 and these years of crisis, Germany is a tired man, after a short night, and the low growth expectations are partly a wake up call.

“And now we have a good cup of coffee – which means structural reforms – then we will be continuing to succeed economically.”

Yet not much help is coming from the Government either, which is hamstrung by bitter budget arguments between coalition parties, leaving little sense of direction for businesses.

“Germany is in a bit of a limbo for the time being,” says Fiedler.

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