Berlin has in the past shown great flexibility in crisis management – Now things have changed
For decades, Germany was the steam engine of the European economy, and on several occasions – with compensation, of course – it managed to prevent various crises, but also to emerge unscathed from difficult situations. However, this momentum seems to be running out of steam, putting the whole continent at risk.
The country faces its greatest threat since reunification in a time very different from the 1990s: decades of misguided energy policy, a strong car industry based on internal combustion engines, and the slow transition to new technologies that undermine the country’s competitiveness.
“We were naive as a company because everything looked good,” Martin Brudermüller, CEO of BASF SE, told Bloomberg. “These problems we have in Germany are piling up. We have a period of change ahead of us. I don’t know if everyone realizes that.”
While Berlin has shown its ability to overcome crises in the past, the question now is whether it can pursue a sustainable strategy.
The prospect seems distant. Chancellor Olaf Solz’s ragtag coalition is consumed by petty infighting over everything from debt and spending to heat pumps and speed limits.
But the warning signs are hard to ignore. Although Scholz himself told Bloomberg in January that Germany would ride out Russia’s energy crisis without a recession this year, data released Thursday showed the economy has contracted since October and has grown only twice. over the past five quarters.
Economists see German growth lagging the rest of the region for years to come, and the International Monetary Fund estimates Germany will be the worst-performing economy in the G-7 this year. Still, Scholz remains optimistic: “The outlook for the German economy is very good,” he told reporters in Berlin after the latest economic data. By unleashing market forces and cutting red tape, we “solve the challenges we face”.
Hard days are coming
As Bloomberg points out, the main danger at the moment is that the data revealed is not a one-off, but a harbinger of things to come.
Currently, Berlin seems incapable of sustainably meeting the energy needs of its industrial base. In fact, many accuse it of being heavily reliant on old-school mechanics. and lack of political and commercial flexibility to move into faster growing sectors.
To their credit, industrial giants such as Volkswagen AG, Siemens AG and Bayer AG are flanked by thousands of small Mittelstand companies, and the country’s conservative spending habits put it on a stronger fiscal footing than its peers to support transformation. future. But he has little time to waste.
The energy bet
The most pressing challenge for Germany is to begin its energy transition. Affordable energy is a key requirement for industrial competitiveness, and even before Russian gas supplies ended, Germany had some of the highest electricity costs in Europe.
Berlin is responding to concerns by seeking to cap electricity prices for certain energy-intensive industries such as chemicals by 2030 – a plan that could cost taxpayers up to 30 billion euros ($32 billion). dollars). But that would be a temporary measure, a “band aid” and shows Germany’s desperate supply situation.
After shutting down its last nuclear reactors this spring and pledging to phase out coal by 2030, the country installed about 10 gigawatts of wind and solar capacity last year, half the pace it needs. to achieve its climate goals.
Additionally, the Solz government aims to connect around 625 million solar panels and 19,000 wind turbines by 2030.
The harsh reality is that the resources to produce such clean energy are limited in Germany due to its relatively small coastline and lack of sunlight. In response, the country is looking to build massive infrastructure to import hydrogen from countries like Australia, Canada and Saudi Arabia, relying on technology that has not been tested on this scale.
High voltage networks
At the same time, Germany is expected to speed up construction of high-voltage grids that connect wind farms on the northern coast to power-hungry factories and cities further south. And there is little storage to ensure the country can get through the holidays.
“Germany needs a cross-party agreement on the speed of expanding renewable energy infrastructure,” said Claudia Kemfert, professor of energy economics at the DIW research institute in Berlin. After the next national elections in 2025, “other political constellations could once again block the energy transition. It wouldn’t be good for Germany as a place to do business.”
The European economy appears to have a well-funded and well-established system for generating ideas to keep its economy at the cutting edge. Spending on research and development is the fourth highest in the world behind the United States, China and Japan. And according to the World Patent Office, about a third of patents filed in Europe come from Germany.
However, much of the innovative power is rooted in large companies such as Siemens and Volkswagen and is concentrated in established industries. As smaller manufacturers continue to thrive, the number of new startups is declining in Germany, unlike the growth seen in other developed economies, according to the OECD.
Reasons include excessive bureaucracy and cultural risk aversion. Funding is also an issue. Venture capital investments in Germany totaled $11.7 billion in 2022, compared to $234.5 billion in the United States, according to DealRoom. Germany also works under a heavy academic system and does not have a single university in the top 25 of the latest Times Higher Education ranking.
Patent data shows that Germany’s ability to stay ahead is weakening. In 2000, the country was in the top three for world-class patents in 43 of 58 key technology categories, but in 2019 it reached that ranking in less than half of the sectors, according to a recent study by Bertelsmann Stiftung.
The real picture in the automotive industry
The weakening of Germany’s technological advantage is particularly evident in the automotive sector. While brands like Porsche and BMW defined the era of internal combustion engines, German electric cars struggled. BYD Co. overtook VW to become China’s top-selling auto brand last quarter. Key to its push was an electric model that costs around a third of VW’s ID3 but offers greater range and connectivity with third-party apps.
Much of Germany’s wealth and social class is based on a vibrant manufacturing sector that provides well-paying jobs. But that power has led to dangerous dependencies on foreign markets for orders and raw materials – especially China. Like other democracies in the wake of Russia’s invasion of Ukraine, Berlin is now trying to reduce its dependence on the Asian superpower, but Germany’s biggest corporations are paying no attention.
Economy and technology
Much of Germans’ money is held in a network of around 360 public sector savings banks, called Sparkassen. These institutions are controlled by local communities, causing potential conflicts of interest while reducing the economic power of the country.
Germany’s two largest publicly listed banks – Deutsche Bank AG and Commerzbank AG – have been mired in controversy for years and although they are on the mend, they are still overshadowed by their Wall Street counterparts. Their combined market capitalization is less than a tenth of that of JPMorgan Chase & Co.
In technology, the biggest German player is SAP SE, which dates back to the 1970s and makes complex software that helps companies run their operations. There are few obstacles for the new national champions on the horizon. Digital payment company Wirecard AG briefly filled that role before collapsing in a shocking accounting scandal.
The lack of investment in Germany is particularly acute in digital. Despite having an infrastructure that ranks it 51st in the world for fixed internet speeds, it has the fourth lowest level of spending among OECD countries relative to the size of the economy.
“Years of underinvestment have left Germany behind,” said Jamie Rush, chief economist at Bloomberg Economics. “Berlin will have to spend more and make it easier to start infrastructure projects.”
To speed up long-delayed development, the government has unveiled a plan to overhaul the planning process for laying fiber optic cables and mobile communications infrastructure.
Pressures and recession
Europe’s largest economy has come under considerable pressure, particularly after Russia’s invasion of Ukraine and the subsequent decision by European leaders to sever economic and trade relations with Moscow in a vast and key for European economies, in the context of the imposition of sanctions. for the intervention in Ukraine.
Commerzbank analysts say a recession in the second half now looks more likely than a recovery.
Households spent significantly less in the first quarter, according to the German statistics office, as final consumption expenditure fell 1.2% over the period as consumers reduced their purchases of clothes, furniture, cars and more.
“Germany went into recession late last year, after all, as the energy price shock weighed on consumer spending,” said Claus Vistesen, chief eurozone economist. at Pantheon Macroeconomics, in a note.
German GDP is unlikely to continue to decline in the coming quarters, he said, but, he added, “we don’t see a strong recovery either.”
The latest figures for Germany come in the broader context of high inflation and high interest rates in the Eurozone. The European Central Bank is expected to raise interest rates again at its next meeting on June 15.
As the head of Germany’s central bank, Joachim Nagel, one of the ECB hawks, said yesterday, the bank will have to make several more interest rate hikes.
In a recent report, the OECD defined the scale of the challenges in stark terms: “No major industrial economy has ever seen the very basis of its competitiveness and resilience so systematically tested by changing social, environmental and regulatory pressures.”
This in turn will have implications across the continent, according to Dana Allin, professor at SAIS Europe. “The health of the German economy is vital for the wider European economy and for the harmony and solidarity of the bloc,” he stressed.