> The reason Germany ceased to be Europe’s growth engine has less to do with Russian energy than with changing circumstances in the export markets where the country’s industrial champions once flourished. In the 2000s, former Chancellor Gerhard Schröder slashed unemployment benefits and created a low-wage sector to help German exporters increase their market shares across Europe. Since then, many other European countries, including France and Italy, have made reforms to cut labor costs themselves, and Germany faces tougher competition in its biggest export market and has been running a trade deficit in goods with other EU members since 2020.
>Outside the EU, “made in Germany” goods struggle to find new clients. Exports to China have been roughly flat since mid-2015 and may even start to drop, as President Xi Jinping has made clear that he wants to make his country less dependent on European industry. German car exports to China were down 24 percent in the first three months of 2023 compared with the same period in 2022. The U.S. is Germany’s second-largest market after the EU, accounting for 8.9 percent of its exports, but to top off Germany’s troubles, Washington is becoming more protectionist under Joe Biden. The Inflation Reduction Act, for instance, includes purchase subsidies for electric vehicles that primarily benefit buyers of cars produced in North America.
>So what can Berlin do if exports won’t be driving German growth anymore?
>The obvious solution is for Germany to spend more. Greater investment could raise productivity in a country where the railways have the worst delays among major European countries and cellphone and internet connectivity are underfunded and therefore patchy. Investment could boost demand, and liberalizing policies could rebalance the economy toward services. But a dogma of balanced budgets and debt avoidance remains deeply anchored among German politicians and voters.
>Germans don’t seem to feel much urgency around these questions at the moment. Unemployment is still low. In Mannheim, students are out and about, enjoying spaghetti ice cream, the local speciality, priced at €5.80, while the once slightly rundown Berlin Ku’damm feels more and more like the manicured Avenue Montaigne in Paris. In March this year, Chancellor Scholz even said the country will soon see a new “Wirtschaftswunder”—Germany’s age of postwar growth—a prediction that should leave any economist gasping.
>In short, the penny has not yet dropped. Germany’s political elite hasn’t been moved to take the risky step of running up debts and liberalizing at the same time. But until it does, the country’s economy will likely lag European growth. And if the economy ceases to serve as a source of national pride, political forces may thrive by brandishing more nativist concepts of German identity.
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> The reason Germany ceased to be Europe’s growth engine has less to do with Russian energy than with changing circumstances in the export markets where the country’s industrial champions once flourished. In the 2000s, former Chancellor Gerhard Schröder slashed unemployment benefits and created a low-wage sector to help German exporters increase their market shares across Europe. Since then, many other European countries, including France and Italy, have made reforms to cut labor costs themselves, and Germany faces tougher competition in its biggest export market and has been running a trade deficit in goods with other EU members since 2020.
>Outside the EU, “made in Germany” goods struggle to find new clients. Exports to China have been roughly flat since mid-2015 and may even start to drop, as President Xi Jinping has made clear that he wants to make his country less dependent on European industry. German car exports to China were down 24 percent in the first three months of 2023 compared with the same period in 2022. The U.S. is Germany’s second-largest market after the EU, accounting for 8.9 percent of its exports, but to top off Germany’s troubles, Washington is becoming more protectionist under Joe Biden. The Inflation Reduction Act, for instance, includes purchase subsidies for electric vehicles that primarily benefit buyers of cars produced in North America.
>So what can Berlin do if exports won’t be driving German growth anymore?
>The obvious solution is for Germany to spend more. Greater investment could raise productivity in a country where the railways have the worst delays among major European countries and cellphone and internet connectivity are underfunded and therefore patchy. Investment could boost demand, and liberalizing policies could rebalance the economy toward services. But a dogma of balanced budgets and debt avoidance remains deeply anchored among German politicians and voters.
>Germans don’t seem to feel much urgency around these questions at the moment. Unemployment is still low. In Mannheim, students are out and about, enjoying spaghetti ice cream, the local speciality, priced at €5.80, while the once slightly rundown Berlin Ku’damm feels more and more like the manicured Avenue Montaigne in Paris. In March this year, Chancellor Scholz even said the country will soon see a new “Wirtschaftswunder”—Germany’s age of postwar growth—a prediction that should leave any economist gasping.
>In short, the penny has not yet dropped. Germany’s political elite hasn’t been moved to take the risky step of running up debts and liberalizing at the same time. But until it does, the country’s economy will likely lag European growth. And if the economy ceases to serve as a source of national pride, political forces may thrive by brandishing more nativist concepts of German identity.
Tja.