Contrary to the statements by the federal government, the German economy has not come through the double crisis of the corona pandemic and the Ukraine war well. While overall economic output in the euro area (excluding Germany) increased by 4.2 percent last year, economic growth in Germany was just 1.9 percent. Unlike in most other EU countries, German economic output at the end of 2022 was still below that at the beginning of the pandemic.
Improvement is not in sight. According to spring reports from research institutes commissioned by the government, the economies of the euro area (excluding Germany) are expected to grow by 1.1 percent this year and by 1.6 percent in 2024. In Germany, on the other hand, people will be pleased if the end of 2023 shows a zero for the year as a whole. The Handelsblatt Research Institute also sees no real recovery for 2024; Germany, the former engine of the euro economy, has mutated into a brake pad.
Review: After the financial crisis of 2008/09, the German economy recovered quickly. When the euro crisis took hold of southern Europe a little later, the country benefited from well-qualified immigrants from the crisis-ridden EU countries.
Contrary to all forecasts, the population increased. At the same time, the labor force participation of women increased. Last year, 45.5 million people were employed – 3.5 million more than ten years ago and six million more than 20 years ago. The “sick man of Europe”, as Germany was called around the turn of the century, had become the economic powerhouse.
Against this background, hardly any social project was too expensive for the two grand coalitions from 2013 to 2021 and no acquisition was too big for some company leaders. In addition, the automotive industry, which is extremely important for the location, not only gambled away a lot of reputation with the diesel fraud coupled with a high degree of arrogance, but also overslept the development of new drive technologies.
The golden decade ended before the Corona outbreak
The macroeconomic golden decade did not end with the corona outbreak at the beginning of 2020, but six quarters earlier. What initially seemed to be a result of the hot summer of 2018 and new emissions standards for cars turned out to be a tough phase of weakness in German industry.
Prof. Bert Rürup is President of the Handelsblatt Research Institute (HRI) and Chief Economist of the Handelsblatt. For many years he was a member and chairman of the German Council of Economic Experts and an adviser to several federal and foreign governments. More about his work and his team at research.handelsblatt.com.
This seemed to dissolve at the beginning of 2020 – until many conveyor belts stood still from March due to the corona. The old production highs are still a long way off, according to the latest data of the Ministry of Economy the output of the manufacturing industry is currently a good eight percent below spring 2018.
Further setbacks followed, to which German politicians always reacted with the same pattern: a lot of money was not distributed to consumers in a targeted manner. This signaled vigor and at the same time cushioned the short-term economic consequences for potential voters.
Only, such a Keynesian economic policy is indicated when demand fails due to external shocks. But stimulating higher demand when supply chains collapse or energy prices rise sharply and supply collapses cannot work. But Keynesians see aggregate demand as the determinant of output and employment.
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In addition, politicians are turning a blind eye to the well-predicted aging surge that will soon set in and become a stress test for the welfare state and the economy over the next 15 years.
Additional production facilities required
Without the immigration of at least four million skilled workers, a growing number of retirees will face a shrinking labor force. According to the current spring report by the institutes, trend growth, which has long been around 1.5 percent in Germany, has already fallen to around one percent and is likely to drop to 0.5 percent in the coming years.
The national income can only increase sustainably if additional production opportunities arise. Federal Chancellor Olaf Scholz (SPD) and Economics Minister Robert Habeck (Die Grünen) are mistaken if they believe that simply replacing the existing energy infrastructure with new systems designed for renewable energies would generate additional growth.
The opposite is true: if functioning power plants are shut down, productive assets and thus opportunities for generating income are destroyed. The “new economic miracle” predicted by Scholz will remain a pipe dream.
In addition, the – in fact correct – energy turnaround will take revenge on past omissions. State and administration have misjudged the possibilities of digitization, so that the approval of new (energy) plants is too tedious.
Furthermore, the transport infrastructure has been neglected, so that heavy transport with wind turbines has to take long detours to avoid unsuitable bridges – not to mention divergent regulations when such transports have to pass through several federal states.
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The government wants to counter the looming large-scale shortage of personnel with qualified immigration. However, a major problem for potential immigrants is that there is no affordable housing where there is a shortage of workers. But without a guarantee of an apartment, hardly any skilled worker will come to Germany.
Long-term growth policy necessary
In addition, international investors pay close attention to the risks associated with energy supply. A gas shortage could be avoided last winter. But Klaus Müller, the head of the authorities responsible, never tires of emphasizing that the coming winter will probably be the more difficult one.
Because in addition to the problems with the gas supply, the last nuclear power plants will be shut down this Saturday, and the government is considering phasing out coal-fired power generation more quickly for climate protection reasons.
However, there is no realistic plan as to where the additional electricity required for decarbonization is to come from – in 2022 the share of renewables in total energy consumption was only 17 percent.
Putting the German economy on a higher growth path does not require short-term economic measures, but rather a long-term growth policy. In addition to a secure and affordable energy supply, this includes a qualified workforce, moderate corporate taxes with modern depreciation rules as well as planning security and a good infrastructure.
In November 1976, the Advisory Council tried to dissuade Chancellor Helmut Schmidt (SPD) from his path of demand-oriented global control to overcome the oil price crisis at the time with the report “Time to Invest”.
More growth-friendly framework conditions could help to identify promising innovations. In this way, new production opportunities could arise that form the basis for good income opportunities and working conditions. “Investing more would bring benefits for everyone” was the message of the economists at the time. Nothing to add to that today.
>> Read here: Germany has to get used to modest economic growth – A comment
Scholz and Habeck would be well advised to accept that the energy transition and aging can only be managed without social upheaval through more growth.
More: German economy stuck in the doldrums