Germany throwing away its recovery? | DW News

Key Concepts

• Structural Crisis: A deep-seated problem within an economy's fundamental framework, rather than a temporary downturn.
• Lost Decade: A period of prolonged economic stagnation.
• Private Investment: Spending by businesses on capital goods, research, and development.
• Public Sector: Government entities and their activities.
• Energy-Intensive Industries: Sectors that consume significant amounts of energy, such as automotive parts and machinery.
• Value Added Tax (VAT): A consumption tax placed on a product whenever value is added at each stage of the supply chain.
• Populist Proposal: A policy suggestion that appeals to popular desires and prejudices rather than rational argument.
• Rule of Law: The principle that all people and institutions are subject to and accountable to laws that are publicly promulgated, equally enforced, and independently adjudicated.

Economic Situation in Germany

Stagnation and Declining Investment

Germany is currently experiencing a prolonged period of economic stagnation, with GDP levels returning to those seen in 2019. This represents a "lost decade" of growth. A significant challenge is the decline in private investment, which has fallen back to 2015 levels. The only sector showing expansion is the public sector, which has increased employment. Without this public sector growth, the recession would have been more severe. While forecasts suggest a return to growth next year due to increased government spending, the sustainability of this growth is questionable, and it may only be a short-term effect.

Factors Contributing to the Crisis

Since 2018, key German sectors like automotive and machinery have faced increasing pressure. This is attributed to:

• Higher Domestic Costs: Increased operational expenses within Germany.
• Increased Innovation Abroad: Competitors, particularly China, have become more innovative.
• Energy Crisis: Germany's "wobbly" and "narrow" energy policy, including the shutdown of nuclear plants, has driven up energy prices.
• Russian Gas Supply Shock: The cessation of Russian gas deliveries following the invasion of Ukraine significantly impacted German industry. Approximately 15% of value added in German manufacturing is energy-intensive, affecting sectors like automotive parts, machinery, and other energy-intensive industries.

Public Spending vs. Private Investment

A chart comparing economic output, public spending, and private investment (all indexed to 2015) shows that these indicators were relatively aligned until around 2018. Since then, they have diverged. The rise in public spending is not a consequence of declining foreign investment but is likely partly driving it. The government has increased debt and spending without sufficient regard for the overall economic situation.

Government Reforms and Policy Critiques

Wasted Time and Misdirected Efforts

The period was intended for reforms to improve business conditions, social spending, and energy prices, and to reduce bureaucracy. However, the government has been bogged down in debates, such as over pensions, and is perceived to have "wasted time."

• Positive Steps: Some initial measures, like accelerated depreciation for investment and the planned reduction of corporate tax from 2028, were seen as positive steps towards economic growth.
• Questionable Spending: Significant funds have been allocated to interest groups, such as a cut in the VAT for restaurants. Other ideas, like tax breaks for overtime work, are considered questionable. The core issue in Germany is not a lack of overtime but an abundance of part-time work.
• Pension Increases: The government is massively increasing pensions, placing a huge burden on future budgets. This is in addition to increased military spending, which is currently debt-financed and unsustainable in the long term.

Demand vs. Structural Problems

The argument that more generous pension payments stimulate economic activity through increased spending is countered by the assertion that Germany does not have a significant demand problem. Wages and pensioner incomes have been rising steadily, with inflation between 2-3%. The primary issue is identified as a structural problem, requiring structural reforms and improved incentives to work. The current pension decisions are seen as reducing incentives to work due to anticipated tax increases.

Lessons from France

The situation in Germany is compared to France, which is also facing debates about social and debt spending. While maintaining political stability might be a short-term goal, it is not sustainable in the long term as budget problems worsen. France is described as having a "dysfunctional government" where political parties struggle to agree on deficit-reducing reforms. The practice of postponing distributional conflicts to the future exacerbates them. France is now in a critical situation with rising interest rates on its debt, and Germany is moving in a similar direction due to its inability to control spending, particularly the debt-financed military expenditure.

Business Sentiment

Slow Decline and Cautious Optimism

Regular assessments of business sentiment by the EPO Institute show a slow, but steady decline over the past few years, consistent with the stagnation. While the current situation has stabilized, expectations for the future have brightened slightly due to anticipated government spending. However, a significant turnaround in business sentiment has not yet been observed.

Dialogue with the AFD Party

Absurd Economic Policies

The EPO Institute's president, Clemens F., criticizes the economic policies proposed by the far-right populist AFD party as "completely absurd."

• Pension Proposals: A key proposal to increase pension payments from 48% to 70% of gross wages is deemed impossible to finance and a typical populist tactic.
• Anti-Immigration Stance: The AFD's anti-immigration policies, including the desire for past immigrants to leave, would lead to an economic collapse, as one-third of the German population has a migration background.

The Danger of Ignoring the AFD

While the AFD's policies are considered flawed, the speaker argues that completely ignoring them is counterproductive. This silence allows the myth to grow that the AFD offers better solutions because established parties fail to address pressing issues. A dialogue is necessary to expose the flaws in their proposals.

Invitation to Industry Groups

The decision of whether to invite AFD representatives to industry group events is a complex one. While an outright ban is an extreme position and can alienate AFD voters, it is crucial to ensure that their "no good ideas" are brought out into the open.

Frustration as a Driver

The willingness of some industry groups to engage with the AFD is seen as a reflection of frustration with the current political landscape. Moderate parties are perceived as reluctant to enact necessary reforms and address distributional conflicts. Business leaders, accustomed to quick action, are frustrated by the lack of progress.

Optimism for the Future

Despite the challenges, there are reasons for optimism:

• Options for Reform: Germany has the capacity to implement reforms and solve its problems.
• European Cooperation: Opportunities exist to deepen cooperation within Europe and strengthen the common market.
• Labor Law Reform: Changes to labor laws can improve economic conditions.
• Attracting Talent: Germany can position itself as a secure place for democracy and the rule of law, attracting scientists who are skeptical about the US.

The key takeaway is that Germany has opportunities and room to act, but it needs to "get its act together" and implement reforms.