Will Germany become the "sick man of Europe" again?, After nearly 25 years, the "sick man of Europe" | Germany

Since last year, the bleak side of Germany's economic situation has become increasingly prominent. Energy crisis, high inflation, rising production costs and reduced orders for enterprises, and sluggish economic growth status and prospects

Against this backdrop, Germany has once again been labeled as the "sick man of Europe" after 25 years, attracting the attention of multiple foreign media outlets. "Germany's economic downturn evokes memories of the 'sick man of Europe' era," Bloomberg said.

Given Germany's position as the largest economy in the European Union, this argument has resurfaced and attracted attention.

But at the same time, some argue that 25 years later, Germany is suffering from another disease, and the current economic situation is influenced by multiple factors both domestically and internationally.

The argument has resurfaced

Economic growth is weak, the job market is rigid, and export demand is slowing down... About 25 years ago, Germany faced a new situation and challenges after the reunification of the two Germanys. At that time, the title of "sick man of Europe" sounded an alarm in German politics.

Subsequently, the government led by then German Chancellor Schr ö der took a series of reform measures, and her successor Merkel firmly pushed forward, leading Germany to significant achievements in development.

Starting from the beginning of the 21st century, Germany has ushered in a golden age. In China, the unemployment rate has dropped from double digits to single digits, the per capita GDP has increased by over 40%, and the fiscal surplus has reached tens of billions of euros over the years

Abroad, Germany's first-class engineering technology is widely praised, and as an export powerhouse, it stands out in Europe and even the global economy. Its economic growth rate once surpassed neighboring countries and was on par with the United States

Germany thus broke away from the label of "sick man of Europe" and became a recognized star.

However, things always move forward in constant development and change. Unfortunately, for Germany, the possibility of a repeat of history is approaching.

Since last year, the bleak side of Germany's economic situation has become increasingly prominent. According to data from the German Federal Bureau of Statistics, in the first quarter of this year, Germany's gross domestic product (GDP) declined by 0.3% month on month, marking the second consecutive quarter on quarter decline and leading to a "technical recession" in the German economy.

According to Eurostat data, Germany's GDP showed zero month on month growth in the first and second quarters of this year, while France and Spain's GDP showed an upward trend during the same period.

Compared to neighboring countries, Germany's inflation situation is also more severe. The consumer price index increased by 6.2% year-on-year in July, higher than the average level of 5.3% in the Eurozone.

Thomas Aubster, a senior economist at the Cologne Institute of Economics, said that "sticky" inflation is eroding Germans' purchasing power and fueling "pessimism in families.".

The situation on the enterprise side is also not optimistic. Official evaluation data shows that industrial output contracted by 1.7% year-on-year in June, and both the manufacturing and construction industries were affected.

Meanwhile, a study by the German Central Cooperative Bank concluded that small and medium-sized enterprises, commonly referred to as the "pillars of the German economy," are in danger.

In terms of exports, data from the German Federal Bureau of Statistics shows that the situation is still sluggish. In June, the value of exported goods only increased by 0.1% month on month and decreased by 1.9% year-on-year.

The International Monetary Fund predicts that Germany will be the only developed economy to experience economic contraction this year, with an expected contraction of 0.3%, while the average GDP growth rate of Eurozone countries is expected to be 0.9%. In the next five years, Germany's economic growth rate is expected to be lower than that of the United States, the United Kingdom, France, and Spain.

Multiple factors

Analysis suggests that a series of factors both inside and outside Germany have contributed to this situation.

Abroad, the German economy has been affected in recent years by such factors as the disruption of the supply chain by the COVID-19, the crisis in Ukraine, the continued sharp interest rate increase by the Federal Reserve, the slowdown of global economic growth, and the reduction of external demand.

Since the start of the interest rate hike process in July last year, the European Central Bank has followed the pace of the Federal Reserve in raising interest rates nine times, a total of 425 basis points. While curbing inflation, this move also brings higher borrowing costs to consumers and businesses, which has dealt a particularly heavy blow to the German construction industry.

"The rise in interest rates and the sharp rise in construction costs are stifling new business," said Klaus Volabe, head of investigation at the IFO Institute for Economic Research in Germany.

At the same time, the pillar industries of the German economy, including the automotive and machinery production industries, heavily rely on exports and are particularly sensitive to fluctuations in foreign demand. The public opinion has also noticed that the German automotive industry is facing increasingly fierce competition in the international market.

Deutsche Bank Chief Economist David Forktz Landau stated in June that as the technology gap widens, Germany is falling far behind the United States. He added that the US government's subsidy program will exacerbate this backwardness.

However, many analysts believe that some of the external problems facing the German economy are only temporary, such as reduced demand, while deeper problems lie domestically.

Firstly, there are structural issues in the domestic economy. Some comments suggest that over the years, Germany's excellent performance in the old industrial sector has overshadowed its insufficient investment in the new industrial sector, and fiscal prudence has led to too little public investment.

For example, Germany's investment in information technology accounts for less than half of its GDP compared to the United States and France. Red tape has also become an obstacle. Obtaining a business license takes 120 days, which is twice the average time for OECD members.

"In the past 10 years, Germany has not undergone any economic reforms at all," said Kasten Brewski, head of macro research at the Dutch International Group. "In terms of digitalization, infrastructure, and international competitiveness, it lags behind in all international rankings and is realizing this reality."

German media also claimed that Germany's past economic model was based on importing cheap energy, raw materials, etc., processing them, and then exporting them as high-value goods. But this is no longer feasible today. For example, energy intensive enterprises are particularly vulnerable to fluctuations in energy prices.

For a long time, Germany has relied on Russia's energy, but the Ukrainian crisis has had a significant impact on Germany's energy supply. Moreover, as Germany has bid farewell to the era of nuclear power, obtaining affordable and renewable energy is an urgent challenge facing Germany.

The high energy costs have even prompted some companies to consider leaving Germany. In June, the President of the German Confederation of Industries, Siegfried Ruswum, said in an interview, "Many companies headquartered in Germany have performed well globally, but their operations in their own countries are difficult."

The shortage of skilled talents is also a major factor. Some comments suggest that the baby boom after World War II means that 2 million workers in Germany will retire in the next five years. Currently, two-thirds of employers say it is difficult to find skilled workers. With the increasing proportion of retirees, the pension system is facing greater pressure.

"Average level"

Given its position as the largest economy in the European Union, the trend of Germany once again becoming the "sick man of Europe" has drawn attention. Some comments suggest that Germany, which has long been regarded as the "engine" of economic growth in the region, is now becoming the "brake".

Some argue that Germany today is different from 25 years ago, and calling it the "sick man of Europe" is too pessimistic. Holg Schmidin, who first referred to Germany as the "sick man of Europe" 25 years ago, holds this view.

Schmid is now the Chief Economist of Berenberg Bank. He said that the current employment situation in Germany is not as sluggish as it was 25 years ago, and public finance is also stronger, which helps Germany cope with economic shocks.

Schmidin also noted that the German government is taking measures to help businesses address labor shortages and accelerate the planning and approval process for infrastructure projects.

"In terms of economic growth rate, even if it no longer ranks first and is no longer an economic powerhouse, Germany is still at an average level," said Schmidin.

Observers also suggest that to avoid becoming the "sick man of Europe" again, Germany can take reform measures such as reducing corporate taxes, increasing investment in traditional and digital infrastructure, attracting foreign skilled talents, and raising retirement age.

However, public opinion also noted that this German government faces challenges in addressing future development issues. This German government is composed of the Social Democratic Party, the Liberal Democratic Party, and the Green Party through negotiation and compromise, with differences on policy issues such as taxation and finance. At the same time, far right political parties are eyeing closely. Recent polls show that the support rate of the German Select Party has reached a record high of 22%.

From a European perspective, it seems that Germany is not alone in getting sick. "Perhaps just the most prominent one," Brzeski said.

It is reported that as the third largest economy in the eurozone, Italy's manufacturing industry is also sluggish, and labor shortages are also a concern. In the past few years, Italy has also been labeled as the "sick man of Europe".