Germany is the fourth largest economy in the world but appears to be rapidly falling behind its peers. According to the International Monetary Fund (IMF), its projected real Gross Domestic Product (GDP) growth for calendar 2024 is just 0.5%. Indeed, Germany was the world’s worst-performing major economy last year. What has gone wrong? Germany used to be regarded as the powerhouse of Europe, the home of manufacturing excellence, and one of the world’s great export economies.
Since Angela Merkel retired in 2021 and Olaf Scholz took over, the German economy’s reputation for excellence seems to have drained away. But political leadership is only a small part of the problem.
Germany’s GDP shrank 0.3% last year and exports fell 4.6% in December, a sharper decline than economists had expected. The country has been plagued by high interest rates, low export demand and high energy prices triggered by Russia’s invasion of Ukraine in 2022.
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Source: Trading Economics
The leader of Germany’s main industry association, Siegfried Russwurm, has slammed the German government’s energy policies as “absolutely toxic”, in a sign of declining business confidence in chancellor Olaf Scholz’s stewardship of the economy. He said that Germany’s climate agenda was “more dogmatic than any other country I know” and that “The country’s decision to phase out nuclear energy and coal and switch to renewables was placing businesses in Europe’s largest economy at a disadvantage to those in other industrialised nations”.
Industrial leaders have long complained about the government’s climate policies, saying they are too ambitious. Germany plans to achieve carbon neutrality by 2045 and to derive 80% of electricity consumption from wind and solar energy by 2030, up from 41% in 2021. That, Russwurm said, was “too dogmatic”. “We’re pursuing a goal of 100% when it’s obvious the last 10% is going to be incredibly expensive.”
Russwurm said business supported the green transition, but ministers had failed to explain to companies “what happens when the wind doesn’t blow and the sun doesn’t shine”. “We still have no clarity on how and by when we can create reliable reserve capacity,” he said.
Germany has also seen nationwide rail strikes and widespread protests by farmers angry at cuts to agricultural subsidies, while industrial action by Lufthansa ground crews is set to cause severe disruption to air travel.
Dragging Germany down is a loss of competitiveness on the back of structural changes since the war in Ukraine and the energy crisis. The country’s powerhouse manufacturing sector has slumped, turning Europe’s biggest economy into an anchor for the region. Hopefully, rapidly declining inflation will mean that the European Central Bank (ECB) cuts rates in the latter part of the year.
Source: FT
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