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European economic locomotive stalled, can Germany stage a comeback?

Trains were cancelled, flights stopped and highways blocked by angry farmers.

world’s fourth largest economyGermanyThe beginning of this year was not good. A strike by Lufthansa ground staff in mid-February was the latest cause of travel chaos; In January, train drivers went on strike over a pay dispute and farmers blocked roads to protest against planned subsidy cuts.

In a country known for its strong laws protecting workers’ interests, the widespread strike reflects the depth of Germany’s troubles.

Europe’s largest economy shrank for the first time since the coronavirus outbreak last year. The outlook is also bleak: the International Monetary Fund (IMF) estimates that Germany will be the slowest-growing major economy in 2024, growing by just 0.5%.

More pessimistic forecasts suggest output will fall sharply for the second year in a row as the economy faces the impact of prolonged high energy prices, high borrowing costs and weak domestic and foreign demand for German goods.

The energy crisis caused by the Russo-Ukrainian war continues to have an impact. German industrial output declined for the seventh consecutive month in December, the longest decline on record, official data showed.

But Germany’s problems are also structural, from labor shortages and layers of bureaucracy to aging physical and digital infrastructure that negatively impacts productivity.

Under-digitalization is an example of:European UnionThe Commission recently reported that only 19% of households have fiber optic cables to connect to high-speed Internet, compared to an EU average of 56%.

Economists say that what is needed most right now is economic reform.

“Germany needs fundamental economic transformation,” said Marcel Fratzcher, director of the German Economic Institute in Berlin. “Germany’s biggest challenge is not the next two years, but the next ten years; it needs to reshape its industries.”

The government has taken temporary steps in this direction. Take steps to motivateinvestIncreasing financing for new businesses, speeding up approval of infrastructure projects and relaxing immigration rules for skilled workers to help address labor shortages.

But more will be needed to take the economy on a new path. However, politicians have limited powers, particularly given Germany’s constitutional strict limits on government borrowing, which could derail massive spending plans. The restrictions were reinstated in this year’s budget after being halted due to the twin shocks of the pandemic and war in Ukraine.

“As long as fiscal austerity remains in effect, any economic recovery will be almost impossible,” said Carsten Brzeski, global head of macroeconomics at ING. “That means structural change will have to come from the corporate world.”

Is the business model broken?

Germany has overcome great challenges in the past. Following the devastating defeat in World War II, the country faced a declining labor force due to food rationing, price controls, declining industrial production, and the deaths of millions of working-age men.

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