The German economy is on the brink


Analysis

14:30

Putin can’t blame the country’s economic slump

by means of Ralph Schöllhammer

Waiting for Olaf. Credit: Getty

The economist Herbert Stein once wrote that if something cannot go on forever, it will stop. It seems that the German – and thus probably the European – economy is reaching that point. Most of Europe’s 100 largest companies were founded in the 1980s or earlier, meaning the old continent slept through the digital revolution of the 1990s and 2000s. There is no European counterpart to American companies such as Facebook, Amazon, E-Bay or the Chinese Alibaba or WeChat.

This became painfully clear during the Covid pandemic when it emerged that the once vaunted German bureaucracy relied on paper, pens and fax machines in its healthcare system due to a complete lack of digitization in key areas. It is therefore not surprising that the German economy is also showing cracks elsewhere. Measured by market capitalization, only one German company makes the top 100 in the world, and German market capitalization as a share of global market capitalization has shrunk to 1.97%, an all-time low† These are devastating numbers for a country that just a few years ago was seen as a model for the world with its transition to green energy and its planned exodus from nuclear power.

To make matters worse, one of the largest German manufacturers of wind turbine blades has announced that it will stop production in Germany and move to India. Likewise, Villeroy & Boch, a company that has been producing tiles in the German city of Merzig since 1879, will withdraw its factory and move production to Turkey, citing high energy and labor costs as the main reason. You could argue that these are just anecdotes, but it’s probably no coincidence that Germany posted a trade deficit of more than a billion euros for the first time in 30 years, meaning Germans import more than they export.

With consumer confidence at an all-time low and producer prices rising at a record pace, the immediate outlook for the German economy is a cause for concern, exacerbated by a recent comment by Robert Habeck, the Green Minister of Economy and Climate Protection, that “the entire market threatens to collapse at some point.” Electricity prices have been rises to a record high, with the current 1-year electricity futures contracts for EUR 340 per MWh. To put this number into perspective: in the past three decades, this value has never exceeded €100 per MWh. In other words, by the year 2023, electricity will turn from a utility to a luxury for many Germans.

With the war in Ukraine and Germany’s reliance on Russia coming to light, energy has become a scarce resource for Germans almost overnight, while major cities like Hamburg are already preparing to ration gas and hot water supplies. . And this may just be the first step, given that Moscow is ramping up its commodity war with Europe and cutting not only gas supplies but also oil from Kazakhstan. So far, Russia claims that this is all for technical reasons that can be easily solved, but it nevertheless demonstrates the ease with which Putin can squeeze Europe’s largest economy. The sudden realization of a complete lack of alternatives has also panicked the major German unions, warning that without enough gas, entire industries could collapse.

However, one thing remains true in spite of all these problems: they did not cause, but exposed the slump in the German economy. An ideological fixation on renewables, combined with the rejection of nuclear power and an addiction to Russian gas, led to a focus on everything but the things that matter. From internet technology to electric vehicles, Germany is lagging behind and the once-respected “Made in Germany” label is sounding more and more hollow. One can only hope that this clash with reality will put an end to a cognitive dissonance that could derail the entire European economy and thus the European project.

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