“Dramatically bad,” Minister Robert Habeck (Economics, Greens) called the state of the German economy at the end of February. His colleague Christian Lindner (Finance, FDP) called the situation “embarrassing”.
The reason for the gloom was Habeck’s ministry’s forecast that the German economy is likely to grow by only 0.2 percent this year. Previously, 1.3 percent growth was expected – after a 0.3 percent contraction last year. The International Monetary Fund (IMF) expects 0.5 percent growth in the country.
The Economist Germany once again labeled this last summer “the sick man of Europe”. The weekly magazine already made this diagnosis in the late 1990s: in the years after German unification, the main symptom was high unemployment. At that time, a reform program, introduced under Chancellor Gerhard Schröder (SPD), got the country moving again. Twenty-five years later, thus The Economist, the world’s third largest economy is once again the source of concern in Europe. According to IMF forecasts, German growth will lag behind that of the US, UK, France and Spain over the next five years.
Into the article The Economist Minister Habeck responded resignedly this autumn. “Some Germans are in full fear mode,” he wrote in response to the cover story, “but that does not correspond to reality, and whining doesn’t solve anything.” The German economy would quickly regain its shape, Habeck believed in September. There are now increasingly worrying sounds coming from Berlin, especially because the coalition partners cannot agree on how to turn the tide.
Lack of labor
The problems facing the German economy are numerous. Exports are suffering from stagnant growth in China. The industry, which was highly dependent on gas from Russia, is suffering from high energy prices. High inflation keeps consumption low, declining purchasing power frustrates employees. Higher interest rates discourage companies from investing.
According to Ulrike Malmendier, economist, professor at the University of California at Berkeley and advisor to the Federal Government, the lack of labor is the main determinant of the poor growth forecast. “There is simply not enough work done at all levels of society,” she said Der Spiegel.
The coalition in Berlin came up with it to give the economy a boost Wachstumchancengesetz (Growth Opportunities Act), also called the ‘toilet law’ by critics. It is a package of tax cuts for businesses, subsidies for companies that accelerate the energy transition and the prospect of faster permits, so that fewer plans get stuck in the German bureaucracy.
The law, which would first provide companies with a tax discount of 7 billion euros, was voted down by the Bundesrat, which is comparable to the Senate. This includes representatives from the states, including many CDU members who believe that states should absorb too much of the tax cuts themselves. An amended law will be voted on on March 22, now amounting to 3 billion.
It is not only the opposition that is critical. In the Frankfurter Allgemeine Zeitung the director of the Munich Ifo Institute for Economic Research, Clemens Wuest, called the law “not even a drop in the ocean” and “homeopathic.”
A recent ruling by the Constitutional Court exacerbates economic uncertainty in Germany. The court ruled that a budget trick by the coalition under Chancellor Olaf Scholz (SPD) is unlawful, causing a climate and transition fund of 60 billion euros to evaporate in one fell swoop. That fund was essential for the Greens in the government to be able to make investments. Coalition partner FDP, however, wants significantly lower taxes for companies and maintains the Schuldenbremsethe legally required budget balance.
Photos Wolfgang Rattay/Reuters and Michael Probst/AP
Insecurity
The disagreement between the coalition partners makes the government less effective and does not exactly strengthen confidence in the economy. Due to this uncertainty, the German central bank, the Bundesbank, expects another contraction of 0.3 percent in the first quarter of this year. In the Financial Times said economist Moritz Schularick that “you cannot complain that companies and households are insecure and do not invest and have no confidence in the future,” if you “don’t have a plan for what the German economy should look like in five to ten years.”
In the short term, many Germans know where they stand: standstill. No fewer than three large-scale strikes have been announced this week. On Tuesday and Wednesday, bus, tram and metro drivers in various regions will stop work, on Thursday and Friday the train staff of Deutsche Bahn and the ground staff of the airline Lufthansa.
Far too little has been invested in infrastructure over the past ten years. Roads and tracks are outdated. According to many economists, too little attention has been paid to childcare and schools. But due to the tight budget and declining tax revenues, this backlog cannot be made up quickly.
Economist Schularick mentioned Germany recently in the FAZ a “prosperity museum”. The country is still prosperous, but the industry is outdated, just like the population, and there is little drive for innovation or entrepreneurship, according to Schularick. The divided coalition in Berlin will not be able to do anything about this quickly.
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