A quarter of a century ago, the “Economist” labelled Germany as the sick man of Europe. Reunification, a rigid job market, and diminishing export demand put the economy to a tough test and pushed unemployment into double digits.
However, reforms in the early 2000s marked the beginning of a boom phase. Germany became the envy of its competitors. Punctual trains and technological excellence turned the country into the world’s leading exporter.
While Germany prospered, the global context kept evolving. Today, the country finds itself on the defensive once more. Once a growth leader, it is now more of a laggard among Europe’s economies.
Between 2006 and 2017, Germany outperformed major competitors and kept pace with the United States. But now, in 2023, it could be the only major economy shrinking after three-quarters of stagnation.
According to the IMF, Germany’s growth over the next five years will lag behind that of America, the United Kingdom, France, and Spain. While unemployment is low at around three percent and the country is overall wealthier and more open, dissatisfaction is growing. Eighty percent of respondents perceive Germany as unfair. Swiss railways now have to exclude delayed German trains from their network. Foreign Minister Annalena Baerbock had to cut short her trip to Australia due to a plane malfunction.
For years, Germany’s strength in traditional industries masked the backlog in new technologies. Budget constraints and complacency slowed down public investments. Germany lags significantly behind the US and France in terms of IT investments as a percentage of GDP. Bureaucratic conservatism, geopolitical uncertainties, and an aging population exacerbate the problems.
Germany’s economy is closely intertwined with China – in 2022, trade amounted to $314 billion. This relationship, once purely profit-oriented, has grown more complex. German automakers are losing market share in China.
Adding to the challenges is the energy transition: Germany’s industry consumes vast amounts of energy, and consumer CO2 emissions far exceed those of the French or Italians. The option of cheap gas from Russia is no longer viable, and at the same time, Germany has bid farewell to nuclear power.
Where are the young talents?
Germany also faces a talent shortage. Due to the baby boom after World War II, around 2 million workers will retire in the next five years. Integrating 1.1 million Ukrainian refugees presents a challenge, as many are children and non-working women. The current coalition government of Social Democrats, Free Democrats, and Greens seems scarcely aware of the magnitude of these challenges.
The temptation to cling to the status quo is strong. However, this won’t restore Germany’s prosperity. China continues to develop, and competition is becoming fiercer. Germany needs technological investments as a catalyst for new businesses and industries. A digitized administration could provide relief for small and medium-sized enterprises (SMEs) that lack the capacity for bureaucracy.
Reforming approval processes could also ensure that infrastructure projects are implemented efficiently and within budget. Even if Germany can’t spend as freely as it did in the 2010s, investments are essential to avoid falling behind internationally.