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20 March 2024

Germany is on the brink of economic decline

Digital investment is being cut and industry is stuck in the past, in a country where the fax machine still rules.

By Wolfgang Münchau

The Italian economy started to decline around 2000. In the UK, productivity growth declined after the global financial crisis, and never recovered. What has now tipped the German economy over the edge is Russia’s invasion of Ukraine. Germany’s current trajectory is not just the downward part of your average economic cycle. The great age of “Made in Germany” – of German manufacturing and engineering excellence – is drawing to a close.

This is a story of industrial decline few people saw coming, though it started years ago. Industrial production in Germany has fallen by a cumulative 8 per cent since 2015, whereas in the rest of the eurozone it has gone up by 4 per cent. This is a huge shift, and there is more to come. The harbinger is the steel company ThyssenKrupp. Its chief executive is reported to have proposed cutting capacity by 40 per cent, anticipating falling demand in the long run (the company has since decided on a less drastic reduction). Steel sits at the beginning of engineering supply chains. If you cut the steel, the rest follows. Germany has entered what economists call a structural slump.

Having grown up in Germany, I can testify to the important role engineering and technology plays in German society. It used to be common to hear people on buses discuss hydraulic systems or other technical subjects. A majority of school leavers would be drawn to the technical crafts or science and engineering degrees. Apart from the great footballers of the 1970s, the heroes at the time were the engineers at the car companies who developed the next generation of engines. The Audi slogan “Vorsprung durch Technik” stood for this economic model. Ferdinand Porsche, the late patriarch of the Porsche family, was once asked which model he liked the best. He answered: the next one. That was the spirit. That was a time when Germany looked to the future.

I see digitalisation, more than geopolitics, as the big intruding factor that has disrupted this paradigm. Car firms used to make major profits on diesel engines and after-sales service. Electric cars, however, have more in common with consumer electronic devices: the profit comes from batteries and software. But China and the US own most of that supply chain.

Russia’s invasion of Ukraine has certainly damaged energy-intensive production. You would expect the fall in energy prices to have stopped the rot. But this is not happening. BASF, the chemical giant, concluded some time ago that its future lies outside Germany.

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Old-fashioned manufacturing still matters even in a digital world. Germany produces more ammunition for Ukraine than anyone else in Europe. Even electric cars have mechanical parts. The Germans know a thing or two about scaling up industrial production. Germany is also a rich country that is starting its path of industrial decline from a high level. A well-trained workforce will ultimately adjust to a new world. There is a promising new generation of entrepreneurial start-ups, especially in the Munich area. But it will take some time, maybe a decade, before they hit their prime. Until then, I expect the current malaise to persist.

The problem is that there is not much advocacy for diversification from the German government, or indeed anywhere in public discourse. The debate is focused mostly on existing companies and sectors, not new ones. Unlike the UK or the US, Germany does not have the infrastructure for a start-up economy; it is the old companies that do most of the investment – and many are living in the past.

When economic decline comes, it always has a major impact on politics. Since the euro’s introduction in 1999, Italy has had 11 changes of prime minister. Since the global financial crisis, the UK has had six – four since the Brexit referendum. Germany has had only three chancellors since 1998. I expect that era of stability is about to change – starting with next year’s elections.

A German crisis is always a European crisis. Germany’s neighbours in central and eastern Europe are heavily integrated into its supply chains. The EU also depends on German net contributions to its budget, and on Germany’s triple-A rated government bonds as a backstop for the eurozone.

Perhaps the biggest policy error made by Angela Merkel and her contemporaries was to misjudge the impact of geopolitics on German industry. The global shocks of our time require more investment into defence and security, and into tech. But economic weakness restricts the fiscal room for manoeuvre. When there is no growth dividend to distribute, you can only spend on defence if you spend less on something else. What they are cutting is digital investment. The fax machine still rules.

There is a lively economic debate going on in Germany – but I fear they are trying to fix the wrong problem. The story is all about competitiveness. If only the wages were lower, or the government paid more in subsidies, things would be better. But the problem with German electric cars is not that they are too expensive to make: they are not state of the art. Chinese electric cars are not cheap and nasty. They are better.

My sense is that the Germans are focused on old industries, and old-industry economic policies, because this is all they have ever known. It will be some time until they realise that the future of the German economy will depend far less on Volkswagen than on companies that have yet to be founded. The old Porsche once said the best way to predict the future is to invent it. His country is a long way away from this.

[See also: The West is revealing its hand to Putin]

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This article appears in the 20 Mar 2024 issue of the New Statesman, Easter Special 2024

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