Germany is in the worst period of its recent history

The world’s growing geo-economic divisions have exacerbated the situation for a country that places great emphasis on exports, while Scholz has been paralyzed by infighting within most of the country. Germany is in the worst period of its recent history.

What a difference two months make! In June, on the eve of the European Football Championship, the central topic of discussion in Germany and Europe was whether the tournament would bring a sporting and organizational success that would restore optimism to the country and inject new impetus into its struggling economy.

It is now early August and a lot has changed. Despite playing well, Germany was eliminated in the quarter-finals of Euro 2024. The chaos on the German railways has left an indelible memory for everyone involved in the event – journalists, spectators and even football players.

But most importantly, economic indicators for the second quarter and July show that Europe’s largest economy is once again stagnating or even shrinking, while the mood in the business community is not good. To stick with sports, the mediocre (by usual standards) performance of German athletes at the Paris Olympics sounds almost like a metaphor for this situation, with Germany “demoted” to tenth place in the medal table.

The continuity is shrinking. In the second quarter of this year, the German economy began to shrink again: -0.1% compared to the same period in 2023. Even if the June data are based only on forecasts and there may be surprises in the coming weeks, it is clear that the optimism in Germany at the beginning of the year (GDP growth of 0.2% in the first quarter) has faded.

This is confirmed by Ifo data, which measures business confidence and expectations for six months, which fell from 88.6% in June to 87% in July, and by the rise in unemployment, which saw more than 82,000 people lose their jobs last month, the second worst figure in the past 20 years. Germany currently has 2.8 million unemployed people, equivalent to 6% of the working population. Overall, its economy is smaller than it was two years ago.

The question is not whether Germany will become the “sick man of Europe” again, as it did in the late 1990s. The real problem is that without major structural adjustments and mindset changes, China is destined to oscillate between hope and disappointment, weak recovery and sudden decline, and the development path is very fragile at best. Despite the current fog, Europe still regards Berlin as an economic engine and political beacon.

Negative factors. Germany is actually suffering from five negative factors.

The number of people in the labor force (i.e. between the ages of 15 and 64) decreases. Public investment as a percentage of GDP is extremely small between 2018 and 2022: among the 16 countries with the highest incomes, Germany ranks second from the bottom with 2.5%, according to OECD-IMF data. Only Spain performs worse, at 2.4%, but Italy also performs poorly, ranking third from the bottom with 2.6%. Third, Germany’s per capita income compared to the United States will fall from 89% in 2017 to 80% in 2023. Fourth, Germany still lags seriously in the digital economy, which did not exist during the Merkel era and has never existed. In terms of strategic investments. Finally, the increasing fragmentation of the world’s geo-economics, characterized by the protectionist policies of the various blocs, has even more serious consequences for a completely export-oriented economy like Germany’s, which is dependent on world trade. Moreover, with the US economy … frozen and the Chinese economy slowing down, the prospects for a strong export-led restart in Germany are minimal or non-existent.

The catalyst is instability. Even more serious is the catalyst, instability, which has plagued Berlin’s political scene for months, with the government of Chancellor Olaf Solz paralyzed by infighting. Irene Soave says everyone was surprised by the letter from liberal transport minister Volker Wissing to Ursula von der Leyen, in which she called for a change in the rules on diesel emissions limits, which could take eight million cars off the road in Germany. However, it was not clear whether Wissing spoke for the entire government, while his Green allies took an opposing stance on the green transition. This is not the first time in Brussels, where it is a popular joke that if you talk to three German ministers, you feel like you are talking to ministers from three different countries.

Ultimately, what split the Berlin coalition was the budget issue, which contains the root of all problems: namely, whether to keep the Schuldenbremse, the fiscal brake that sets a limit on annual debt, which all governments consider to be inappropriate and harmful. Economists. Only the liberals strongly defend it, for whom it is almost a question of identity and survival. In June, the parties seemed to agree on this move, but without touching the mechanism. After the summer vacation, in view of the regional elections in Thuringia, Saxony and Brandenburg in September, the budget issue will flare up again. And this time, the situation may be very serious…