Official data showed, on Friday, that the German economy stabilized without achieving any growth rates in the second quarter of the year, as the crisis in Ukraine, the pandemic and supply disruptions push Europe’s largest economy to the brink of deflation.
End of the era of cheap energy
“The war in Ukraine put an end to the German economic model as we knew it,” said ING bank analysts, based on “low-cost energy imports and industrial exports in an increasingly globalized world,” according to a report published by Agence France-Presse.
With the low cost of production and transportation, Russian gas contributed over decades to the prosperity of the German industry, which accounts for 30 percent of gas consumption in the country.
Before the war in Ukraine, Russian gas represented more than half of the gas imported to Germany. This share has now fallen to 35 percent.
In its quest to completely get out of its dependence on Russian gas, a goal that Berlin has set itself a deadline to achieve in the middle of 2024, Germany intends to resort to more expensive energy sources, such as Norwegian or Dutch gas or liquefied natural gas from the United States or Qatar, or less regular such as energy Solar or wind energy.
globalization faltered
The Sueddeutsche Zeitung newspaper wrote in July, expressing fears that “Germany, as an exporting country, benefits most from free trade. But this is precisely what is in danger.”
The COVID-19 pandemic and the war in Ukraine exposed the vulnerabilities of economies when supply chains falter and essential components such as semiconductors can no longer be imported.
German industry suffered in particular, especially the automobile sector.
With Russian supplies dwindling, China has become Germany’s number one trading partner, but it’s raising concerns in Berlin.
At a time when trade between the two countries increased by 15.1 percent in 2021 compared to the previous year, Liberal Finance Minister Christian Lindner acknowledged that reliance on China “is not healthy either.”
And economic expert, Claudia Kimfert, considered that “this may constitute a new danger,” noting that it is not as large as the Russian danger, “but we must rely more on a national economy and strengthen resilience.”
Staff shortage
Staff shortages remains the number one problem for many companies in a country with an aging population, even if it is overshadowed by the consequences of the war in Ukraine.
With about a million jobs currently vacant, Marcel Fracher, head of the Institute for Economic Research, said that “Germany will need an additional 500,000 workers every year for the next ten years,” noting that this constitutes “a risk to the country’s competitiveness and prosperity.”
Auto equipment maker Continental warned in July that Germany “is in dire need of orderly immigration”.
inflation shock
After years of price stability, the fear of inflation is back in the EU.
But the concern is greater in Germany, where the hyperinflationary shock of the 1920s still dominates public debate.
Two economists at the French Observatory of Economic Situation OFCE also stated that the obsession with price stability is also linked to “preserving a competitive industrial sector and a nation of savers”.
However, demands are growing in a country that clings to a moderate level of wages and July saw the longest social movement in German ports in forty years.
Steelworkers union IG Metall is demanding 8 percent pay rises for 3.8 million industrial workers, the highest since 2008.
Spiegel asked: “Is there a danger of a yellow vest movement in Germany?” Similar to the protest movement in France, she warned that “if the middle class collapses, everything could collapse.”
The illusion of financial discipline
Should we return next year to the fiscal rigor that underpins the German model? That is the finance minister’s stated goal, but ING experts warn that it is “as surprising as it is unrealistic.”
After deviating from the rule of financial discipline during the crisis of the outbreak of the Covid-19 epidemic, Germany is now re-spending billions to support families and companies in the face of the energy crisis, while the accelerating transformation in the energy field requires massive investments.
ING warned that “Germany needs time and money” to implement “investments and structural changes with the same resolve that it has imposed in the past on other eurozone countries”.
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