Stagnant German growth in the second quarter has led analysts across the board to predict a recession as the outlook becomes clouded by the threat of a halt to Russian gas supplies.
But it is not only growth that is sputtering at zero percent between April and June – Germany’s entire economic model is being called into question by experts. Here’s a look at the challenges on the table right now.
READ ALSO: Germany economy stalls as recession looms
End to cheap energy
“The war in Ukraine puts an end to the German economic business model as we knew it – a model which was mainly based on cheap energy imports and industrial exports into a increasingly globalised world,” say analysts from ING bank.
Less expensive to produce and transport, with prices pinned down in long-term contracts, Russian gas has for decades contributed to Germany’s economic prosperity.
Industry consumes 30 percent of the gas burnt in Germany. Before the war, more than half of the total supplies came from Russia, a figure which had fallen to 35 percent by the beginning of June.
To wean itself completely off Russian gas, Germany is looking further afield for new supplies including shipments of liquefied natural gas from the United States and Qatar, as well as moving more quickly to renewable electricity generation.
Meanwhile, German society is having to take extreme measures to save gas. Cities have started turning off the lights, including Berlin, as is shown in the cathedral below.
Globalisation in crisis
“As an exporting nation, Germany has benefited disproportionately from free trade. But it is exactly that which is now in danger,” opined the Süddeutsche daily earlier this month.
The coronavirus pandemic and the Ukraine war have shown the weaknesses of open economies as supply chains have been upended and key components have become scarce. Germany has been among the most exposed to the logistical snafus of the past two years.
Germany’s dependence on China is also worrying politicians in Berlin. The strong two-way ties between Germany and China were “not healthy”, liberal Finance Minister Christian Lindner said in April.
Beijing is Germany’s number one trade partner, with trade between the two nations climbing again by 15.1 percent in 2021.
“It’s potentially a new risk,” economist Claudia Kemfert told AFP. While the risk was less acute than dependence on Russia, more needed to be done to “focus on the domestic economy and build resilience”, she said.
After years of anaemic growth, inflation is back with a vengeance in the European Union. In Germany, the memory of 1920s-style hyperinflation weighs heavy on the public debate.
Beyond this psychological block, the obsession with price stability ensures a “competitive industry and a nation of savers”, according to a recent report by French think tank OFCE.
Rising prices have led to rising labour unrest in Germany. July saw the longest industrial action at German ports in 40 years and a day of strikes by ground staff at Lufthansa. Unions haven’t ruled out more strikes happening if employers do not push up workers pay.
Ahead of negotiations that are set to kick off in September, the powerful IG Metall union is asking for an eight-percent pay rise for 3.8 million workers across various industrial sectors, the biggest wage demand since 2008.
Overshadowed by the war in Ukraine, the lack of skilled workers is a major headache for German industry.
On top of the million vacancies already advertised, “Germany will need 500,000 extra employees every year for (the) next ten years,” said Marcel Fratzscher, head of the DIW think tank in Berlin.
The potential shortfall was a “risk for the competitiveness and prosperity of the country”, he noted.
Auto supplier Continental raised the alarm in July saying the shortage “threatened the future of the German economy”, which “urgently needs controlled immigration”.
Germany’s coalition government made up of the Social Democrats, Greens and Free Democrats say they want to make Germany more attractive to skilled immigrants to encourage them to come to Germany and work.
Germany is also planning to relax citizenship laws as part of its overhaul of immigration policies, which will mean non-EU nationals will be allowed to hold more than one nationality.
Debt brake illusion
Returning to Germany’s strict budgetary rules in 2023 after a three-year pandemic-enforced hiatus is a key aim for Finance Minister Lindner.
However, the goal was “as surprising as it is unrealistic”, said analysts at ING.
Germany is preparing to spend billions again to support households through the coming energy crisis and investing colossal amounts into the switch to renewable energy.
“Germany will need time and money” to implement “investment and structural change as determined and committed as it demanded from other eurozone countries in the past”, the ING analysts said.
By Sophie MAKRIS