It went from being admired by everyone to the worst performance in the world. What happened to the German economy?

 

It went from being admired by everyone to the worst performance in the world. What happened to the German economy?

For most of this century, Germany has been an economic success. It dominated global markets for high-quality products such as luxury cars and industrial machinery. The Germans sold so much to the rest of the world that half of the economy ran on exports.

Employment was abundant and money in the state coffers grew, while other European countries were drowning in debt. Books were written about what other countries could learn from Germany.

Now the story is different.

Germany is currently the worst-performing large developed economy in the world. Both the International Monetary Fund and the European Union predict that the German economy will contract this year.

The recession comes in the wake of Russia's invasion of Ukraine and the loss of Moscow's cheap natural gas. This was an unprecedented shock to the energy-intensive industries of Germany, which had long been Europe's industrial powerhouse.

Germany is currently the worst-performing large developed economy in the world. Both the International Monetary Fund and the European Union predict that the German economy will contract this year.

The recession comes in the wake of Russia's invasion of Ukraine and the loss of Moscow's cheap natural gas. This was an unprecedented shock to the energy-intensive industries of Germany, which had long been Europe's industrial powerhouse.

The sudden poor performance of Europe's largest economy has triggered a wave of criticism and debate about the way forward.

Berlin risks "deindustrialization" as high energy costs and government inaction on other chronic problems threaten to send new factories and high-paying jobs elsewhere, believes Christian Kullmann, chief executive of the large company German chemical Evonik Industries AG.

The loss of cheap Russian natural gas needed to power factories has "painfully undermined the business model of the German economy," says Kullmann.

After Russia cut off most of its gas to the European Union, the German government asked Evonik to keep its 1960s coal-fired power plant running for a few more months.

The company is replacing the plant with two gas generators that could later run on hydrogen, as part of plans to become carbon neutral by 2030.

The loss of cheap Russian natural gas needed to power factories has "painfully undermined the business model of the German economy," says Kullmann.

After Russia cut off most of its gas to the European Union, the German government asked Evonik to keep its 1960s coal-fired power plant running for a few more months.

The company is replacing the plant with two gas generators that could later run on hydrogen, as part of plans to become carbon neutral by 2030.

Kullmann is in favor. "It was bad political decisions that developed and influenced high energy costs in the first place. And German industry and German workers cannot now be left to foot the bill."

The price of gas is nearly double what it was in 2021, hurting companies that need it to make glass, paper and metal coatings used in buildings and cars.

A second blow came with the slowdown in the economy of China, a key trading partner, after several decades of strong growth.

These external shocks have exposed cracks in Germany's foundations that were ignored during years of success, including the delayed use of digital technology in government and business and a slow approval process for badly needed renewable energy projects.

Kullmann is in favor. "It was bad political decisions that developed and influenced high energy costs in the first place. And German industry and German workers cannot now be left to foot the bill."

The price of gas is nearly double what it was in 2021, hurting companies that need it to make glass, paper and metal coatings used in buildings and cars.

A second blow came with the slowdown in the economy of China, a key trading partner, after several decades of strong growth.

These external shocks have exposed cracks in Germany's foundations that were ignored during years of success, including the delayed use of digital technology in government and business and a slow approval process for badly needed renewable energy projects.

Furthermore, the money the government had on hand was, in part, due to delays in investing in roads, the railway network and high-speed Internet in rural areas.

Companies face a serious shortage of skilled labor, with job vacancies reaching a record high of just under two million.

The 2011 decision to close Germany's remaining nuclear power plants was called into question due to concerns about prices and electricity shortages. The government has already admitted that it was a mistake to rely on Russia to reliably supply gas through the Nord Stream pipelines under the Baltic Sea - which were closed and damaged during the war.

Drewsen Spezialpapiere, which makes paper for passports and stamps as well as paper straws, has purchased three wind turbines near its factory in northern Germany. Thus, it can cover around a quarter of its external electricity demand, as it moves away from the use of natural gas.

Specialty glass company Schott AG has experimented with replacing gas with emission-free hydrogen at the factory where it produces glass in tanks at a temperature of 1,700 degrees Celsius. It worked, but only on a small scale, with hydrogen delivered by truck. Massive quantities of hydrogen produced with renewable electricity and supplied by gas pipeline would be needed, which does not yet exist.

Drewsen Spezialpapiere, which makes paper for passports and stamps as well as paper straws, has purchased three wind turbines near its factory in northern Germany. Thus, it can cover around a quarter of its external electricity demand, as it moves away from the use of natural gas.

Specialty glass company Schott AG has experimented with replacing gas with emission-free hydrogen at the factory where it produces glass in tanks at a temperature of 1,700 degrees Celsius. It worked, but only on a small scale, with hydrogen delivered by truck. Massive quantities of hydrogen produced with renewable electricity and supplied by gas pipeline would be needed, which does not yet exist.

Schmieding, who once dubbed Germany "the sick man of Europe" in an influential 1998 analysis, believes that label would be exaggerated today, given the low level of unemployment and solid public finances. This gives Germany space to act, but reduces the pressure to make changes.

The most important immediate step, according to the economist, would be to end uncertainty about energy prices. Whatever policies are chosen, "it would be a great help if the government quickly reached agreement on them, so that companies know what they are doing and can plan accordingly, rather than postponing investment decisions."