Saving the “made in Germany”, the urgent mission of Chancellor Scholz

He turned Germany in the new “sick man” of Europe? Fear of economic decline dominates the start of the new course in the leading European economy and puts the government of Olaf Schölz.

The former powerhouse of the European Union (EU) should be the only major industrial country to suffer a recession in 2023, according to the International Monetary Fund (IMF).

But the remedies are not unanimously convincing in the German chancellor’s coalition.

What’s wrong?

The German economy is in a slump. It stagnated between April and June, after two consecutive quarters of decline in GDP, according to final data published on Friday.

When exports and industry cough, all of Germany catches a cold. These two pillars of “made in Germany” They are especially sensitive to rising prices, interest rates and the difficulties of the Chinese economy, Germany’s main trading partner.

“About 50% of our GDP comes from exports. Exports made us rich (…) but when the world economy weakens, Germany suffers more than the others ”, explained to the weekly Die Zeit Robert Habeck, Minister of Economy.

Added to this is the energy shock suffered by German companies that bought cheap Russian gas, replaced by more expensive suppliers since the invasion of Ukraine.

What is the government debating?

The German coalition, made up of the Social Democrats, the Greens (who own the Economy portfolio) and the Liberals (heading the Finance Ministry), has shown signs of division.

Habeck advocates freezing until 2030 the prices of electricity for the industries that consume it the most, subsidizing their expenses.

The measure, estimated at 20,000 million euros, would seek to maintain the competitiveness of certain sectors, while solar and wind energy are developed.

“It is unthinkable to intervene directly in the market by distributing subsidies”responded Christian Lindner, the (liberal) finance minister, a position shared by Scholz.

Lindner is committed to lowering taxes for companies.

But last week, a 6 billion euro package of tax cuts was blocked in the Council of Ministers by the outburst of an environmental minister.

“The coalition again close to breaking! What a bad start after the summer holidays”criticized the newspaper Bild.

What do economists advise?

“Germany’s problem is not circumstantial, but structural”explained Marcel Fratzscher, director of the DIW Berlin economic institute.

Germany needs a “long-term transformation program, with an investment offensive, extensive de-bureaucratization and a reinforcement of social systems”detailed in an analysis.

The uncertainty about the cost of energy in the medium term, the cumbersome regulations, the lack of qualified labor and the slow digitization hold back companies in the country.

“Tax cuts or traditional stimulus programs are not the right measures in this situation”indicated Sebastien Dullien, an economist with a social democratic tendency.

Is the situation that serious?

Faced with alarmist headlines, experts try to calm things down.

“Germany is like a forty-something who was successful for a long time, but now has to reorient himself professionally”argues Clemens Fuest, of the Ifo economic institute.

Difficult but not impossible, according to Holer Schmieding, an economist at Berenberg. Unlike the period 1995-2002, when Germany was the sick of Europe, “Many actors in the government and the opposition are in agreement today (…) on the need for major changes.”

In addition, the country has almost no unemployment.

Scholz rejects fatalistic speeches. “We must not blacken the panorama and artificially create a crisis”he declared, recalling that the American semiconductor giant Intel chose Germany for a large investment.

Source: AFP