In what must now seem like Germany’s halcyon days of 2015, then chancellor, Angela Merkel told a press conference in Berlin “I am happy that Germany has become a country that many people abroad associate with hope.” It was a statement recognising Germany’s commitment to those seeking asylum and the additional $6.7bn needed to accommodate the system during the height of the migrant crisis.
How heavily those words must weigh on her successor, Olaf Scholz, and indeed, on his compatriot and President of the European Commission, Ursula von der Leyen, in 2024. While Germany may still hold the hopes of migrants in its hands as applications rose to 2015 levels last year, hope must be in short supply in its halls of power. For Germany as an economic power and figurehead of the EU finds itself somewhat beleaguered these days. Long have the Germans been the adults in the room, shouldering the responsibility not just for a nation but the EU too.
As Merkel herself said in the same speech, helping others “is something very valuable, especially in view of our history.” And it is perhaps towards history that Germany must now turn in order to find a path forwards out of its current slump.
By the end of the Second World War, Germany was, in essence, a ruined state with much of its population displaced and malnourished, its buildings destroyed and its economic infrastructure collapsed. It became known as Germany’s ‘Stunde Null’ or ‘Zero Hour,’ a blank slate as it were, a place from which everything would have to be built anew. Its people seemed to be facing a bleak and uncertain future, but by the time the Berlin Wall fell in 1989, Germany had the third largest economy in the world, and still holds onto its top three position today. The country needed a miracle in order to recover and it got one.
Germany did not invest enough money into the electricity supply system for many years
According to Eichengreen and Ritschl in their LSE working paper Understanding West German Economic Growth in the 1950s, the country’s remarkable turnaround reflected its “convergence to the productivity frontier, a process during which investment and growth were higher than normal.”
The effect was so pronounced that the Germans coined a word for it: ‘Wirtschaftswunder’ or ‘economic miracle.’ In reality, regaining control over inflation, as well as efficient labour practices, was what helped to create the conditions needed for productivity. But productivity relies on industry and industry requires energy, in all its forms.
Energy independence
During a recent speech to the German Chambers of Industry and Commerce, Reuter’s reported Scholz saying “the German economy has faced unprecedented challenges over the past two years or so since Russia’s invasion of Ukraine.”
Germany’s over-reliance on relatively cheap Russian energy was just one of several major problems it has needed to address in recent years. Out of the G7 economies, Germany’s was the only one to shrink last year, with an aging workforce and underinvestment counted among the reasons why.
Germany’s economic advisors have cut growth projections for 2024 to 0.2 percent. In the last quarter of 2023, the economy shrank 0.5 percent. As the IMF reports: “with this cheap gas no longer available, the German manufacturing model does not work anymore,” and as of last year, Germany’s manufacturing sector has slipped into recession.
A new deal was brokered with Qatar in 2022 for two million tons of liquefied natural gas (LNG) each year starting from 2026, but this alone is not enough to solve Germany’s energy crisis. Markus Krebber, the head of RWE, a German multinational energy company, said in a recent interview: “the root cause for our problems is that Germany did not invest enough money into the electricity supply system for many years.” In order to achieve this, investment and expansion in renewables must be a priority. Krebber goes on to say, “Germany, with its energy-intensive industries, should have started to take action in this regard 10 years ago or even earlier.”
From this perspective the way forward seems to be: invest in renewables, the lights stay on in the factories and everything else falls into place. But is it that simple? Unfortunately not.
According to the IMF some of Germany’s problems are temporary and some are structural, but wholesale gas prices are now back to 2018 levels, so while energy will always be a factor in production costs and overall competitiveness, it is not the only factor.
A temporary issue such as higher inflation has caused consumers to hit pause on purchases and in order to counteract inflation, the ECB raised interest rates, which in turn caused depression in interest-sensitive areas such as construction. The more fundamental structural issues are productivity growth and an aging workforce (see Fig 1).
Making more market miracles
The German economic miracle following the end of the Second World War was achieved via the introduction of the ‘soziale Marktwirtschaft’ or ‘social market economy,’ which finely balances free-market capitalism with social policy. Germany’s remarkable recovery from the ravages of war was forged in a liberal market economy and returning growth to productivity now could also benefit from less government interference and a ‘Goldilocks zone’ of regulation that balances fair competition and the welfare state.
We need factory workers, engineers, doctors, care workers
In terms of the workforce, the IMF also believes that “over the next five years, the growth rate of Germany’s labour force will drop by more than in any other G7 country.” This, they say, is a result of baby boomers retiring and the current migrant wave coming to an end. Solving this issue could be achieved by raising immigration levels, but regulating immigration is an incredibly difficult balance to strike, as Scholz says himself in an interview with Der Spiegel in October last year.
“We must be firm in cases where someone does not have a right to stay. But at the same time, we have to be open and modern, because we need workers from other countries.”
The chancellor is well aware that Germany needs more workers and more immigration: “Around 13 million citizens of Germany – affectionately referred to as the baby boomers – will soon be heading into retirement. That is why we need factory workers, engineers, doctors, care workers.”
In fact it is clear from his Der Spiegel interview that the chancellor recognises the maladies of Germany’s structural issues and how to treat them, but the world is a changed place, made evident by the rise in popularity of right-wing populist parties such as Germany’s AfD, who are in direct opposition to Scholz’s Social Democratic Party (SPD).
The task ahead of Scholz is not for the faint of heart and I believe that this has as much to do with addressing Germany’s temporary and structural issues as it does with handling the insecurities and anxieties of Europe’s citizens. Kicking off the EU election campaign in Hamburg in April, Scholz rallied behind the SPD with the mantra: “we need hope.” We sure do.
