Germany's paralysis threatens the European economic system | Economy | EUROtoday

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The European financial locomotive stays stranded. And simply as when Germany sneezes the eurozone catches a chilly, the capitals of the principle neighborhood companions look askance at every little thing that occurs in Berlin. At the second, the prospects are by no means promising. The nation's 5 giant financial analysis and evaluation institutes—amongst which is the distinguished Ifo—this week sharply lowered their forecasts for 2024: if simply half a 12 months in the past they anticipated development of 1.3%, now they’re slicing it drastically by multiple level, as much as 0.1%. All of this happens in a transparent earlier context of decline, since Germany closed 2023 with a contraction of 0.3% of its gross home product (GDP), which led the German Minister of Economy, Robert Habeck, to explain the outlook as “dramatically bad”. The coming months, with the first interest rate cuts in sight, will be key to determining whether the country manages to get out of the hole.

Massive farmers' tractor units in Berlin. Completely empty airports in Frankfurt and Hamburg. Bleak train stations in Munich. These are just some of the images that have been photographed in the last three months in Germany, agitated by union demands for workers to regain purchasing power and, at the same time, by economic paralysis. This situation is already beginning to affect the behavior of the rest of Europe. Not in vain, Germany still represents more than a quarter of the wealth of the euro zone. Raymond Torres, Director of Economics at the Savings Banks Foundation (Funcas), explains: “The eurozone economy is growing less due to the strong dependence and interconnection between Germany and other countries such as France and Italy.” “It is still early to know what will happen in the medium term, but in the short term the impact is clearly negative,” he provides.

The main international institutions – such as the International Monetary Fund (IMF) or the Organization for Economic Cooperation and Development (OECD) – already take into account the possible contagion effect. Although in recent years economic forecasts have become a kind of guessing exercise given the number of unforeseen events, all projections coincide in highlighting the timid progress of countries like France and Italy and, consequently, of the eurozone itself. At the end of January, the IMF forecast growth in 2024 of 1% and 0.7% for Paris and Rome, respectively, leaving the euro zone with a slight rise of 0.9%. A few days later, the OECD did the same, setting increases of 0.6%, 0.7% and 0.6%. The two organizations, however, put the forecast for Spain—for now less exposed to Germany—at 1.5%. Similar forecasts are those offered by the European Commission. “Spain is in better shape than the rest of the EU,” the European Commissioner for Economy, Paolo Gentiloni, stated in an interview with EL PAÍS. However, although countries like Spain pull the wagon, their momentum is not enough to compensate for the German stagnation.

Analysts at the consulting firm BCA Research, in fact, believe that the euro zone could enter a slight recession this year even if the entire European Union manages to avoid it. And, remember, Germany's weight in the single currency is still 28%. In The Rest Of Europe Versus Germany (The rest of Europe compared to Germany), recently published, the analysis firm concludes that, if it were not for the country's performance, the GDP of the euro zone would have grown by 12.8% in the last three years compared to the 10.6% that has been officially recorded . The problem, according to BCA's head of European strategy, Mathieu Savary, is that this trend will continue as long as Berlin continues to face material obstacles such as those related to the energy transition, fiscal austerity measures, real estate problems and weak external demand. . “These headwinds are depressing consumption and, therefore, the national GDP.” All these difficulties, he adds, have a considerably lower incidence in other community countries.

In the German case, Torres adds, two disturbances have come together that have a joint impact. One is related to inflation, the sharp rise in rates and the loss of purchasing power by households, which affects private consumption and purchasing capacity. This situation has had effects in more European markets, although its consequences have moderated over the months. The second alteration, continues the Funcas situation director, is intrinsic to the German country and is linked to its change in its productive model, so its consequences are structural in nature.

Until a few years ago, the German national economy drank from a cheap supply of energy from Russia and the outsourcing of part of the production to Asian countries, mainly China. That is to say, this dependence on Moscow and Beijing is particularly more pronounced than that of other countries, which has undoubted consequences in a phase of green transition and in moments of geopolitical tension like the current one. The energy consequences after the start of the war in Ukraine and the cutoff of gas supplies from Russia are obvious. But we also have to look towards the Asian giant – the second non-EU trading partner for Germany – to get an idea of ​​the damage that the drop in exports and the war in the automobile market are causing in Berlin, particularly with regard to cars. electric.

There are more points to take into account, such as the weak investment activity of companies in Germany. In the short term, details Timo Wollmershäuser, economic analyst and deputy director of the Ifo, German industry suffers from weak global demand for capital and intermediate goods, that is, precisely those in which the national industry is specialized. Added to the weak export prospects is “the great uncertainty regarding the economic policy of the German Government”, something that causes companies to postpone their investment decisions. Therefore, he summarizes, “Germany has ultimately become less attractive as a business location.” Added to all this, Wollmershäuser adds, is that taxes are high, that bureaucracy is an obstacle, that digitalization is advancing slowly, that energy prices are high and that demographics are causing a shortage of labor. Due to all these factors, the IMF estimates that it will be the country with the slowest growth in the G-7 this year, after having been the only economy in the group to contract during 2023.

An operator works at a Siemens transformer factory in Dresden, Germany, on April 2023.
An operator works at a Siemens transformer factory in Dresden, Germany, on April 2023.Sebastian Kahnert (DPA/ Picture Alliance/ Getty)

Opportunity for the south

For all these reasons, they believe in BCA Research, the most likely thing is that the euro zone economy will follow in the footsteps of the previous year and will once again show signs of clear weakness during 2024. This will be because the German peso will pull down the average or because the contagion will be real and other economies like the French or Italian ones will end up getting the flu. Or by a mixture of both. The global growth momentum of the past 12 months appears to have largely bypassed Europe. The region has been grappling with the lingering effects of high energy prices, high interest rates needed to control inflation, and weak consumer confidence. “These headwinds have hit manufacturing companies especially hard, including those in Germany,” says Alfred Kammer, IMF European director.

All in all, analysts add, it is expected that the divergence between Germany and the rest of Europe – mainly that of the south – will increase this year, as the former continues to stagnate and the latter improve. Ángel Talavera, head of the European economics area at the Oxford Economics analysis center, also believes this: “Inevitably, Germany's stagnation will lead the eurozone to another year of very low growth,” he explains. However, Spain seems like it will escape again and grow above average. “In fact, in our projections we have Spain and Germany on opposite sides of the table.” Berlin, like the rest of the community capitals, is affected by the rate rise. However, Talavera insists, the country has additional problems such as low demand—especially external—and regulatory burdens with long waiting times for project approval, which puts obstacles in the way of investment.

The latest forecasts from the European Commission, the most recent of the main organizations, point to the pull of the south compared to the stagnation of Germany and other traditionally leading economies. In addition to Spain, for which Brussels projects a GDP increase of 1.7% in 2024 and 2% in 2025, others such as Greece or Portugal stand out, as well as Malta or Cyprus. Along these lines, Raymond Torres suggests, it is worth analyzing the positive side that the change in the German cycle may have. That is, with the gradual adaptation of the new production model, “many multinationals can consider their investments and locations.” For now, these disruptions do not appear to be causing relocations. However, “trend changes are beginning to be seen in terms of new investments.” This does not compensate for the negative “not even close”, but it is a window of opportunity in the medium term for countries like Spain.

Furthermore, the IMF insists that, even if growth were to recover in the short term, the prospects for Europe are not optimistic unless the Union begins a reform process. Alfred Kammer focuses on European per capita income, a third lower on average than those of the United States. Also, in the need to improve productivity and realize the potential of the single market, “reducing internal barriers.” This must be complemented by changes at the national level: in Germany “there is significant scope to reduce bureaucracy and barriers to new business formation.”

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