The German economic model out of breath

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Germany entered its first monthly trade deficit since reunification in 1991. Its export sales are swamped by steep rises in the cost of imports – especially oil and gas, following the invasion of Germany. Ukraine. With forecasts of further rises in domestic inflation and a worsening deficit over the summer months, German Chancellor Olaf Scholz warned of a protracted crisis – one that “will not pass in a few months”. He’s right, but if anything that underestimates the seriousness of the economic challenge. The German model of economic growth, pursued with some success for three decades, is now on its last legs.

The German growth model was based on three pillars: cheap imports of energy and raw materials; abolition of home manufacturing wages; strong exports to the rest of the world. Since reunification, successive governments, whatever their political color, have pursued the same objective: to make Germany the world’s leading manufacturing exporter by value.

Two of those three legs were kicked out. Cheap energy imports, already under pressure in 2021 as fuel prices began to rise, came to a halt with Russia’s invasion of Ukraine and the sanctions imposed in response. Under Angela Merkel, Germany had become increasingly dependent on Russia for its energy, with around half of its gas supplies and a third of its oil coming from Russia by early 2020. Prices for both being historically depressed, in real terms, in the 2010s, and supplies from Russia seemingly guaranteed, it looked like smart business. The political difficulties, although aggravating with Russia’s growing assertiveness, especially after the annexation of Crimea in 2014, could be largely ironed out.

Those days are over, as Scholz and his coalition partners Grüne (Greens) were keen to point out. But even in the unlikely event that the conflict in Ukraine is soon resolved, driving down gas and oil prices in Europe, the “new normal” is likely to be much more expensive in the future – with higher prices for commodities foodstuffs, of which Germany is a huge importer, and for the growing range of hard-to-supply rare-earth minerals needed to produce electric cars. The German semiconductor industry alone cannot meet domestic demand, and Europe’s share of global semiconductor production has fallen from 44% in 1990 to around 10% today. As a result, global semiconductor shortages have hit German automakers hard over the past 18 months. His government (like those of other EU members) is now trying to increase domestic investment in semiconductor manufacturing.

[See also: US diplomat Marie Yovanovitch: “The Trump years did great damage”]

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The second disruption to the German growth pattern is more subtle than that resulting from the war and invasion, but just as important. The success of German exports, especially after the financial crisis of 2008, is based on the sale of products with high added value, such as complex machine tools or high-end automobiles, in the fast-growing markets of Asia from ballast. In 2020, China was the second largest market behind the United States for Germany, having grown rapidly over the previous decade to account for 8% of all German exports. These exports have supported both a notoriously large automotive industry, but also Germany Mittelstand (the medium-sized companies that fuel the German economy) smaller manufacturing exports, focused in particular on the export of capital goods – machinery to make other products. Seemingly insatiable demand for machinery and equipment from China as the economy weathered the recession of 2008-09 and beyond supported German export growth. Growing household prosperity in China also meant an expanding domestic market for consumer goods, with China’s auto market already the largest in the world in 2009, and German automobiles particularly favored by its expanding and newly affluent middle class.

But even before Covid-19 hit, those export sales were under pressure. The Chinese government’s targeted investment in machine tools and other capital goods, a central part of its “Made in China 2025” strategy, released in 2015, has exposed German exporters to direct competition in its biggest overseas market. Although Chinese manufacturing wages have risen sharply in recent years, they remain well below those in Germany and, with Chinese companies buoyed by heavy investment, subsidies and direct government support in the form of industrial policy, Exporters battled cheaper competitors selling increasingly sophisticated and comparable products. . The German solar industry, for example, was dramatically wiped out by Chinese competition a few years ago. Meanwhile, shutdowns in 2020 and beyond have also hammered demand for German products.

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The only step of the strategy still in place is the abolition of German wages and salaries. It has been a resounding success for German capital since reunification. By investing in new factories in Slovakia, Poland and elsewhere from the early 1990s, German companies integrated the relatively low-wage economies of Eastern Europe into their supply chains, directly reducing their costs. but also putting downward pressure on wages in Germany.

In the early 2000s, this attack on workers’ living standards was taken up by the government of Gerhard Schröder. The ‘Agenda 2010’ program consisted of a series of major welfare reforms creating what amounted to a two-speed workforce inside Germany: a relatively protected (but shrinking) older section ), able to enjoy the benefits and support of the rightly famous German social model, was faced with a growing contingent of workers, generally younger, less educated and often immigrant, systematically excluded and pushed into low-paying, full-time jobs. partial and precarious. Average real wages in Germany barely increased from the 1990s until the financial crisis of 2008, and even fell somewhat between 2004 and 2008. Inequality rose sharply.

Since the crash, real wages in Germany have risen, but the Eurozone crisis has created the opportunity to maintain the same cost-cutting pressure on living standards. The economic institutions of the EU have played a key role in this respect. The trade and government deficits of southern European euro members, such as Spain and Greece, have created a market inside the euro area for German products, while outside the euro zone, the presence of these weaker economies in the single currency meant that the euro was permanently devalued, which made German exports, sold in euros after 1999, cheaper and therefore more competitive internationally.

The share of German workers in national income has fallen as profits have risen. But so did German business investment spending, which fell from over 25% of GDP in the 1980s to around 20% in the 2010s. It was an economy on borrowed time: exploiting its position international rather than investing for the future. With the removal of the two pillars of the German growth model, the Scholz government risks relying heavily on its only remaining pillar: the removal of wages and salaries. Real wages have fallen over the past two years and German bosses are warning of the worst. The alternative would be to abandon the export model and revive the national economy – raising real wages as the main objective, cutting profits in export-oriented sectors if necessary and increasing public investment to create jobs. But neither the current government nor its opposition seem willing to break with the post-reunification economic legacy. It will be the German workers who will be forced to pay the price.

[See also: Can Ukraine win the war?]

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