Germany: Endless Decline? How the German crisis is a warning for Europe

19 Settembre 2023 - 19:00

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Germany in crisis questions the energy and industrial challenges of the whole continent: here’s why Berlin is still the sick man of Europe and what is happening to the economy of the region.

Germany: Endless Decline? How the German crisis is a warning for Europe

Germany "sick man of Europe": is this how the German nation will end this complicated 2023?

The economic perspectives of "Europe’s powerhouse" are increasingly worse. Germany faces difficult challenges, testifying to the loss of momentum in the Old Continent.

Hans-Werner Sinn, president emeritus of the Ifo Institute, added to the chorus of skeptics about Berlin’s future, underlining that the weak manufacturing production in the region’s largest economy and the high energy prices continue to hit Germany’s industrial heartland, undermining its recovery.

The key point is the following: the German crisis is not a short-term phenomenon according to Sinn, as underlined in an interview for CNBC at the Ambrosetti Forum in Italy. What is really behind the decline of Germany and why are the signs worrying for all of Europe? At stake is an energy revolution with long and uncertain outcomes.

What’s happening in Germany: Is the decline unstoppable and for everyone?

According to Sinn, Germany’s weakness today “has to do with auto industry, which is the heart of German industry and a lot of things depend on it”.

Cars were Germany’s top export last year, accounting for 15.6 % of exports, data from the Federal Statistical Office show.

In May 2022, Germany recorded a foreign trade deficit for the first time in decades, totaling 1 billion euros. The country had briefly gone from a trade surplus to importing more than it exported.

Since then, Berlin has once again run a trade surplus, which according to the Federal Statistical Office amounted to 18.7 billion euros in June 2023, but exports remain sluggish.

In addition, according to a research note published in August by Berenberg, Germany could lose 2% to 3% of its current industrial capacity as companies move operations to countries where gas and electricity are cheaper , such as the United States or Saudi Arabia.

Energy price uncertainty has likely contributed to a "collapse" in business confidence, Holger Schmieding, chief economist at Berenberg, wrote in the note.

In the crosshairs there is therefore the policy on energy diversification from Russia, a key supplier for Germany before the invasion of Ukraine and the enormous sustainability challenges to find alternative sources.

Sinn said reliance on renewable technologies such as wind and solar would cause a “volatility problem”, which could pose hurdles for businesses.

“You have to fill [those gaps] with conventional energy, so it is very difficult to have this dual structure and sustain it in the future. On the one hand volatile green energy and on the other hand, conventional energy fills the gaps. This is a double cost. This is a high energy cost and is not good for the industry. It is a difficult path”, he added.

The ambition towards fossil fuel neutrality throughout the EU is therefore called into question. The green and energy revolution is changing the geopolitics and economic and diplomatic priorities of all states, especially in Europe. In heavily industrialized countries and, at least so far, dependent on Russian gas, such as Germany, the recovery appears to be very problematic.

The signal of German difficulties, even if closely linked to the nation’s economic and structural peculiarities, is for everyone: Europe is experiencing a change towards new energy - and industrial - approaches due to tension with China. In the midst of a war and a deep inflationary crisis, the decline of Germany and beyond could last much longer.

Original article published on Italy 2023-09-04 15:33:40. Original title: Germania: declino senza fine? Perché la crisi tedesca è un segnale per tutti

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