Is Germany the “sick man” of Europe again?

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“Germany is struggling. It was the only G7 economy to shrink last year and will again be the group’s slowest-growing economy this year. These are the opening words of a blog by members of the IMF’s European department published on March 27. According to the IMF, its GDP per capita will decrease between 2019 and 2023 That was the 34th worst performance among the G7 economies, with even the UK doing better, down 0.2 percent, and France up 0.4 percent. The 6 percent increase in the US was in a different league.

If Germany was a sick man recently, is it a temporary or chronic condition? There are good reasons to argue that it is primarily the former. As the blog notes, German trade relations have deteriorated significantly since the Russian invasion of Ukraine as the price of natural gas has skyrocketed. However, exchange rates have returned to 2018 levels as the price of natural gas has fallen again. The accompanying spike in inflation reversed and the ECB’s monetary policy began to ease. Finally, the post-pandemic realignment of global demand away from manufactured goods and towards services has also been unfavorable for the German economy. But even this is set in reverse.

The IMF adds that fears about the longer-term future of German industry are exaggerated. Yes, energy-intensive industries have shrunk, but they only account for 4 percent of the economy. In contrast, car production grew by 11 percent in 2023, while exports of electric cars grew by 60 percent. Moreover, he adds, “the value added of manufacturing has remained stable even as industrial production has declined.”

German growth is expected to be just 0.2 percent in 2024, according to Consensus Forecasts in July. However, next year it is expected to reach 1.1 percent. But if this is to be the new normal, it’s rather pathetic. The big problem is these long-term trends rather than recent shocks. The German economy suffers from five unfavorable trends.

First, growth in the German labor force (people aged 15-64) is forecast to decline by 0.66 percentage points between 2025 and 2029 compared to growth between 2019 and 2023. This is the largest such decline in the G7. Second, the share of gross public investment in GDP, at 2.5 percent between 2018 and 2022, was the lowest among major high-income countries with the exception of Spain. It was even below the UK’s rather poor 3 percent. Third, German GDP per capita (at purchasing power parity) fell from 89 percent of the US level in 2017 to 80 percent in 2023. This was the largest relative decline of any G7 member over this period. Fourth, Germany continues to play an insignificant role in the digital economy. As it is the largest European economy, it is also important for the EU as a whole. Finally, the world is moving into an era of fragmentation. This will be particularly significant for Germany’s relatively trade-dependent economy.

These are significant headwinds that need to be considered and addressed. But none of them are particularly surprising. Open immigration, cutting red tape and creating a single European market with a dynamic and integrated capital markets union are all part of the answer.

But there is another feature that is almost never seen as a problem in “respectable circles” in Germany or elsewhere: its huge structural savings surpluses, which of course financed its huge current account surpluses. Many German economists see them as proof of Germany’s international competitiveness and insist that everyone else, especially in the eurozone, should follow suit. That’s bullshit.

The first reason is that everyone else cannot follow his example. Globally, savings and investment must match. So if one economy saves much more than it invests, others must do the exact opposite. This is then reflected in its accumulation of financial claims against deficit countries, mainly as debt.

This German hostility to debt is folly, or worse, hypocrisy. Its surpluses must be balanced by the deficits and debts of others. Moreover, calls for eurozone members to reduce their fiscal deficits will only work well if the eurozone current account goes further into surplus, or if private sectors in other eurozone member states (such as France) are forced into deficit. The danger is that such adjustments will be seen as a “beggar my neighbor” recession caused by Germany. This happened to the Eurozone with near-fatal fury in 2010. It must not happen again, especially given today’s febrile politics.

The second reason is that there is a simple home solution. Germany should use more of its excess savings at home. The obvious way to do this is to increase its ultra-low level of public investment by letting the German government, one of the most creditworthy in the world, borrow from the people it trusts the most, the German public, in order to invest. more at home.

An excellent chapter on “Public Investment in Germany” in a recent book on European public investment states that net public investment has been close to zero since the beginning of this century. The ratio of public capital to GDP is thus permanently decreasing. It makes no sense that a country with such huge excess savings in its private sector should not use it at home, generating both the stronger supply side and the demand that Germany and the Eurozone will need.

Germany’s short-term problems will pass. Its long-term ones are more demanding. However, his reluctance to finance the necessary public investments at home is most unnecessary. The time has come to abolish the absurd “debt brake” in the Constitution.

martin.wolf@ft.com

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