Details of the devastating economic crisis in the Heart of Europe

When the debt crisis swept the European continent in 2010, the economies of countries such as Spain, Greece and Portugal were on the brink of total collapse, and had Germany not intervened at that time to save them, the economies of Europe might have collapsed entirely.

Germany was, and still is, Europe’s economic engine and its first industrial center, and the rudder that directs the policies of the old continent.

However, Germany today seems to be living in completely different circumstances; it is entering a dark economic tunnel itself, while its economy, the largest in Europe, is on the verge of contraction for the second year in a row, which dashes hopes for an economic recovery based on domestic consumption.

With this bleak scene, the political arena in Germany is facing severe instability, after Chancellor Olaf Scholz dismissed the Finance Minister, which caused the fragile government coalition to collapse, and prompted the ministers of the Liberal Party to withdraw from the government, leaving the country threatened with early elections early next year.

In light of these intertwined crises, hopes of emerging from the crisis seem slim, especially with the political, economic and military complications that are worsening day after day.

Is what is happening the beginning of a path of decline that is difficult to reverse?

Or is Germany able to overcome its crisis as it did under Angela Merkel in the past?

In 1999, The Economist called Germany “the sick man of Europe,” as the country grappled with a severe economic crisis.

When Angela Merkel became chancellor in 2005, Germany was on the brink of a recession that threatened its stability, with five million unemployed and a budget deficit of more than $94 billion, or 3.3% of GDP, well above European standards.

Known for her reserve and shyness, Merkel seemed an unlikely choice to lead bold change, but she took an unconventional approach from the start.

In a bold move, she cut corporate taxes from 25% to 12.5%, even as the economy desperately needed every euro to plug its huge deficit.

It was a gamble on jump-starting the economy by stimulating the private sector and making Germany more attractive to investment, and it proved a winning approach that helped transform the country from a faltering economy into a new European giant.

He knew that the German economy relies heavily on what is known in German as “Mittelstand”, or small and medium-sized enterprises, which are the backbone of the German economy.

In 2015, these companies employed about 61% of the workforce and contributed half of the value of domestic production.

Merkel’s tax cuts, along with other reforms, helped stimulate investment, doubling tax revenues and sharply reducing the budget deficit from $94 billion to just $9 billion in two years.

When the global financial crisis hit in 2008, Germany was able to hold its ground, allocating $500 billion to bail out its banks.

In 2010, as European economies stumbled under debt and the specter of bankruptcy, Germany under Merkel achieved its highest growth rate since reunification after the fall of the Berlin Wall, and even helped some European Union countries avoid bankruptcy, despite criticism Merkel faced in those countries for her conditional austerity policies.

Merkel’s economic policies have yielded tangible achievements in her country, as she was able to reduce the unemployment rate to more than two-thirds and raise the gross domestic product from $2.8 trillion to $3.8 trillion, making Germany the fourth largest economy in the world.

Politically, Merkel has been widely regarded regionally and globally, maintaining a delicate balance in Germany’s relations with both Russia and China, despite her country’s membership in NATO and leadership of the European Union.

It allowed Russia to be a gateway for Germany to supply cheap energy, while turning a blind eye to some of its expansionist policies, in the hope of limiting the Kremlin’s ambitions.

As for China, it has made it a major trading partner, which has resulted in a boom in trade and investment, although it’s often criticized for over-consolidating those relations, which may have contributed to strengthening the Chinese economy and leaking advanced technology to Beijing, in addition to the heavy reliance on Russian energy, the disruption of which has now led to a major crisis.

For many of her fellow citizens, Merkel has been a model of moderation, stability and pragmatism, qualities that have made her policies a safe haven for the country during successive crises.

From the eurozone crisis to the migrant crisis, to the Covid pandemic, Merkel has managed to overcome many of the challenges that threatened her country.

But with her departure, Merkel left Germany facing unprecedented challenges.

In addition to the economic impact of the Covid pandemic and the war in Ukraine, the country is facing the rise of the far right for the first time since World War II, and a fragile coalition government that seems unable to make decisive decisions at home and abroad.

With the changes in the global scene and the return of Donald Trump to the US presidency, Germany and Europe behind it are facing a confusing future and weak political will.

Two decades later, in 2023, The Economist once again described Germany as the “sick man of Europe,” but this time in questionable terms, raising questions about whether Germany can overcome its current challenges as it did under Angela Merkel.

Today, however, the situation is more complex: Germany faces a combination of internal and external crises that are putting severe pressure on its economy and political system.

This year, the largest German economic institutes presented a gloomy report predicting a contraction in the German economy, indicating a radical change in the state of prosperity that the Germans have long enjoyed.

According to some economic reports, the German economy is suffering from a recession that is manifested in crises affecting major industries, especially the automotive and chemical sectors, which are the pillars of the German economy.

The automotive industry is the main source of German exports, contributing 15.4% of total exports in 2022.

However, major car companies such as Volkswagen, Audi, Mercedes and BMW face significant challenges.

For example, Volkswagen, one of the country’s largest employers with 650,000 employees, has reported a backlog of more than 500,000 unsold vehicles.

The company’s CEO has said that Germany is losing its global competitiveness, especially in the face of China, which has become the largest and fastest-growing market for electric cars.

Germany’s exports haven’t only declined in the Chinese market, but China has also made impressive progress, with its car exports rising from less than a million cars before 2020 to 2.5 million cars in 2022, overtaking Germany for the first time in 2023.

This rapid advance of the Chinese industry has hurt German exports, which in 2017 amounted to more than 4 million cars.

Moreover, China has begun to compete with Germany in the European market, which prompted the German car rental company SIXT to order 100,000 cars from the Chinese company BYD.

The crisis isn’t limited to the automotive sector alone; traditional German industries are facing serious threats of contraction or even disappearance.

The chemical industry – one of the main pillars of the German economy – is experiencing increasing difficulties, as the largest chemical complex in Europe, BASF, which is also the largest producer in the world, is no longer as profitable as it used to be.

These challenges have prompted the company to close several factories in Germany, in an attempt to reduce losses resulting from high production costs and the interruption of cheap energy supplies that used to arrive from Russia.

The Ukrainian war has cut off cheap Russian gas supplies, which have been a major support for German industry for decades, putting a significant strain on German industries.

Alternative solutions, such as liquefied natural gas and other energy sources, are burdening the German economy with rising costs, leading to general inflation and higher energy prices.

Germany’s attempt to switch to clean energy and adopt environmentally friendly standards has added another cost, increasing production costs and affecting the competitiveness of German products in global markets.

In addition, the Robert Koch Institute for Studies stated that Germany has been suffering for years from a severe shortage of labor in various sectors of life, and that there are various reasons for this shortage.

Many Germans aren’t convinced by the idea of ​​having children, which has led to an increase in the rate of aging, as one in five people in Germany is over 66 years old, which burdens the budget and threatens the payments of the country’s pension fund, in addition to the emigration of a large number of Germans and settling in other countries such as Spain, Switzerland and the United States.

To address the challenge of labor shortages, Germany has turned to the expertise of refugees who have arrived since 2015, who and their children have helped fill some of the gaps in the labor market.

However, Germany still needs more workers, a need that could be met by immigration, but the growing popularity of the far-right Alternative for Germany (AfD) party is worrying immigrant communities and minorities in the country.

The party’s electoral platform promotes policies aimed at restricting immigration and strengthening traditional national identity, which threatens to increase discrimination and racism.

The results of recent regional elections have shown an unprecedented rise of the far right since the end of World War II, especially in the eastern states suffering from economic and social problems.

This shift in voter inclinations raises questions about the future of democracy and social coexistence in Germany, as well as its impact on immigration and integration policies.

In addition, economists have warned that the growing strength of the far right could exacerbate the skilled labor shortage in the east of the country, prompting companies to move operations outside the region.

The head of the Saxon Trade Union Federation pointed out that right-wing extremism has been on the rise for years, complicating the handling of the labor crisis.

He explained that with around 300,000 workers in Saxony set to retire over the next ten years, the labor gap will widen, requiring reliance on foreign skilled labor, in addition to employing digitalization in other areas to fill the gap.

Germany may face a growing economic challenge in the form of a possible deterioration in its trade relations with Middle Eastern countries, particularly Arab countries, as a result of its pro-occupation stances.

Despite mounting criticism, the German Chancellor has repeatedly affirmed his country’s continued commitment to supplying the occupation with weapons and ammunition, making it the second largest arms supplier to Israel after the United States.

This could threaten the future of economic relations with Arab countries, which are a vital market for German products and projects.

In 2023, the volume of trade exchange between Germany and Arab countries reached about 62 billion Euros, in addition to Arab investments in Germany amounting to 100 billion Euros, which makes these economic relations of strategic importance to both parties.

In the event of launching popular boycott campaigns against German products and companies in Arab countries, this may add new economic burdens to the challenges facing Germany.

In addition to its domestic economic crises, Germany is suffering from external pressures related to the cost of the Ukrainian war and rising security tensions in Europe.

Germany has found itself forced to increase its military spending in line with security threats and to meet NATO’s requirement of 2% of GDP this year.

This decision reinforces Berlin’s fears of a possible decline in the United States’ commitment to the alliance, especially after Donald Trump’s return to power and his previous threats against NATO, as he had threatened to reduce Washington’s support for the alliance if member states did not commit to increasing their defense spending.

These factors put additional pressure on Germany, forcing it to redistribute resources from supporting vital sectors to increasing military spending, at a time when the country is already facing major economic and industrial challenges, deepening the crisis and further complicating the solution path.

Finding a solution to Germany’s current crisis seems complex and faces real difficulties, especially in light of the intertwined internal and external challenges.

Reports indicate that the road to recovery may be very difficult, especially with the political tensions that have begun to plague the political scene within Germany itself, which increases the complexity of economic solutions.

As disagreements escalated within the German coalition government, Chancellor Olaf Scholz dismissed Finance Minister Christian Lindner, in a move that reflects the extent of the divisions in Berlin.

The roots of these disagreements go back to the nature of the unprecedented coalition in the country, which brings together three parties with different orientations: The Social Democratic Party, the Free Democratic Party, and the Green Party.

The division is evident around several main axes, including:

Economic policies: The FDP advocates austerity policies and cuts in government spending to control the deficit, while the SPD and Greens support increased spending on social programs and infrastructure.

This divergence was evident in the dispute over how to finance energy subsidies for households and businesses to cope with the sharp rise in costs resulting from the Russia-Ukraine war, a plan that has been activated several times since the conflict began.

Environmental policies: The Greens are a driving force behind ambitious environmental targets to cut emissions and shift the economy toward renewable energy, but the policy faces opposition from the Free Democratic Party, which fears it will hurt traditional industries and raise production costs.

One of the biggest points of contention this year is the decision to phase out coal-fired cars by 2030, a plan opposed by German carmakers who see it as a threat to their future.

Immigration policy: There is a sharp division over immigration policy, with the SPD and the Greens supporting a more open approach, while the FDP calls for tighter immigration and asylum policies.

These differences have been particularly pronounced in the debate over accepting refugees from conflict zones such as Syria and Ukraine, with the FDP arguing that the influx of refugees could add a burden to the German economy under current circumstances.

One of the issues that has deepened the division within the German government is the debate over the constitutionality of the budget, as the Constitutional Court ruled that excessive reliance on loans, a policy that Germany has been committed to for decades, isn’t permissible.

This issue has put Chancellor Scholz and sacked Finance Minister Lindner in direct confrontation, as Lindner adopts a conservative fiscal policy based on controlling public debt, while Scholz calls for a more flexible policy that allows the use of loans to support the economy in the face of crises.

Germany faces a complex set of challenges that make finding a quick solution difficult.

In addition to internal political disagreements, there are external obstacles such as rising energy costs, the impact of the Ukrainian war, growing Chinese competition in major industries, and the return of Trump, which may herald unpleasant surprises for the entire European continent.