Before the turn of the millennium, the Economist magazine predicted that Germany was on its way to becoming “the sick man of Europe”.
The British magazine described it as such due to its lack of competitiveness and high unemployment rates.
However, this ruling was a wake-up call for the political circles in the country and sounded the alarm about the future of the German economy, with the slowdown in reforms after the economically wonderful years following the union.
In light of the warnings, the government of former Chancellor Gerhard Schroeder at the time began a fundamental reform process in the labor market, which yielded good results.
A group of British and German economists concluded in 2014 that Germany had transformed “from a sick man in Europe to a hero and an economic star”.
Currently, the German economy is suffering from the same crisis, as over the past six months economic expectations have decreased, which means that the German economy is on the brink of a technical downturn.
During the last quarter, Germany’s GDP stagnated unchanged from the previous quarter, while all leading economic indicators show a decline in economic growth.
According to the head of the (Ifo) Institute for Economic Research in Munich, Clemens Fuest, said that the German economic situation is getting darker.
The Munich based, Institute for Economic Research, conducts a monthly opinion poll, including a poll of about 9,000 executives about the current state of their business activity, as well as their expectations for the next six months.
The institute’s business climate index fell last July for the third month in a row.
The institute’s experts expect Germany’s gross domestic product to decline again during the current quarter.
“Unfortunately, there is no improvement in sight,” warned Jürg Kremer, chief economist at Commerzbank, adding, “Increases in interest rates worldwide have also cast a shadow, especially since German companies are suffering from an unstable situation due to the erosion of the quality of their sites”.
The International Monetary Fund has stated that Germany’s performance is exceptionally weak in the case of comparison with other industrialized countries, which means that Germany will be the only large country with a shrinking economy amid growing concern about the German industrial sector, which is the locomotive of the country’s economy, which was evident in the slogan Made in Germany”.
In numbers, this sector represents a relatively large part (24%) of Germany’s gross value added.
However, it’s still suffering from the global economic recession, while the machinery and automotive sectors, which depend heavily on exports, are feeling the effects of declining foreign customers.
German companies in manufacturing sector are still trying to save themselves thanks to the backlog of orders during the Covid-19 pandemic due to the supply chain crisis, but if these orders fulfilled, it will decline.
It’s reported that during the period from March to May this year, purchase orders decreased by more than 6% from the previous three months.
As a result, economists attributed the crisis in Europe’s largest economy to several reasons, most notably the monetary policy of central banks.
The US Federal Reserve and the European Central Bank want to rein in inflation through large interest rate hikes.
This increases the cost of loans for businesses and consumers, which in turn inhibits Germany’s important and vital construction sector.
In addition, to weakening companies’ desire to pump new investments, which portends the phenomenon of “disabled economic dynamism”, which is the primary goal of increasing interest rates.
In contrast, other countries in the Eurozone such as France or Spain have coped well with the crisis, as Maurits Schularik, the new head of the Kiel Institute for the World Economy, points out that all of Germany’s European neighbors have higher economic momentum.
This highlights that structural problems impede the progress of the German economy, as the country’s economic model relied on importing cheap energy sources from Russia largely as well as cheap raw materials and semi-finished goods, so that they could be processed and exported as high-value and expensive goods.
However, this model was not always successful, as the successive crises in recent years revealed its weaknesses, as industries that consume energy voraciously suffer from a high-energy bill, in addition to the fact that companies that moved their production sites outside Germany didn’t decide to return again.
A recent study by DZ Bank concluded that small and medium-sized businesses, which are the “backbone of the German economy, are now at risk”.
The study pointed to other problems suffered by German companies that go beyond the problem of high energy prices, on top of which is the shortage of skilled workers, excessive bureaucracy, high taxes, faltering infrastructure, slow digitization and high rates of aging in the country.
In turn, Peter Adrian, President of the Federation of German Chambers of Commerce and Industry, said that large sectors of the German economy suffer from a lack of confidence that pumping large investments into Germany will be feasible in light of the high costs.
Economist Moritz Schularik, head of the Kiel Institute for the World Economy, presented solutions to the crisis in an article published on the institute’s website, in which he said, “If Germany wants to keep the ghost of (the sick man of Europe) away from it again, then must now turn its attention to future growth sector, instead of spending monstrously billions to maintain the energy-intensive industries of yesterday”.
He added that Germany must quickly address its shortcomings, most notably – in his words – “unjustified backwardness in all aspects of digitization, apparent weakness in state capacity and public infrastructure, and the lack of a meaningful strategy to confront the housing shortage crisis… Immigration must be increased to overcome the crisis of aging worker powers”.