Is Germany the ‘sick man of Europe’ again?

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Happy Hump Day and welcome to the 44th edition of Weekly Olio - your weekly dose of giggles, wisdom, and a sprinkle of intrigue with our tantalizing thought piece (yes, we're talking about Publisher's Parmesan here). 🤭

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Today’s Publisher’s Parmesan talks about the German economy and the challenges it currently faces.

For context, Germany is expecting tough years ahead with diminishing prosperity, a shrinking middle class and growing inequality. This is uncharted territory for the government and society, and both are facing some difficult choices.

Exciting, right? 👏

Will come to that, but let’s first start with the curation.

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Publisher’s Parmesan 🧀

Is Germany the ‘sick man of Europe’ again?

The International Monetary Fund forecasts the German economy will shrink in 2023, which would make it the only G7 economy to contract this year. While Germany fell into recession in the first quarter of 2023, there are major differences between the country now and its last stint as Europe’s “sick man”.

Germany has been dubbed “the sick man of Europe” in recent weeks, but some economists question if the label is fair for Europe’s largest economy.

The term "sick man of Europe" was first used in 1998 to describe the challenges faced by Germany's economy after reunification. Today, the International Monetary Fund predicts that the German economy will contract in 2023, making it the only G7 economy to do so this year. As a result, the term "sick man of Europe" has resurfaced in various media outlets.

But does Europe’s biggest economy deserve the title?

Germany's economic performance has been impressive with high levels of employment and numerous job vacancies. It is considered as one of the leading economies globally, and is no longer deserving of the label 'the sick man of Europe'. Some economists have made this argument in defence of Germany's economic state.

In order to gain a better understanding of the current issue, it's important to note that while Germany faced a recession in the first quarter of 2023, there are significant differences between the country's current situation and its previous label as Europe's "sick man". These differences include external geopolitical pressures and a global economic slowdown.

Two distinct issues weigh on Germany's economy: short-term cyclical problems, largely due to the global economic climate, and long-term structural challenges caused by Germany's own issues.

Short-term cyclical issues

One big difference between Germany’s economy now and its situation in the 1990s and early 2000s is the cyclical headwinds it’s currently tackling.

The COVID-19 reopening earlier this year failed to deliver the expected economic recovery, which is now impacting manufacturing countries globally. Meanwhile, rising energy prices and interest rates are also contributing to the problem.

Germany’s exports, for example, are predominantly in sectors that rise and fall with the wider economy, such as cars, machinery, tools and chemicals, while other countries, such as France, are much more dependent on services exports, which are thriving in a post-pandemic world.

Germany is struggling because the export machine is stumbling. It is a different sickness, compared to 20 years ago.

For the first time in decades, Germany reported a foreign trade deficit of 1 Bn euros ($1.03 Bn) for May 2022, marking a shift from its trade surplus to importing more than it exports.

While Germany has since returned to a trade surplus, totalling 18.7 Bn euros in June, exports are still sluggish. The value of goods exported to other countries in June increased just 0.1% from the previous month and was down 1.9% compared to June 2022.

Long-term structural issues

Working alongside those cyclical headwinds are longer-term, structural problems in the German economy that need to be resolved in order for the country to get rid of its “sick man” image.

Germany's economic growth has been underwhelming due to various factors such as high corporate taxes, bureaucratic hurdles, slow approval procedures, insufficient investment in infrastructure, expensive electricity rates, and subpar education. To revive its economy, Germany needs a comprehensive reform package that addresses these issues and sets forth policies to lower corporate taxes, streamline bureaucratic processes, speed up approval procedures, boost infrastructure investment, promote competitive electricity prices, and improve the quality of education.

Pension problems

The number of hours worked in Germany has been declining since 1991, and some forecasts suggest they will continue to drop next year, which could weigh on the country’s growth potential.

The problem is the growing number of people relying on the pension system due to its legacy. Germany has the largest ageing population in Europe, with a growing percentage of Germans in retirement, putting strain on an already buckling pension system.

Reform, which entails the crucial measure of extending the retirement age, is undeniably imperative in the present circumstances. This pressing issue, although currently overlooked, demands immediate attention and resolution - the sooner we tackle it, the more advantageous it will be for all parties involved.

Energy obstacles

Like most of Europe, Germany’s energy prices have been volatile following Russia’s full-scale invasion of Ukraine. But energy is also a longer-term issue for the country as it tries to implement its Energy Efficiency Strategy 2050, which includes slashing its primary energy use by 2030.

But the move toward more sustainable energy generation is not necessarily a one-way, or cheap, journey. For example, Germany closed its last three nuclear power plants in April, as the country looked to minimize the risk of nuclear accidents, but many climate scientists saw the move as a step in the wrong direction.

Meanwhile, there are fears that high energy costs are prompting German companies to consider leaving the country altogether.

Germany is ‘average’

With so many factors contributing to Germany’s “sick man” reputation, the country may struggle to shake off the image for some time.

Germany is no longer top of the pile in terms of the European growth rate, it is no longer the powerhouse. It’s average.

Germany might be the sick man of Europe, but a couple of sicknesses clearly have also hit other European economies. So it is not that this is an isolated case. However, Germany is probably only the most prominent and the most exposed one.

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Disclaimer: The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group or individual.