The diagnosis is clear-cut, unequivocal and perhaps a bit alarmist? On February 14, the German Minister of Economy, Robert Habeck, made an unusual confession during a debate organized on the occasion of the Central German Craft Fair in Leipzig. Facing the Minister-President of Saxony, Michael Kretschmer, the environmentalist declared that the country’s economy was in a “dramatically bad” situation.
The leading European power indeed ended the year exhausted. In 2023, its GDP fell by 0.3%, while that of France increased by 0.9%. But has Germany really become the “sick man of Europe” again? In an interview with L’Express, economist Monika Schnitzer, president of the German Council of Economic Experts, sets things straight and analyzes the causes of the current decline of her country, while qualifying Robert Habeck’s comments.
L’Express: two weeks ago, Robert Habeck declared that Germany’s economic situation was dramatic. Do you share this observation?
Monika Schnitzer: In 2023, our economy contracted by 0.3%, while we expect very little growth this year. We are clearly at the back of the pack compared to the rest of Europe. The situation is not good. On the other hand, it is not a crisis comparable to those of the financial crisis or the pandemic. In this sense, it appears more pessimistic than it appears.
It is not common to hear this kind of statement. When we said during the pandemic that the situation was dramatic, there was a clear reason for doing so. With the energy crisis that began with the war in Ukraine, there was also a clear argument to support this view. The current period is really not comparable. I don’t want to interpret Robert Habeck’s words, but I think one explanation could be that he wanted to create a sense of urgency and show that we need to get our act together. This is certainly true for the government and for the coalition partners who must work together on this subject.
What are the causes of this bad situation?
Some effects are still due to the pandemic. The hotel and catering sector is still struggling. Retail continues to struggle and this could reflect a structural shift as consumers increasingly shop online. Households are gloomy. Real income has fallen due to inflation, but is recovering. Yet Germans are reluctant to spend.
Furthermore, energy prices have fallen significantly, but they remain high and will remain so. The rise in interest rates has severely penalized the building industry. We’re seeing a pretty significant drop in housing construction here. Of course, this was the objective of the European Central Bank in raising rates: to reduce demand in order to lower prices. But certain sectors, such as construction, are more affected than others and are experiencing a significant slowdown in their activity. And as if that were not enough, geopolitical tensions are intensifying and creating great uncertainty. Finally, exports to China are no longer what they used to be.
Is the German model in danger?
At present, we are still one of the top three or four powers in the world. So this is a situation where we can still rely on a robust economy. At the same time, a number of our business sectors are undergoing profound changes. The automotive sector is facing the transition to electromobility. The chemical industry is particularly affected by high energy prices and must reduce certain energy-intensive production, such as ammonia.
In addition, on the demographic side, baby boomers will soon retire, which increases the labor shortage. This requires finding solutions by increasing immigration and automation, while improving the reallocation of those from jobs where they are no longer useful to positions where they are needed. This is something we need to work on to continue to be a high-performing economy.
Is the government open to increased immigration and an emphasis on automation?
Part of the legislation has been amended to facilitate the immigration of people from countries outside the European Union. But we still need to streamline the procedures to attract people, give them visas, verify their diplomas. The government is aware of the need for this administrative upgrade, but this change seems to be taking longer than we would like.
In terms of automation, the use of artificial intelligence is clearly a major turning point. The problem is that public administration is already far behind other countries when it comes to digitalization. Moreover, this is also the case for many small and medium-sized businesses. They have not taken the digital shift like in other European states, even though this would considerably increase their productivity. The question now is whether they will use AI tools. There is still a way to go.
Why don’t these companies take advantage of these tools?
Most likely for the same reason they haven’t used digitalization until now. On the one hand, they worry about the security of their data. On the other hand, they don’t see the urgency. Until now, it was enough to build perfect machines that could be sold all over the world in order to be successful and make a lot of money. German businessmen and politicians never thought it was necessary to have German or European platforms like Google and Amazon. Unfortunately, today this is clearly a liability, because these large platforms have the resources, data and computing capacity to make enormous progress in AI.
Apart from the automobile or manufacturing industry, in which sectors could Germany establish itself in the near future?
I think the pharmaceutical industry has enormous potential. We have a hugely successful company, BioNTech, which produced one of the first mRNA vaccines. This type of technology has enormous potential. She is currently working on developing a cure for cancer using this technology. Here again, AI can be a real game-changer, because it makes it much quicker to find treatments that actually work. It also helps to understand how old drugs can be used for new purposes.
If we want to encourage this industry, we need to think about how we enforce our data protection rules, as this holds back businesses, for example in clinical trials. The fact that we interpret European legislation much more restrictively than other countries is a great disadvantage for German companies.
Does Germany now have the means to get out of this situation?
German companies have shown in the past that they can adapt and emerge stronger from crises. Even today, we have companies that make significant profits and have sufficient funds to invest. It is not a lack of private funding that is stopping us from moving forward. For the German government, the situation is a little more delicate. We are hugely behind in infrastructure investment. We also need to spend more on military defense. Over the past thirty years, our investments in defense have been insufficient.
So we need to reconsider how we spend our money, while hoping that these investments will also stimulate the economy. However, the debt brake (Editor’s note: rule which has limited the annual budget deficit to 0.35% of GDP since 2016) leaves the government with very little room to invest. As a Council of Economic Experts, we have made some suggestions on how to change these regulations. To be clear, it is essential to have such a tool. But in its current form, we think it is too strict.
Would it be difficult to change this rule?
A two-thirds majority is required to adopt such a change. For the moment, it does not appear that the coalition partners and the opposition are in agreement on the subject. But we think it would be a very good idea.
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