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Germany Risks Letting a Good Crisis Go to Waste

Europe’s locomotive is turning into a drag. Germany, the European Union’s largest economy and its traditional growth engine, is headed towards a contraction this year. The country’s top economic institutes see output shrinking by 0.6% in 2023, before a slight rebound next year to 1.3%. The slump has immediate causes that also affect the rest of the EU. But it is also throwing a stark light on decades of domestic under-investment, both public and private. Berlin can’t afford not to tackle the problem.

Selling goods abroad, for so long the country’s key growth driver, has turned into a weakness. Exports account for more than half of Germany’s GDP, compared to just a third in France and 37% in Italy, according to the World Bank. But an unexpected slowdown in China – a major trading partner – and sluggish European growth have reduced foreign demand for German cars, washing machines and other goods.

The latest data on industrial production show a year-on-year slump of 1.8% in July, worse than the average 1.1% fall in the EU and in contrast to small upticks in France and Spain. German industry has adapted quickly to higher energy prices – although the hit was severe on energy-intensive sectors such as chemicals and aluminium – and yet the shock could end up shrinking the country’s potential output by 1.25%, according to a recent paper by the International Monetary Fund. A hit of that size would wipe out most of the country’s estimated growth for 2024.

Source : Reuters

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