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To start the year, economic problems have compounded and crippled the German economy. Experts predict that the coming year for Germany might still experience slower growth, as it has been facing economic turmoil since the pandemic. A major cause that has worsened the economic situation in Germany is the energy crisis that started after Russia’s invasion of Ukraine. Though, structural, long term issues that persist in Germany have also contributed to the economic slowdown. This essay seeks to discuss the causes and possible impacts of the faltering German economy.
A key cause that has affected Germany over the years is the energy crisis. Germany has long been termed the “manufacturing powerhouse” of the world, but the energy-intensive industries in Germany have taken a hit when Germany could no longer import cheap Russian natural gas. Several companies require energy to keep metal and glass red hot 24 hours, to produce glass and metal coatings found in buildings and cars. With the energy crisis, Germany has had to scramble to look for alternative sources, as countries across the world boycott purchases of Russian oil and gas and sanctions were imposed on said oil and gas. The answer for that has been to transition to more renewable energy sources, and to do that, Germany has had to import a lot of raw materials from China, like Lithium and Aluminum. Such materials are important for the production of solar panels. Hence, the inability to obtain affordable Russian natural gas since the start of the Russian-Ukraine conflict has limited Germany’s growth.
Though, blame cannot be fully attributed to these external factors, as Germany has had structural issues that were yet to be exposed prior to these external circumstances. Notably, the under-equipped digital infrastructure in Government and Business and extensive bureaucracy are some of the underlying issues within Germany’s economy. Extensive bureaucracy has been an issue as it has led to slow approval processes for key projects, leading to a delayed transition to clean energy, and also a loss of other vital beneficial economic projects. For instance, Evonik, a german-based firm, decided to open a production facility for lipids for COVID-19 vaccines in Indiana, due to the eagerness by the United States to approve the project and provide subsidies. German officials, on the other hand, were more disinterested in doing so. Around the world, countries are all racing to provide subsidies to attract the highest quality future technologies, and Germany is certainly lagging behind its competitors. If it continues to do so, it will struggle in attracting valuable investments to boost its economy.
Next, another structural problem that bothers Germany is the ageing population. According to the Ageing Working Group of the European Union, Germany is projected to spend 12.5% of their GDP on public pensions by 2050, above the OECD average of 10%. As its population rapidly ages, the size of its workforce will gradually shrink. Without immigration or more women or elderly in the workforce, by 2045, Germany would have lost 7 million out of its 45 million workers. When that happens, Germany would likely have to rely on digital technologies and automation to compensate for the reduced labour. However, Germany has its struggles on this end as well, as only about 49% of the German population have basic or above basic digital skills (according to Eurostat data). The OECD average on the other hand, stands at 53.92%. As such, even as Germany seeks to automate its industries, it will face challenges as well, and it will struggle to keep up with the rest of the world.
To resolve such economic turmoil, the German government is going to have to centre policies around developing the digital infrastructure, the digital economy, through subsidies and grants, that would signal to firms that Germany is a country genuinely committed to furthering digitalisation. That way, firms will be more enthusiastic in developing the digital ecosystem in Germany. With digitalisation, and a buzzing technology network, they could work towards resolving some of its structural problems like its ageing society. Growth in the technological sector could reap benefits such as more automation, which would reduce the need for manpower, especially in a country that is already lacking in high-skilled labour. Apart from that, Germany also has to further efforts to cut down bureaucracy and red tape in a bid to attract more projects and kickstart these projects to help boost its economy.
Though, Germany still has to resolve one of its biggest challenges, the budget crisis. With a “debt brake”, where they only borrow about 0.35% of its GDP, Germany might struggle in trying to implement subsidies and grants to attract investments and projects for clean energy in Germany. It will also hinder its ability to digitalise its government services. At the same time, it is still burdened by aid to Ukraine, which Chancellor Olaf Scholz has insisted will not be reduced. Instead, if needed, they might have to expand aid for Ukraine if the crisis worsens.
Now, as Germany’s economy falters, how will that impact Germans?
Politically, Germans are growing more and more discontented towards the government. Chancellor Olaf Scholz, lost 13% of his popularity in comparison to 2022. The coalition led by Olaf Scholz has also lost popularity, and the biggest winners right now seem to be the far-right opposition parties, which is currently polling at 20%. Socially, the economic struggles, high inflation, have led to workers undergoing strikes, demanding higher wages to tide over this period of time. To start the year, farmers with tractors, railway workers and doctors are all organising strikes that would threaten to disrupt services across Germany. Overall, if Germany does not implement changes to its economy, and such economic slowdown persist, the current government might continue to lose popularity and protests could remain.
In conclusion, many challenges threaten Germany’s economy in 2024, as it is predicted to be one of the few major economies to undergo a slowdown. External factors continue to challenge Germany and structural issues also continue to bother Germany and worsen its economic position. Overall, this could have a detrimental effect towards the confidence the Germans have with the current regime, and it could lead to further strikes and protests as people face more economic hardship.
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