It’s a symbol of Germany’s economic might. The chemicals factory of BASF in the city of
Ludwigshafen. BASF helped spread Germany’s industrial power around the world.
Now, it's axing 2600 jobs here. All the while, it’s opening a new 10-billion-dollar factory... in
China. Germany has long been known as Europe’s
economic powerhouse. But this year, it’s the world’s worst performing leading economy.
German economic growth is down, its factories are less productive, and hope for its future
success is waning. As Germany’s economic outlook shifts from
grand to gloomy, the model behind its rise is thrown into doubt.
Why should you change a winning team? The success of really the last 20 years probably
has made a couple of people, you know, a bit blind, a bit insensitive to how the global
economy has changed. If left untreated, Germany’s economic
pain risks spreading to an entire region. It's really the European Union where most
of the trade for Germany takes place. Exporting and importing at the same time. So if Germany's
economy is not doing that well, that is also experienced by the other countries.
In this episode, we will analyze the rise and potential fall of Europe’s biggest economy.
The situation overall is not great. The German economy is shrinking, and companies are
telling us, yes, they expect a certain stabilization, but overall,
most companies arerem pessimistic.
We will look under the hood of Germany’s economic success.
What is the German recipe for success so far? That was to produce technologically
advanced products that are in high demand all over the world.
We will assess the gravity of its problems. We can’t be naïve. We are experiencing a cyclical
downturn, but we also have structural problems that we are working on.
And we will ask ‘Is Germany’s economic success model doomed?’
That’s all coming up on Business Beyond. To understand Germany’s problems today,
we have to dissect what made the country so successful in the first place.
During the 1990s, Germany’s economy was struggling.
Reunification merged a successful capitalist economy with a low-income socialist planned
economy. Absorbing the East meant West Germany had to dish out big social security
payments. The consequences strained Germany’s budget and its job market.
20 years ago, early 2000, the late 1990s, sick man of Europe, we had actually only one big
problem in Germany and there was or maybe two, and it was the aftermath of the
reunification and we had surging unemployment
To turn the country’s economic woes around, the center left government of Gerhard
Schröder introduced reforms that greased the wheels of the job market: they cut
employment benefits and created more temporary and low paying jobs.
The first thing is it really led to labor market reforms that lowered wages or made people
more willing to accept jobs at wages that they would have otherwise not considered.
More people working in lower wage jobs meant labor became cheaper. So German
companies were able to manufacture and sell goods at a better price. At the same time,
other parts of the world started buying more stuff.
When you look back over the last 20 years. We had China joining the global economy. We
had also Eastern European economies joining the European Union. We had many
emerging economies clearly catching up with the developed world. So all these factors
together were creating a huge demand for manufacturing goods.
Roadmarking machinery, custom made tunnel drills, printing machines for stage designs and
specialized endoscopy devices. Made in Germany was synonymous with
precision and quality. The country went from laggard to leader. It inspired literature. And
flashy economic papers. It even won the world cup.
What is the German recipe for success so far? That was to produce technologically advanced
products that are in high demand all over the world.
It’s fastest growing buyer? China. The country’s emergence as a market economy
in the 2000s played into the hands of German engineers. German
exports to the country surged. That was a completely new market
and it was a huge market and it was really very profitable to go there and sell our products.
Thanks to Beijing’s boom, Germany became the world’s third biggest exporter.
But, since then, the sunny outlook has become cloudy.
As long as things go fine, it’s like: Okay, big party. But at the moment, the world economy
hits a bit of a bump in the road. Like now, the German economy suffers immediately.
The world bank says the global economy is perilously close to falling into a recession. The
war in Ukraine and the continuing effects of the pandemic mean it has significantly
downgraded its expectations for this year. Germany’s economic model made it extremely
dependent on appetite for German products around the world. And, right now,
that appetite is waning. Particularly in one of its most important markets.
After peaking in 2020, the share of Germany's exports to China has been on a steady
decline. Remember BASF,
the German chemical giant? They recorded a 76% profit loss in the
second quarter of 2023. The main reason? Lagging demand from China. And BASF is no
outlier. So if something goes wrong in China,
it immediately means the demand for, say, German cars is falling. But the demand for German
engineering machine tools, you know, Siemens type big engineering projects is falling as well.
On the one hand, Germany is a giant exporter of consumer goods. So products that are
ready to use like cars and medicine. On the other hand, the German economy also
depends on selling capital goods, so products that are used to produce other things.
And so the Germans export fewer consumer goods to China, fewer capital goods to China,
and fewer capital goods to countries that export consumer goods to China. So, it's
basically once you have a tailspin in Germany, it hits three times where in other
economies it would just be the exports in the narrower sense, the consumer goods that
would be hit. The global demand driving Germany’s success
is dampening. But that’s not the only problem.
Remember the energy crisis in Europe? It really turned Germany’s industry on its head.
Let’s go back to the BASF plant in Ludwigshafen. On any given day,
the plant uses more power than Switzerland. Factories like these make Germany’s industry much
more energy intensive than that of its neighbors.
That wasn’t much of a problem when Russia provided cheap gas to the country. But, with
the Russian invasion of Ukraine, Germany’s era of affordable energy ended. And so did
momentum for G erman manufacturing. During the second quarter of 2022, sky-high
natural gas prices jolted BASF’s energy bill up by more than 700 million Euros.
So at the moment we are paying the price of a delayed energy transition. We were too
heavily dependent, especially on Russian gas. And this is why now we see fossil energy
inflation. And with this also a stagnation of the German economy at the moment
BASF was forced to shut down its most energy-intensive production lines.
Some 700 jobs will be affected. All the while, its expansion plans for China remain intact.
Up until about a year ago, I think people would incorrectly say that businesses care about
two things only when they decide on where to locate, and that is taxes and wages. And
then since the year ago, they would say it's taxes and wages and energy.
Germany has now made it out of last year’s energy crisis. And prices have been falling. But
in some areas, lasting economic damage might have been done.
So, yes, energy prices have come down again since the surge last year. And in the first
week after the start of the war in Ukraine. But energy prices are still higher than pre pandemic.
Plus, the future of energy supply and the future of energy prices is highly
uncertain. And this explains why. You know, and I guess, you know, it's understandable
why businesses, corporates are also looking elsewhere to see, okay, is there another
region that might offer more stability, more clarity, more energy security than Germany
currently can? Rising energy prices and falling orders
have hurt Germany’s gas-guzzling industry. It's producing less of the things that made it rich.
And that’s making a country known for its efficiency lose momentum. Right now, Germans
work fewer hours, so are less productive, than employees in other industrial nations.
We are in the process of deindustrialisation because production is falling and I don't see it
easily coming back. If demand OUTSIDE Germany is falling – economic
engines INSIDE the economy become more important. Like how much people buy.
But here’s the issue: They aren’t buying enough.
The problem in Germany has been that private consumption has systematically been to
too low. Relatively low wages helped jumpstart
Germany’s export machine 20 years ago. Now, they are making matters worse.
Wages cannot rise much more, wages don't rise much more. Um, so, so the effect is that
private demand doesn't grow much in Germany, which means that the German economy
is even more dependent on exports than it would otherwise have been. So wages have to
be kept under control because it depends on exports. So domestic demand falls, export,
you know, become even more important as a proportion.
According to a study by the Knowledge from Growth Institute, Germans’ wage expectations
this September were the lowest they have been since the beginning of the survey in 1991.
But its not just low incomes suppressing consumption. Germans’ wallets are also under
stress from rampant inflation and high energy prices.
With low demand insi de the country, the export sector will likely remain Germany’s biggest
economic engine. But, when it comes to the goods its sells, analysts believe that Germany
has been betting on the same horse for too long. All the while, the racetrack has changed.
I think we only just have to ask ourselves, what is it that we're mainly purchasing on a
daily basis. Is it an app or is it really a good. And I think most people will answer: Well,
indeed it is an app. It is music, it is a movie, but it is not kind of a tangible manufactured
good. And this is where the German economy
is not that strong. And this is also where the German industry is hit the most.
As Germany’s traditional export industry declines, the question is what big new thing will
replace it. So far there’s no clear answer. Except for software maker SAP, Germany’s tech
sector is essentially non-existent. And that’s no coincidence.
The German government has been frugal concerning its future. For the past two decades,
it has invested significantly less into its economy than its European neighbors.
I think, you know, we've done well. And when we do well, we just, you know, think that
we have everything we need. Marianne Janik is the CEO of Microsoft in Germany.
Berlin’s prudence is linked to a cultural dislike for public debt here in Germany. A relic of the
hyperinflation that gripped the country during the Weimar Republic.
Fiscal policy in Germany is, you know, to put it mildly, is repressive. Right. I mean, they
you talk about the black zero, the Schwarzer null, but a zero means nothing in fiscal policy.
It's not good to have a zero because it means essentially that you're not investing in the
future. Right. It's like you have to think of your economy as a house that you buy over 30
years or longer, not as a household that has to meet sort of weekly or monthly budget
constraints. That's not how you do it.
One crucial sector that has been underfunded is IT. Only a third of all German households
have very high-speed internet connection. And the country’s workforce is less digitally savvy
than that of many other European countries. We shouldn’t be defeatist, but we also shouldn’t
be naive. We have to change things. We have a big transformation
of our economy ahead of us. That’s Christian Lindner, Germany’s finance
minister. His government recently approved further budget cuts for investments in
digitalization. Germany being the
country where you just think about efficiency, about cost reduction.
And this also, you know, doesn't help when you have to evolve. You have to invest, of
course, in those digital infrastructures. So we've done a little bit too well maybe.
Digitalization is one of Germany’s keys to more economic growth. But, at the moment, 40%
of Germany’s small and medium-sized businesses can’t find employees with necessary
digital expertise. For one, the country’s society is ageing, so
there aren’t enough workers to fill vacancies. But it’s also because those who CAN
work don’t have the right training. Because of the crisis, we are seeing growing
interest in training for digital professions. Dalia Das founded an IT bootcamp in Hamburg.
Retraining schools like this one are becoming more common. They offer
to bring employees up to speed. Germany is lagging behind in the digital
realm. If we don’t manage to include all social groups and make them more digitally savvy,
we are going to have problems. To bring its economy on a future-fit path,
Germany now plans to double its funding for AI and create new university labs for research. But
for progress in these highly advanced technologies, Germany will first need
to mend the craters in its digital foundation. There's a lot of research going on in Germany,
the entire IT sector. We are not very good at it so far, but there's
a lot of potential for development Germany’s traditional export market is waning,
and its tech sector is weak. So, experts say it’s important to explore new areas of growth.
We have to see there are huge opportunities out there in many sectors and how can we
be successful in developing them? I think it's mostly based on our ability to be innovative,
to research. Innovation begets economic growth.
But it’s not an area Germany performs well in. A 2023 study placed it 10th worldwide. Behind
countries like Singapore, Switzerland and Denmark.
But lack of innovation isn’t coming from a lack of ideas. Germany registers more patents in
Europe than any other European country. The issue is turning those ideas into GERMAN
businesses. The first hurdle is made up of paper. Lots of it.
Germany is infamous for its bureaucracy. It takes more than 120 days to start a new
company in Germany, compared to just 40 in Italy or Greece.
And construction permits take more than 50% longer than the average for industrialized
countries. The second hurdle, also paper.
Let's look at Marvel Fusion for example. The Munich deep tech start-up wants to produce
zero-carbon energy with atomic fusion. It’s thriving and expanding massively. It recently
announced the construction of its first lab worth 150 million dollars – in the United States.
This is Heike Freund, the COO of Marvel Fusion If I compare the European ecosystem to the
US ecosystem, especially when it comes to investments, more than 90% of all the investments
globally have been done in the US and not in Europe,
in the private fusion company space. Giant funding like the one Mar vel
Fusion needed is still hard to come by in Germany. Meaning many ideas get stopped in their tracks.
I believe we have amazing human capital here. We have great talent here, we have a
great industrial ecosystem here. So, Germany would have all the pieces here to develop
the next tech champions. But with that missing funding gap, it's close to impossible to
commercialize those innovations at the end in Europe.
At the beginning of this video, we asked whether Germany’s economic success model is
broken. The experts we spoke to painted a picture of a country whose prosperity is
threatened. Not only by short-term problems but also by structural issues. *Aside* Even
Germany’s finance minister admits to that.
Subtitles: We shouldn’t be naïve. We are experiencing a cyclical downturn, but we also
have structural problems that we are working on. Talent, energy, infrastructure,
digitalization... Ample trade, cheap energy and strong
industry fueled Germany’s boom times. They lulled leaders into a false sense of security. Their
failure to pursue reforms is now coming back to bite.
It doesn’t make sense to keep things as they are. Everything changes, so we have to
change as well. Now, Germany has to find a new economic
engine. That will entail breaking out of existing patterns.
So in the current situation, it will not be possible to orchestrate a full overhaul of the
German economy and sticking to the fiscal debt brake.
Investing in the future. We should be broad. And politicians
don't need to answer this question: “what are the sectors of the future?” But they have to create
conditions that allow for developments in many areas.
Improving energy supply. The current government has now made
a lot of decisions to increase the share of renewables much faster than in the past.
So a lot of barriers have been removed. There are now windmills installed a little bit faster,
but a lot of solar PVS on the roofs. That is increasing at the moment. So this is
going in the right direction. And boosting a dwindling workforce.
Pay them better and they will come. It’s not a mystery.
At the same time, experts say that Germany’s success as an export power shouldn’t be
buried completely. But it doesn't mean we have to throw
away our comparative advantage. For instance, in trade, I think the German government at the
moment is doing, in that case the right thing. They are saying, let's try and do new trade
agreements with Latin America, with other countries
So you sort of have a have an interesting problem is that the slump in Germany will be
more accentuated because of its industrial structure and its sort of position in the
international division of Labor. But the inverse happens when the world economy picks up
again because then Germany is the first one to benefit.
One thing is certain, the cushy years are coming to an end. What Germany does with that
realization will determine the strength of its economy in the years to come.
And Germany has been sort of the engine of of the European economy. So people worry,
people ask. But on the other hand, you know, I think it's a good thing that that we get a
little bit of attention as well that makes us also reflect a little bit and get this reflection,
this perspective from the outside so that we, as you know, German economy, German
companies, German industry start to reflect a little bit what we want to stand for.
And that’s it from this episode of Business Beyond. If you want to dive deeper into the German
economy, check out our recent video on German carmaker’s troubles in the electric vehicle space.