Can Germany Overcome Recession and Regain Its Economic Strength

 

The Need to Improve the Business Environment for SMEs

In recent months, several reports have highlighted Germany's economic struggles, particularly in manufacturing. The country has long relied on high-quality engineering and affordable Russian gas to fuel its industries. However, as the February 23 parliamentary elections approach, much of the political discourse has centered on immigration, despite Germany experiencing two consecutive years of recession.

Friedrich Merz, leader of the Christian Democratic Union (CDU), is expected to win the elections, but he faces significant economic challenges. According to a report by DW, Porsche recently announced plans to cut 1,900 jobs, and ceramics manufacturer Wiesenthal will close a plant by the end of next year. Since the COVID-19 pandemic, Germany has lost around 250,000 manufacturing jobs, as per the Financial Times.

Klaus Wohlrabe, an economist at the Ifo Institute, noted that unemployment in Germany rates have been rising and are expected to exceed three million in the coming months.

What Is Causing Germany’s Recession?

Germany’s economy faces multiple issues, with uncertainty being a primary concern. The country is in a governmental transition, leaving businesses unsure about future economic policies. As a result, companies are postponing investments, and consumers are saving more due to job insecurity.

Even if the new government reassures businesses, global political shifts, particularly the America First policies advocated by former U.S. President Donald Trump, add to the economic uncertainty.

Deeper Issues Beyond Economic Uncertainty

Germany’s industrial production peaked in 2018, long before the COVID-19 crisis, supply chain disruptions, and the European energy crisis. In 2023, industrial output declined by 4.5%. This trend is most evident in core industries like automobiles and machinery, while sectors such as pharmaceuticals, aviation, and shipbuilding continue to perform well.

Structural challenges include excessive regulations, weak public infrastructure, and an aging population. The retirement of the baby boomer generation in the next decade is expected to worsen the skilled labor shortage, potentially leading companies to reconsider local investments.

Why Is Germany No Longer a Global Export Champion?

Germany relies heavily on electricity and gas to power its industries. Previously, it depended on cheap Russian gas, but the Russia-Ukraine war ended this supply, forcing the country to seek alternative energy sources at higher costs.

According to Kunal Husaev from Bruegel, the surge in energy prices stems from reduced Russian gas imports, pushing the EU to rely on expensive liquefied natural gas (LNG) from global markets.

Strong Competition from China

China’s rapid technological advancements pose another challenge. Previously, Germany benefited from China’s demand for high-tech machinery. However, China now produces its own electric vehicles (EVs) and other goods that compete with German exports in global markets.

To address these challenges, Wohlrabe emphasized the need for Germany to invest in education, infrastructure, climate protection, and defense, while reducing ineffective government subsidies and social transfers. He also stressed the importance of securing diverse and stable energy supplies.

Meanwhile, Klaus-Jürgen Gern from the Kiel Institute for the World Economy suggested that instead of focusing on attracting large corporations, Germany should enhance the business environment for small and medium-sized enterprises (SMEs). Lowering corporate taxes, improving investment incentives, and reducing bureaucratic barriers are essential steps to reviving German industries.

For more insights, visit: News24Go and Ara TV.