Germany's economic model shaken by energy crisis

Published on Jul 29, 2022 03:08 PM IST

"As an exporting nation, Germany has benefitted disproportionately from free trade. But it is exactly that which is now in danger," said the Sueddeutsche daily earlier this month.

File photo of German Chancellor Olaf Scholz. (AFP)
File photo of German Chancellor Olaf Scholz. (AFP)
AFP |

Stagnant German growth in the second quarter has led analysts across the board to predict a recession as the outlook becomes clouded by the threat of a halt to Russian gas supplies.

But it is not only growth that is sputtering at zero percent between April and June -- Germany's entire economic model is being called into question by experts.

End to cheap energy

"The war in Ukraine puts an end to the German economic business model as we knew it -- a model which was mainly based on cheap energy imports and industrial exports into a increasingly globalised world," said Carsten Brzeski, economist at ING bank, in response to the second-quarter growth data.

Less expensive to produce and transport, with prices pinned down in long-term contracts, Russian gas has for decades contributed to Germany's economic prosperity.

Industry consumes 30 percent of the gas burnt in Germany. Before the war, more than half of the total supplies came from Russia, a figure which had fallen to 35 percent by the beginning of June.

To wean itself completely off Russian gas, Germany is looking further afield for new supplies, including shipments of liquefied natural gas from the United States and Qatar, as well as moving more quickly to renewable electricity generation.

Globalisation in crisis

"As an exporting nation, Germany has benefitted disproportionately from free trade. But it is exactly that which is now in danger," said the Sueddeutsche daily earlier this month.

The coronavirus pandemic and the Ukraine war have shown the weaknesses of open economies, as supply chains have been upended and key components have become scarce. Germany has been among the most exposed to the logistical problems of the past two years.

Germany's dependence on China is also worrying politicians in Berlin. The strong two-way ties between Germany and China were "not healthy", liberal Finance Minister Christian Lindner said in April.

Beijing is Germany's number-one trade partner, with trade between the two nations expanding again by 15.1 percent in 2021.

"It's potentially a new risk," economist Claudia Kemfert told AFP. While the risk was less acute than dependence on Russia, more needed to be done to "focus on the domestic economy and build resilience", she said.

Inflation shock

After years of anaemic growth, inflation is back with a vengeance in the European Union. In Germany, the memory of 1920s-style hyperinflation weighs heavy on the public debate.

Beyond this psychological block, the obsession with price stability ensures a "competitive industry and a nation of savers", according to a recent report by French think-tank OFCE.

Rising prices have led to increasing labour unrest in Germany. July saw the longest industrial action at German ports in 40 years and a day of strikes by ground staff at Lufthansa.

Ahead of negotiations that are set to kick off in September, the powerful IG Metall union is asking for an eight-percent pay rise for 3.8 million workers across various industrial sectors, the biggest wage demand since 2008.

Staff wanted

Overshadowed by the war in Ukraine, the lack of skilled workers is a major headache for German industry.

On top of the million vacancies already advertised, "Germany will need 500,000 extra employees every year for (the) next 10 years," said Marcel Fratzscher, head of the DIW think tank in Berlin.

The potential shortfall was a "risk for the competitiveness and prosperity of the country", he noted.

Auto supplier Continental sounded the alarm in July saying the shortage "threatened the future of the German economy", which "urgently needs controlled immigration".

Debt brake illusion

Returning to Germany's strict budgetary rules in 2023 after a three-year pandemic-enforced hiatus is a key aim for Finance Minister Lindner.

The goal is "as surprising as it is unrealistic", said Brzeski of ING.

Germany is preparing to spend billions again to support households through the coming energy crisis and investing colossal amounts into the switch to renewable energy.

"Germany will need time and money" to implement "investment and structural change as determined and committed as it demanded from other eurozone countries in the past", said Brzeski.

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