Germany is in the doldrums

There was a time when, in the eyes of many, Germany could do no wrong: The economy was strong, unemployment was low, and its strategy of fiscal consolidation was successful. A broad political consensus provided stability, and German society was not beset by deep divisions. As former chancellor Angela Merkel’s 2017 campaign slogan put it, Germany was “a country in which we live well and happily.”

As the year draws to a close, Merkel’s slogan, forgotten even by her own party, comes across as wishful thinking. The prevailing view now is that Germany can no longer get anything – or at least the important things – right. The public’s mood is weary and pessimistic: 46 per cent of Germans believe that they will be worse off in ten years. At the end of 2022, only 28 per cent were hopeful about 2023, the most negative response since 1951.

They were right: 2023 turned out to be a dismal year for Germany. The economy has been experiencing a mild but persistent recession, and the prospects for 2024 are equally gloomy. A severe and long-unresolved budget crisis paralysed the federal and state governments, infighting among the three coalition partners is rampant, and many reform efforts are currently stalled or have been abandoned. No wonder Krisenmodus (crisis mode) was the German word of the year.

The influential newspaper Frankfurter Allgemeine Zeitung recently devoted a full page to Germany’s biggest problems – 13 in total, many of them self-inflicted. Globalisation is both slowing and changing, and few new markets for German goods are emerging, putting pressure on the country’s export-oriented economy. Moreover, investments are too low, capital markets are too weak, and a virulent strain of technophobia has slowed the digitalization drive.

That is just the tip of the iceberg. Germany also suffers from underinvestment in public infrastructure, overregulation, excessive bureaucracy, and labour shortages. German society must contend with several challenges, including a broken immigration system, expensive housing, some of Europe’s highest energy prices, and underperforming schools.

By contrast, the newspaper could identify only three encouraging signs: Germany’s industrial core is likely to benefit from artificial intelligence; the pharmaceutical sector is regaining its former strength; and the Mittelstand – the country’s vital small and medium-size manufacturers – remains relatively resilient and innovative.

What went wrong? To be sure, the Covid-19 pandemic, Russian President Vladimir Putin’s war in Ukraine (and the resulting energy crisis), a surge in migration, and conflicts in the Middle East have all contributed to the current situation. But, more importantly, they have revealed how unprepared Germany was for unexpected shocks and shifting geopolitics.

Many of these problems have been festering for some time: from economic and energy dependencies to outdated administrative systems and innovation-stifling regulations. But the country’s leadership decided to ignore them, and voters went along, believing that things would work out.

While the German downturn has many causes, chief among them is the often-overlooked “liability of success.” What is true for companies is true for countries: good financial performance can lead to complacency. During periods of strong economic growth, governments become overconfident and disregard changing conditions.

This liability was exacerbated by the premium German voters place on stable political leadership and maintaining the status quo. Merkel, far from a political visionary, fit Germany like a glove, taking incremental steps rather than pushing for badly needed reforms.

The ruling coalition (the Ampelkoalition, or traffic-light coalition, named for the colors of the three governing parties) was formed under the banner of “daring more progress.” But Chancellor Olaf Scholz is neither a visionary nor an effective manager of his conflict-ridden and gaffe-prone government.

It has been virtually impossible for the Ampelkoalition to find common ground. The Social Democrats cater to their old and shrinking base with taxpayers’ money; the Greens have a reform vision that is increasingly out of step with public opinion; and the Liberal Democrats repeat their mantras of “no new taxes” and “restraints on public spending” while insisting on the debt brake, the constitutional limit on new borrowing. If the coalition’s policy record during its first two years in power is any indication of what is to come, more Germans should be concerned about their country’s future.