Why is the German economy stumbling?

Published 22.02.2019 00:14

Germany, the world leader in innovation and industry, has been facing the threat of recession in recent months. Industrial production in Germany has seen a 0.4 percent decline in December, especially with the effect of the decrease in the construction industry and the production of consumer products. As a result, industrial production in Europe's largest economy decreased consecutively in four months. They were unable to prevent the shrinking contrary to economists in the country who expected a boom in the industry and energy sectors. It seems possible that the shrinkage in factory production data will likely negatively affect unemployment rates in the long term, posing a systematic risk similar to the one in Japan.

Representatives of the real economy sector, who found statements regarding shrinkage made by the German Federal Statistics Office (Destatis) and the German Economy and Energy Ministry insufficient, highlighted that the effects of intra-EU competition between France and Italy and the Brexit process on Germany have not properly been examined. The German government, which displayed a rather depressive image in the 2018 year-end global trade reports, had revised its 2019 growth forecast from 1.8 to 1 percent due to an increase in disputes in global trade and concerns over Brexit. The economists who expect a 7 to 10 percent decrease in factory orders on a yearly basis and think the shrinkage based on demand will proceed as is seem to be one of the first signals that the situation could get worse.

The present government, which prioritized employment and the protection of welfare levels in the 2030 German National Industry Strategy report, noted that the trans-Atlantic competition will no longer be U.S.-EU-centric and that Asia will also pose a serious threat for Europe. The Germans, who think the consortium in Europe is especially important in regard to the competition with China, fear that the damage incurred by the disintegration of the union could be millions of euros. Without a doubt, the loss of the competitive edge in Asia due to the already high costs and the risk of losing technological superiority will be a dark nightmare for Europe. It is useful to remember the statement made by the German industry minister against this threat. Economic Affairs and Energy Minister Peter Altmaier's statement saying, "The state could go as far as acquiring temporary shares in large companies, and this is not to expropriate these companies but is necessary to prevent the sale of significant technologies, which may lead them to leave Germany. And to achieve this everything can be established, including a participation fund," serves as the biggest proof that states are evolving into the socialist period from free market economies.

Orthodox policies

When we skim through German economy magazines, we come across an interesting scene. It is thought that free trade and orthodox economic policies, deemed to be the reason behind welfare and wealth in Europe over the past 60 years, will become Germany's biggest enemy within the next 20 years. There are many economists who believe that reviving economic activities in a Keynesian approach through taxes in the orthodox system, keeping liquidity high through public borrowing and creating demand through public spending now mean suicide for Germany. There is another group, who support the school that I support, that defends the idea of fixing prices, dumping, exporting goods below cost to take hold of the markets, imposing tariffs and tightening import quotas.

The last sentence should especially bring some things to mind. The economic policies of U.S. President Donald Trump and his team are resented by many but see the future ahead – the analytic financial perspective behind the "America First" rhetoric. If you want to compete with Asia, you cannot ensure this by opening all doors and serving your technology up on a silver platter. From this point on, serious limits will be necessary on access to research, development and innovation information and the German economy is suffering from this today. Before the 2008 economic crisis, Germany's exported goods made up 51 percent without tariffs, quotas and limits, but this rate has vnow regressed to around 35 percent. Not only for Germany, but tariff restrictions have also become a source of problems for G8 countries. While tariff rates are 16 to 19 percent in average, nontariff customs rates have reached 45 to 55 percent. This means that if there is no demand within the country or from your neighbors for the products you make, the chances of you selling that product have decreased 50 percent compared to 10 years ago. The main reason behind the reduction of factory demand is the barriers on access to supply, and Germany is now very far away from Asia both in kilometers and in terms of mentality.

There are a few exit points for Germany in the current circumstances. The first is to decrease the public and fund support to the European Union. We already mentioned the risks of not doing this. The second happens to be the defense industry move, which may disturb everyone. The fact that German firms only have 8 percent of the total share in the European Defense industry, losing the lion's share to the British and French, is not acceptable considering how competent the country is.

Meanwhile, the German government has started to scrutinize the U.S. using World War II stipulations as a control mechanism on the German defense industry. The idea of a European army promoted by French and German governments may give larger shares to German companies.

We have industry giant China's Made in China 2025 strategy plan, Donald Trump's America First economy doctrine and now German Chancellor Angela Merkel's 2030 German National Industry Strategy plan. While everybody is busy publishing their own report, one should see that central banks are not increasing their gold reserves for no reason. The era of partnership has come to an end.

* Ph.D. researcher in the Private Company Economic Research Department MENA at Swiss Business School

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