Having fallen into recession in 2023 with a GDP decline of -0.3%, Germany is no longer the model, the reference and the anchor of Europe. Is this an air gap or a long-term phenomenon? According to Christian de Boissieu, it is too early to decide, and different scenarios remain open
Despite the many uncertainties, several challenges appear to be structural. Germany is now paying the price for its poor energy choices, which are also bad ecological choices: the abandonment of nuclear power, heavy dependence on coal, delays in the deployment of renewable energies and hesitation towards hydrogen. The effects of the war in Ukraine have served as an eye-opener here.
Moreover, the indexation of German performance to industrial dynamics, a strength when the world economy is doing well, becomes a handicap when Chinese growth and American activity slow. A lesson to be learned for all European countries, including France: reindustrialization must go hand in hand with a strengthening of European sovereignty and less dependence on China and the United States.
The recession in German
In 2023, Germany will have been the only G7 country in recession. Admittedly, a limited recession (GDP decline of -0.3%), but this comes after a post-Covid catch-up of 2021-2022, observed in Germany as elsewhere. What is more worrying is the combination last year of a failure in domestic demand, driven by inflation, rising interest rates (a policy of the ECB that has been applauded by the German public in the name of the demand for monetary stability!) and a lack of confidence among consumers and businesses alike. Industrial production is worrying: it is still 9% below its pre-pandemic level. As for foreign demand, the negative shock to non-EU exports added a layer of disappointment and mistrust. With, at the end of the day, a rise in unemployment to 5.9%: Germany is moving away from full employment…
For 2024, the forecasts as usual diverge. There is a big gap between the IW Economic Institute, which anticipates a continuation of the recession, and the IMF, which last October forecast growth of (+0.9%), as well as the Bundesbank (+0.4%). But convergence is taking place on crucial points:
- In all scenarios for this year, German growth would be below the average growth of the eurozone and France.
- Nominal wages will rise faster than inflation, which is gradually declining. Real wage growth is expected to be supportive of consumption, but it will dampen disinflation.
The icing on the cake is that the political context is deteriorating rapidly, with the rise of the far right (AfD party), the anger of farmers and road hauliers, and cracks in the government coalition. Public finances were Germany’s pride, compared to France or Italy. This is still partially justified, with a public debt ratio of only 65% of GDP (112% for France…). But the unexpected decision of the Constitutional Court in Karlsruhe to refuse a transfer of 60 billion euros to the budget seriously complicates the closing of this budget for 2024 and probably beyond.
In the face of all these challenges, the financial sphere remains unperturbed. Is it recklessness, the financial markets’ belief in the thesis that the eurozone’s best pupil is simply out of sight, delays in the adjustment of finance to the real economy? We don’t really know. German interest rates remain the risk-free rates of the eurozone, and the spread paid by France has not decreased. The rating agencies are not revising Germany’s (AAA) rating, at least for now.
The European consequences
Beyond the judgment of the financial markets, Germany’s current fragility – which it would be absurd to celebrate – is already having lasting consequences for Europe in several respects. First of all, Germany, the leading economic power in the zone, is for some time a burden on European growth. The mediocrity of this growth, which is due to the almost general inadequacy of potential growth, and therefore to structural factors, is accentuated by the absence of a locomotive country in the area. Secondly, Germany’s weakening, even if it were only to be cyclical, pushes this country to accept compromises that it would not validate if it had remained on its own cloud. To something misfortune is good!
It is probably no coincidence that President Macron, during his speech in Davos last week, indicated that “we may need to dare Eurobonds again” to pool long-term financing. We remember how our German friends resisted the launch of the first wave of Eurobonds for a long time… Finally, the current problems of political governance in Germany give an increasing role to countries that follow German-style financial orthodoxy but have a more modest economic weight, such as the Netherlands, Austria or Finland. There are thus rebalances in Europe, reflecting the legitimate desire of the “small” countries to count, and which are significantly changing the collective decision-making process. We had already seen this during the adoption of the European Covid recovery plan, adoption delayed by the susceptibility of some of these countries that have been neglected for too long.