Source: AFP
Weak exports, costly energy and the green transition have combined to form a “perfect storm” for the German economy, leaving Chancellor Olaf Scholz’s coalition at loggerheads over how to change course.
The government will present its latest economic forecasts for 2024 on Wednesday, with media reports suggesting a sharp downgrade to growth of just 0.2%.
In its autumn forecast, the government still expected output to rise by 1.3%.
The country closed 2023 in recession, contracting by 0.3%, and the latest figures suggest that the first quarter of 2024 will see further contraction.
Germany also risks anemic growth by 2028 if no action is taken, German media reported.
The German economy, Europe’s largest and traditionally a growth engine of the eurozone, is being hit by “a perfect storm,” Economy Minister Robert Habeck said earlier this month.
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The situation was “dramatically bad”, he added.
Germany’s once mighty industrial sector has been hit particularly hard by multiple headwinds.
Having previously relied on cheap imports of Russian natural gas, the sector is still reeling from the energy price spike caused by Russia’s invasion of Ukraine.
The European Central Bank’s spate of interest rate hikes to tame inflation added to the pain, curbing demand and investment.
Exports have fallen due to weaker trade with key markets such as China, which is increasingly producing its own goods. Geopolitical tensions, including shipping disruptions in the Red Sea, have added to trade woes.
The long-promised shift to a greener economy, meanwhile, which requires significant public and private investment, has hit fresh hurdles after a shock legal ruling last year forced the government to rethink some of its climate spending plans.
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Attractive green subsidies in the United States have already lured some German companies, which complain about the lack of incentives offered by Scholz’s government.
German chemical giants BASF and Bayer were among around 60 companies to make a joint appeal to European Union leaders to adopt a “European industrial pact” to help the industry out of recession.
“Without a targeted industrial policy, Europe risks becoming dependent on even basic goods and chemicals. Europe cannot afford for this to happen,” the statement said.
Debt brake series
In an open letter over the weekend, 18 federations representing the “Mittelstand” of small and medium-sized businesses considered the backbone of the German economy urged politicians to take action.
“It is one minute to midnight. What is at stake is nothing less than the salvation of the German Mittelstand,” he said.
But the three parties that make up Solz’s coalition of the Social Democrats, the Greens and the liberal FDP are at odds over how to respond.
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Finance Minister Christian Lindner of the pro-business FDP wants to lighten the tax burden and cut red tape for businesses.
“If we do nothing, Germany will become poorer,” he warned.
A draft law that would cut corporate taxes by about seven billion euros ($7.5 billion) a year is set to be approved by lawmakers on Wednesday after months of wrangling.
But Economy Minister Habeck, from the environmentalist Greens, wants to go further.
He called for an easing of the government’s constitutionally enshrined “debt brake,” a self-imposed ceiling on annual borrowing that critics say has prevented much-needed spending to modernize infrastructure and finance environmentally friendly projects.
Tensions over the brake rose when a top court in November found the government broke the debt rule when it transferred billions of euros earmarked for pandemic support to a climate fund, throwing Scholz’s budget into disarray.
While Scholz’s Social Democrats have since signaled they are open to tweaking the rules, any easing of the debt brake remains a red line for the FDP.
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Economic headwinds contributed to a sharp drop in support for the government.
Plans to scrap agricultural fuel subsidies sparked nationwide tractor protests last month, with many farmers expressing displeasure with Scholz and his coalition partners.
FDP secretary general Bijan Djir-Sarai recently called the coalition’s future into question.
“An economic recovery is necessary,” he told Bild newspaper. Whether the coalition is able to make the necessary changes will be “the deciding point in the coming weeks and months,” he added.
Source: AFP