The lower house of Germany’s Parliament voted to legalize the recreational use of cannabis last week. It was a timely move. Germany’s leadership class is going to need all the mellow it can find in a world that isn’t going Germany’s way.
Russian advances in Ukraine and American paralysis over the next aid package are reinforcing the reality that Germany needs to defend itself but lacks the power to do so. [emphasis, links added]
So are developments in the Red Sea, where German manufacturers must cope with shipping delays as the Biden administration fails to keep the vital waterway clear.
Forget the 2% of gross domestic product that Germany has repeatedly promised and failed to spend on defense.
Defense Minister Boris Pistorius shocked many observers this month when he said that in the new world situation, Germany may have to spend as much as 3.5% of its GDP on defense.
The economic news is also grim.
Last year Germany’s GDP shrank 0.3%, and last week the government slashed 2024 growth estimates to a pitiful 0.2%.
Economists expect negative growth during the first quarter of 2024, placing the country in recession. The outlook for housing is bleak, with business confidence reaching all-time lows.
The news in manufacturing is a little better. This month the widely followed HCOB German Flash Composite Purchasing Managers’ Index fell to 46.1, the eighth month in a row that the index has pointed to decreasing economic activity.
Energy prices are a particular sore spot. The chemical giant BASF announced €1 billion in spending cuts in its German operations, blaming a mix of weak demand in the German market and “structurally higher energy prices.”
Enormous U.S. subsidies under the so-called Inflation Reduction Act are leading German companies to look across the Atlantic.
Chinese competition is another massive worry. China long ago passed Germany as the world’s largest car producer.
Increasingly, especially in electric vehicles, it is challenging Germany as both a low-cost and high-quality manufacturer.
Beijing aims to marginalize German capital goods and automobile companies in China while Chinese exporters challenge German dominance in world markets.
With the associations representing the small and medium-size Mittelstand firms that make up the heart of the German economy warning in a rare joint open letter about Germany’s loss of competitiveness, Economy Minister Robert Habeck isn’t mincing words.
The economy is in “rough waters.” The “competitiveness of Germany as an industrial location” is in doubt.
It isn’t all doom and gloom. The outlook for the service sector is brighter than for manufacturing, and as the Journal reported last week, the Ifo Institute’s business-climate index improved slightly this month.
The best that can be said for the outlook? “The German economy is stabilizing at a low level,” according to Ifo’s president.
Meanwhile, Germany’s dysfunctional three-party coalition government is paralyzed by internal struggles.
The largest party in the coalition, Chancellor Olaf Scholz’s Social Democratic Party (SPD), is deeply divided over foreign policy, with many nostalgic for good relations with Russia and allergic to military spending.
The SPD also wants Biden-like government spending initiatives to revive the German industrial machine and expand social benefits.
The Greens, the next-largest party, are by German standards foreign-policy hawks but continue to press for a rapid energy transition that drives up costs for business and consumers.
The third party in the coalition, the Free Democrats, wants to hold the line on government spending. As if this weren’t enough trouble, the conservative opposition parties have a blocking minority in Parliament’s upper house.
This is not where Germans thought they would be. Sixteen months ago, I visited Berlin and heard from a stream of government officials, think tankers, and economists that everything was working fine.
Russia was failing in Ukraine. The energy transition would boost German competitiveness and employment. Germany’s Mittelstand would handle anything China could throw at it.
Under the circumstances, it’s no surprise that antiestablishment parties are growing in Germany.
Read rest at WSJ
