From Boom to Bust: How can Germany Restart its Economic Engine?

by | May 15, 2024

(15 May 2024 – Martens Centre) 

Welcome remarks:

  • Tomi Huhtanen, Executive Director, Martens Centre

Moderator 

  • Eoin Drea, Senior Research Officer, Martens Centre

Speakers 

  • Robert Grundke, Senior Economist, Economics Department of the Organisation for Economic Co-operation and Development (OECD)
  • John O’Donnell, Chief Correspondent, Reuters
  • Sandra Parthie, Head of the Brussels Office, The German Economic Institute (IW), President of the EESC’s Section for the Internal Market

The aim of the conference organized by the Martens Center was to shed light on the complexities of the German economic landscape amidst challenges and transitions. The event addressed the 2023 contraction attributed to persistent inflation, high energy prices, and weakened foreign demand, which led to declines in industrial activity, household income, and government expenditure, resulting in a 0.3% shrinkage of GDP. Discussions also highlighted the unwinding of a decade-long property boom, the costs associated with addressing transitions such as the green transition and demographic aging, and Germany’s strategic positioning in the face of the geopolitical landscape. Presented as the “sick man of Europe” in the early 2000s, Germany had, in recent years, achieved significant growth, establishing itself as a major economic player. Today, however, what are the challenges facing the country?

2024: A new year of challenges for the German economy

In his presentation, Robert Grundke, Senior Economist for the OECD, emphasized that Germany’s economic growth had already started to decline before the COVID-19 pandemic and the Ukraine crisis. Manufacturing production had been falling since before 2020, indicating underlying structural issues. Although inflation began to decrease in 2022, confidence among businesses and consumers is only beginning to recover now. Grundke highlighted the persistent problem of low business investment and capital outflow, with Germany trailing behind countries like Belgium and France. This lack of dynamism is compounded by a high rate of business exits compared to new entries, significantly below the OECD average, pointing to a competitive disadvantage.

John O’Donnell, Chief Correspondent for Reuters, traced Germany’s economic vulnerabilities back over two decades, exacerbated by the 2008 financial crisis. He noted that the current situation is marked by severe property price declines, the worst in Europe, and technological crises in key sectors such as automotive and energy. O’Donnell stressed that Germany, traditionally seen as the anchor of the EU, now faces a more complex and challenging environment. The ongoing crises and market instability raise fundamental questions about the resilience of the German economy. From Sandra Parthie’s side, Head of the Brussels Office at The German Economic Institute, the German labor market often focuses on negative aspects rather than positive developments. Despite being an export-oriented economy, Germany is grappling with low investment levels and mixed sentiment among businesses. Additionally, she emphasized the need for significant investments in “every aspect possible,” from infrastructure to education, and public transport to boost economic activity and prepare for future challenges, including climate resilience.

Proposed solutions to address economic challenges

In his presentation, Grundke advocated for a substantial increase in public investments in infrastructure, which are currently low compared to other countries. He pointed out that during the pandemic, German schools had to remain closed longer than those in other countries due to inadequate infrastructure. Enhancing infrastructure investment would not only improve public services but also stimulate economic activity and create jobs. Grundke also called for better utilization of digitalization in the public sector to increase efficiency and reduce costs.

To address the issue of low business investment, Grundke suggested reforms to make Germany more attractive for capital investment. This includes simplifying bureaucratic processes, reducing permit requirements (as emphasized by Sandra Parthie), and leveraging the banking sector’s potential to provide more flexible financing options. Modernizing the public sector through digitalization is crucial. By investing in digital infrastructure and promoting data-driven decision-making, Germany can enhance its competitiveness and efficiency. Parthie also suggested that investments in education, skills development, and lifelong learning are essential to adapt to these demographic changes. Additionally, Germany needs to invest in green technologies and infrastructure to ensure long-term sustainability against climate change.

Another problem highlighted by the panel was that, due to its rapidly aging population, Germany faces significant challenges in attracting and integrating both refugees and skilled workers. Eoin Drea, Senior Research Officer at the Martens Center, noted the common statement among economists that Germany seems “better at welcoming refugees than workers”. To respond, Grundke emphasized the need to streamline bureaucratic processes to make Germany a more attractive destination for skilled labor. Parthie stressed that Germany must become more appealing to private investments and welcoming to companies. She also pointed out that the current labor market favors employees, suggesting that reforms should focus on making the market more flexible and attractive for employers as well.

Finally, Grundke and O’Donnell both mentioned the need for tax reforms to stimulate economic growth. While Germany has high labor taxes compared to other countries, corporate taxes are relatively low. There is room for raising revenue from capital income, property, and consumption taxes. Strengthening tax enforcement can also help increase government revenue. O’Donnell highlighted the potential for banks to play a more active role in stimulating economic growth through increased lending and financial innovation.

The conference underscored the multifaceted challenges facing the German economy and the urgent need for comprehensive reforms. By increasing public investment, stimulating business investment, modernizing the public sector, and implementing tax reforms, Germany can address its current economic challenges and pave the way for sustainable growth and competitiveness in the future.

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