Why Germany is in decline | DW Business

Once upon a time, Germany was the embodiment of fiscal stability. Today, it is the worst performing major developed economy in the world. High energy prices due to Russia’s war in Ukraine and rising interest rates are among the reasons for the decline. But wider structural problems, such as a shortage of skilled labor, lack of innovation and slow wage growth are also pulling the brakes on Europe’s economic engine. The cocktail of challenges recently prompted Finance Minister Christian Lindner to describe his country as a tired man in need of a ‘good cup of coffee’ of structural reforms. So what changes are needed and how fast can they be implemented? Video features interview with Clemens Fuest, President of the Ifo Research Institute.

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Farmers blocking roads trains at a standstill the worst performing major economy in the world last year not to mention a 17 billion Euro hole in its budget Germany once the beacon of European fiscal stability is struggling to help us understand why I’m joined Now by Clemens F president of the

EO economic research institute and a close Watcher of the German economy m Mr fo how did we get into this mess I think it’s a combination of factors of course the German economy was hit very hard by the energy crisis by The Fallout of the Russian attack on

Ukraine uh the country has managed to adjust to that more or less but it has kept us in recession and now we’re finding it difficult to get out of this recession and this is related to a number of factors uh one being that um in in a more medium-term manner some of

Our key Industries are in a difficult transition the car industry with Electric Mobility then with high energy prices the chemical industry is struggling so it’s a number of factors some of them are homemade like high taxes um more and more bureaucracy uh and all these factors are a bit much

Now and perhaps unsurprisingly then a lot of people are feeling very discontent the farmers are angry rail workers are on strike again are German wages too low is that what this is about German wages are rising at the moment uh so wages as such are not

Relevant for Farmers but uh for uh uh train drivers yes but German wages are actually Rising quite quickly so in a way it’s surprising that this is not driving consumption and one explanation would be that people are not so confident about the future and save their incomes rather than consuming them

So that is one factor and it’s related to this question yes we have managed these short-term crisis but the what is lacking is a longer term perspective for returning to economic growth that’s what’s lacking and I want to talk about some potential Solutions a little bit later

But staying on that issue of workers because one of Germany’s biggest problems right now is that it doesn’t have enough of them here is a chart The eepo Institute produced which shows the extent of that problem you can see the breakdown of sectors at the top and the

Share of companies that say they are in need of workers now Mr fo the skill shortage is one thing but that of course comes on top of the fact that German Society is aging very fast what do you think needs to be done to stabilize the labor

Market uh uh one thing is that the workforce is aging and shrinking in particular in the coming years but another factor is that if if you look at ours work we see that more and more people go on part-time work and here the good news is we can do something about

It so currently uh our social transfer and tax system creat strong incentives to work few hours you know just a part-time and by reforming that we could get more people again to work full-time of course there are other factors Child Care doing more for immigration uh so

There is a number of reform that could help here but just to clarify are you saying then that one of the biggest problems is that German Workers aren’t working enough uh correct if you look at individual work hours they have declined significantly over the past years we we

Shouldn’t forget we have 46 million people in the workforce that’s a record at the same time uh everybody’s complaining about uh not finding enough employees how can that be now the answer is if if we look at work hours uh the number of work hours hasn’t really increased the number of emplo employees

Yes but individual work Time Has Fallen very strongly and that explains um why there is such a shortage of Labor Supply so if you were all of Schultz how would you sell that to the electorate uh I think this is an easy sell in fact I would say we need to

Reform our tax and transfer system so that people who work more also have higher net incomes currently for a significant part of the population it doesn’t pay very much when people work more because they lose social transfer they pay very high taxes and by reforming that uh we can generate more

Employment without a great cost to the government so I really think this is one of the few areas where we almost have a free lunch and um we should eat it if it’s free well there’s that question of a free lunch but at the same time there’s a 17

Billion Euro whole in Germany’s budget um how are we going to fix that well the government has decided to fix that through some uh let’s say budgetary Maneuvers but also uh increases in some taxes and uh I think uh what’s behind that is a bigger

Problem and that is a lack of public and private investment in Germany that has been around for some time and I think to fix that we need a major step my preferred solution would be uh a consensus with the opposition and an adjustment in the Constitution that

Would would create a new investment fund uh for a longer period of time so digitization decarbonization infrastructure we need Investments here and we should come up with uh some kind of longer term plan uh to make sure that this investment happen ideally this should go along with cuts

In public consumption spending uh but part of that also has to be financed through debt so in other words an end to Germany’s debt break not at all we can preserve the debt break it’s a bit complicated we can preserve the debt break but create a special fund the debt break leaves room

For that create a special fund uh for these Investments uh the the hurdle is you need need a two3 majority in the parliament for that I wouldn’t dismiss the debt break the debt break has proved to be very useful because it forces politician to really discuss priorities and spending rather than uh financing

Everything and solving all conflicts through debt so I think the debt break is successful it just has this problem that we now have some investment needs and the debt break says yes you can do that you can go into debt but you need a two-third majority for

That I want to look at the perspective of employers now because the head of Germany’s employers Association came out this very week with a very strong statement he said we must be careful not to go from being the engine of the European Union to a museum of prosperity

We employers have lost trust in this government our neighbors look at us with more concern than we do Mr F your reaction to that statement well I think partly this statement is Justified uh but only partly because it’s a bit exaggerated I think the government has managed the

Energy crisis quite well so far so we haven’t had gas had gas shortages and I think that should also be acknowledged but I I support this statement in the sense that yes we do lack a convincing strategy for economic growth and our government doesn’t even have a consensus

That it wants to have growth so there are parts of the government saying no growth is not so important in general we should focus more on climate change and I think that’s a seriously misguided concept uh so the government needs to get its act together and present a plan

That allows us to deal with the challenges ahead like labor shortages decarbonization uh problems with infrastructure so this growth plan is lacking and Mr DGA said uh we need to get our act together and do something about it and I think he’s right in that regard okay well let’s talk about how to

Get our act together um the country’s economic power Germany has traditionally been in the automotive chemicals and Engineering sectors but these are all areas that are both energy intensive and they’re also export Reliance so let’s look at Germany’s ranking when it comes to Innovation because it is not exactly

At the top of its game as you can see here it’s trailing behind the likes of Switzerland Sweden the US UK and Singapore coming in at around number eight overall Mr H we’re talking Solutions here what does Germany need to do to become more Innovative more ready for the

Future uh Innovation is key indeed and Germany has been quite good at Innovation but it’s more about what’s called marginal Innovation so improving cars a little more getting better machinery and Germany has struggled more with being successful in disruptive Innovations in new technologies uh we uh need to do

Something about that so we need to invest more in uh research and development but we also need to create better conditions for newly created companies if you look at the number of newly created uh companies uh Germany uh is weaker here a lot weaker than the US everybody knows that but also weaker

Than the UK so we need to do create better conditions for uh the creation of new companies that has to do with Capital markets with the tax system and so on and we also need to create better conditions for our existing companies to innovate Germany does have a lot of very

Successful industrial companies even outside the automotive industry the so-called hidden Champions but um they are uh held back by bureaucracy a lot of bureaucracy by high taxes um by a lack of qualified employees and we need to do something about that and create better conditions about them and if we do that

I think we’ll also be better in Innovation you mentioned earlier that parts of this German government are more interested in tackling climate change than in promoting growth I’m wondering do you think those two things are possible to achieve at the same time and and is it necessarily wrong to focus

More on climate change than on economic growth I I I think it’s wrong uh to pitch one against the other it’s wrong to say we don’t want to grow generally anymore we want to focus on climate change it would be correct to say yes climate change needs efforts that will

Uh reduce growth or at least require some sacrifice in terms of consumption but to be able to deal with that we need more growth more economic growth not less we need to be more effective we need to have better work incentive we need to innovate more grow more but grow

In an environmentally friendly way that’s the message I think it’s seriously misleading to say oh let’s forget about uh this focus on growth and focus more on climate change um nobody will follow Germans or will follow Europe if we go down that route and nobody in the world will like that

Strategy so we have to demonstrate that we can reconcile climate change with economic success we also have to be open about the fact that yes some sacrifice in terms of consumption will be needed but uh we need to show that economic success can be combined with climate protection if we don’t um other

Countries will say we focus on growth and forget the climate and that would be very bad