Germany needs to stop messing around!

The industrial heart of Europe can no longer afford to indulge complacency and bad policy.

Photo by Stefan-Mueller-climate, CC BY 2.0

Germany is the heart of Europe. It’s the region’s largest economy by a significant margin, and it’s the most populous nation in the EU. It’s also by far the region’s biggest manufacturer:

Source: World Bank

As Germany goes, so goes Europe itself. And yet everyone seems to agree that good old Deutschland is now in big economic trouble. Here’s the AP:

For most of this century, Germany racked up one economic success after another, dominating global markets for high-end products like luxury cars and industrial machinery, selling so much to the rest of the world that half the economy ran on exports…Now, Germany is the world’s worst-performing major developed economy, with both the International Monetary Fund and European Union expecting it to shrink this year.

And here’s an article from Bloomberg detailing the grim prospects ahead for the German economy. There are many scary graphs, but here’s the one that stood out the most to me:

Source: Bloomberg

The WSJ declared that “Germany is losing its mojo”. Joey Politano has a long blog post with many charts showing the woes of Germany’s manufacturing sector. The Economist has numerous recent articles with titles like “Is Germany once again the sick man of Europe?”, “Germany is becoming expert at defeating itself”, and “The German economy: from European leader to laggard”. And so on.

These articles tend to focus on the problem of Russian gas cutoffs, which have raised energy costs for German manufacturers. But if you look at a chart of Germany’s GDP growth, you can see that a noticeable slowdown began around 2018. The country’s economy, which grew so robustly in the decade following the Great Recession, has almost flatlined since then:

After reading endless articles about Germany’s malaise, my considered opinion is that it boils down to three big mistakes: trusting its economic health to Russia and China, a naive degrowth-focused environmentalism, and a reluctance to embrace change and progress. On all three counts, the country seems not to recognize the magnitude of the challenge. Instead they seem to be just muddling along, dreamily expecting the economy of the mid-2010s to somehow magically return.

Germany needs to stop messing around and get serious about fixing its economic model. The fate of Europe rests on its shoulders.

Germany has trust issues (it has too much of it)

The economist Robert Solow once remarked that discussions of European growth tend to degenerate into “a blaze of amateur sociology”. Well, here’s my amateur sociological anecdote. A little over a decade ago, a man from the German government came to give a talk to the University of Michigan economics department about a new data set the German government was collecting from businesses. A professor asked whether we could trust the data, given that reporting fake numbers might help German companies avoid taxes. The government employee’s eyes went wide with shock, and he said, in his charming German accent: “Oh no, they cannot do that. That would be against the rules.”

Oh, well in that case.

Germans trust their government more than people in almost any other rich country on the planet. Trust in government is often a good thing for the efficient functioning of a society (although I can also think of a couple of times when it has gotten the country into trouble). The problem is that in the last quarter century, Germans have extended that trust to countries and institutions that don’t deserve it.