Germany’s Economic Malaise In 35 Charts
What went wrong and what needs to be fixed in Europe’s biggest economy
The worst-performing developed economy globally in 2023, with a contracting real gross domestic product (GDP) and a bleak outlook for 2024. Germany has gone from a country with an exemplary economic model and the envy of other major economic powers, to a place of stagnation, slowing productivity growth, struggling industries, and weak consumers. And it is not just a cyclical development. Many factors have brought Germany’s economy to this state, some of which external, but many of them self-inflicted. The current trajectory is dangerous and could mean a protracted decline, affecting its residents’ fortunes, but is certainly not irreversible.
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Some necessary background
After the Second World War, rebuilding and reorganizing Germany’s economy (in conjunction with reforming its society) presented an enormous challenge, given the state of destruction and the emerging Cold War confrontation. The system of a Social Market Economy (soziale Marktwirtschaft) or Rhine capitalism was the one that politicians in the Federal Republic implemented. It is a socioeconomic model in which capitalism is prudently regulated and while free market forces are allowed to some extent to guide economic activity, the state intervenes and oversees, making sure competition is fair, and that a welfare system is established, ensuring some redistribution of wealth to those who need support for their social and financial well-being.
For such a model to be successful and sustainable, it should not create an undue burden on economic activity that goes beyond what is reasonable. It should not destroy incentives for investment, wealth creation, or productive work. In addition to that, the welfare system requires a certain demographic structure that ensures there is a suitable relationship between those contributing to it and those drawing from it (in various forms: benefits, pensions, or other types of payouts). Many developed and developing countries today, however, are facing demographic challenges so significant, that such systems are put at risk and must be funded by other additional means. As one of the economies with the most generous social spending in the developed world, while at the same time, one of the fastest deteriorating old-age dependency ratios, Germany is facing an even more significant risk in the long run.
One of the greatest economic waves which Germany has been able to ride successfully for decades, was globalization. A study by Prognos from 2018 indicated that between 1990 and 2016, over €1.2k of real per capita GDP growth can be attributed to the effects of globalization. It has benefited from a world-beating export-oriented economic model that relies on free trade and non-adversarial economic relations with the largest economic powers in Europe and the world, especially with the US and China. However, as the world has started to change and geopolitical uncertainty and crises have set in over the last several years, the tide started to turn. ‘De-risking’ is now the word of the day — and Germany has been forced to acknowledge the scope of its international dependencies it has become subject to when international demand for German exports declines, supply chains get disrupted, energy sources become too costly or unavailable, and political actors start running amok or resort to military aggression.
This publication is not an epicaricacy regarding Germany’s current economic challenges. In fact, many of these issues can be observed in other developed or developing countries around the world, in some places with even greater severity. It is also not intended as an ideological critique. On the contrary, it attempts to be a sober look at the facts and data so that one can critically dissect and analyze some of the major causes for these problems and consider potential solutions. It is in the best interest of Europe and the world that Germany be able to overcome its socio-economic problems, and adapt to the changes happening in the world, remaining a strong pillar of and model for democracy.
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Author: Nikolay
Founder of MoneyCraft
