Germany: is recession imminent for the European powerhouse?
Germany has for long been the biggest economy in Europe due to its strong manufacturing base. Its export industry has carried it far and wide, bolstering the country’s economy significantly. Productions in the automotive, chemicals and engineering industries are all major contributors. However, recently performance has dwindled. The US-China trade war has delivered a blow to China’s trading capacity, which has had severe impacts on Germany’s export revenues. China’s increasingly closed-door attitude has declined demand for Germany’s products. Further, the automotive industry, one of Germany’s most central, has stalled in the face of tighter emission standards, once again contributing to the fetters on Germany’s economic growth.
The Financial Times’ Martin Arnold explains that Germany’s economy is very much a “two-speed economy”, with a strong domestic sector to offset some of the issues the country is facing on the export front. However, the consensus amongst political parties stands that the impacts of the faltering manufacturing industry are actually being felt on the domestic front, with the presence of dire shortage of affordable housing in major cities; roads and bridges in a poor state of repair; an unreliable rail network; and slow internet connections. Poor infrastructure surely contributes to a slower economy as people become less happy and can work less efficiently.
All this being said, questions still stand about how such issues can be tackled. A chorus of politicians has targeted focus on Germany’s ‘black-zero’ policy, which mandates for low incurrence of debt to ensure a balanced budget. This policy was created in the early 2000s as a means to curb the expenditure caused by reunification. However, the demand for looser purse strings has heightened, as politicians and economists realize that greater fiscal capacity would benefit the country massively. Though the Social Democrats have quickly realised that rolling back a conservative stance on debt would lead to some unfitting demands, including 60 billion euros by the military, the general consensus is that loosening up liquidity will bolster the losses being made on the manufacturing side.
Currently, the black zero policy imposes a debt-brake, meaning that the federal government’s structural deficit is capped to 0.35 percent of GDP and bars its 16 regions from running any deficits at all. Rolling this back would mean that the government can take on as much debt as it wants (within the parameters set out by the new legislation), and so has a lot more spending power. However, if US-China tensions ease-off with the two countries entering a phase one trade deal, things might become rosier for Germany. Maybe the international scene will relax and Merkel’s Government will not need to take any rash political decisions. This 'wait and see' approach definitely seems to be favored by the finance ministry officials, who say that “dropping the black zero is irreversible - but sticking with it, on the other hand, is reversible”.
The future of Germany is a contentious one, resting on political debate and foreign relations. Some of it is left to fate, and some left to reason. Regardless of the path it chooses, Germany has most definitely found itself in quite an economic quandary for the first time in two decades. It is up to time to reveal whether Europe’s biggest economy is lagging behind.
