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The German economy is heading towards a recession during the second quarter of 2022

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After the release of figures indicating that the German economy is heading towards recession during the second quarter of 2022, experts believe that the problem is not limited to a circumstantial situation, but that the economic model of the first economic power in Europe is faltering.

Turning the page on low-cost energy

ING Bank analysts explained that “the war in Ukraine put an end to the German economic model as we knew it” based, in their words, on “low-cost energy imports and industrial exports in an increasingly globalized world.”

With the low cost of production and transportation, Russian gas contributed over decades to the prosperity of the German industry, which represents 30% of gas consumption in the country.

Before the war in Ukraine, Russian gas represented more than half of the gas imported to Germany. This share is now down to 35%.

In its quest to completely get out of its dependence on Russian gas, a goal that Berlin has set itself a deadline to achieve in the middle of 2024, Germany intends to resort to more expensive energy sources, such as Norwegian or Dutch gas or liquefied natural gas from the United States or Qatar, or less regular such as energy Solar or wind energy.

– globalization falters

The Sueddeutsche Zeitung wrote in July, expressing concerns that “Germany as an exporting country benefits most from free trade. But that is exactly what is in danger.”

The COVID-19 pandemic and the war in Ukraine exposed the vulnerabilities of economies when supply chains falter and essential components such as semiconductors can no longer be imported.

German industry suffered in particular, especially the automobile sector.

With Russian supplies dwindling, China has become Germany’s number one trading partner, but it’s raising concerns in Berlin.

At a time when trade between the two countries increased by 15.1% in 2021 compared to the previous year, Liberal Finance Minister Christian Lindner admitted that reliance on China “is not healthy either.”

“This may pose a new danger,” said economist Claudia Kimfert, speaking to AFP, explaining that it is not as large as the Russian threat, “but we have to rely more on a national economy and strengthen resilience.”

– Staff shortage

Staff shortages remains the number one problem for many companies in a country with an aging population, even if it is overshadowed by the consequences of the war in Ukraine.

And to one million vacant jobs currently, Marcel Fracher, head of the Institute for Economic Research, said that “Germany will need an additional 500,000 workers every year for the next ten years,” noting that this constitutes “a threat to the country’s competitiveness and prosperity.”

Car equipment maker Continental warned in July that Germany “is in dire need of orderly immigration”.

Inflation shock

After years of price stability, fear of inflation has returned to control all EU countries.

But the concern is greater in Germany, where the shock of hyperinflation in the 1920s still dominates public debate.

Two economists at the French Observatory of Economic Situation OFCE also stated that the obsession with price stability is also linked to “preserving a competitive industrial sector and a nation of savers.”

However, demands are growing in a country that clings to a moderate level of wages and July saw the longest social movement in German ports in forty years.

Steelworkers union IG Metall is demanding 8% wage increases for 3.8 million industrial workers, the highest since 2008.

“Is there a danger of a yellow vest movement in Germany?” asked Spiegel magazine. Similar to the protest movement in France, she warned that “if the middle class collapses, everything may collapse.”

The illusion of financial discipline

Should we return next year to the fiscal rigor that underpins the German model? That is the finance minister’s stated goal, but ING experts warn that this goal is “as surprising as it is unrealistic.”

After deviating from the norm of financial discipline during the outbreak of the Covid-19 epidemic, Germany is now re-spending billions to support families and companies in the face of the energy crisis, while the accelerating transformation in the energy field requires massive investments.

ING warned that “Germany needs time and money” to implement “investments and structural changes with the same determination that it has imposed in the past on other countries in the eurozone.”

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