Germany needs a "good coffee" to reform

2024-01-28 19:10:00, Kosova & Bota CNA

Farmers' protests in Germany. One was seen with a photograph of German Chancellor Olaf Scholz. January, 2024.

"Germany is not the sick of Europe; it is just a little tired", said the German Minister of Finance, Christian Lindner.

The phrase "sick Europe" refers to a country on the continent experiencing economic hardship, social unrest or impoverishment.

Germany's economy - Europe's largest - shrank by 0.3 percent last year.

The German minister described this as a "call to action" and, without providing many details, said that Germany is "at the beginning of a new era of reforms".

"What Germany needs now is a good coffee, which means structural reform," he said.

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Germany became known as the "sick man of Europe" in the late 1990s, when its economy faltered and unemployment rose.

Consequently, it has undertaken a series of labor market reforms and its economy has flourished in the decade following the 2008 global financial crisis.

There was a contraction in 2020, due to the COVID-19 pandemic, and last year. Now, according to the forecasts of the Organization for Economic Cooperation and Development, Germany is expected to have the slowest economic growth this year, among the 20 most industrialized countries in the world. Only Argentina is expected to be worse than that.

But this is not its only problem - Germany has started 2024 with massive farmers' protests and transport strikes. All of them are based on the reduction of subsidies from the Government and disputes over wages.

"We, as farmers, have had to endure many cuts, of all kinds, in recent years. We have only been given orders and regulations. The cuts announced for oil in agriculture are the climax," said Ralf Hickmann, a German farmer, for the Reuters news agency.

The cuts are planned to resolve a budget crisis after Germany's Constitutional Court ruled in November last year that the government's 2024 budget was illegal.

Germany needs a "good coffee" to reform

This situation, in addition to causing strife in the Government led by Chancellor Olaf Scholz, has also fueled fears that it could increase the popularity of the extreme right.

Last week there were mass protests in Germany against the anti-immigrant Alternative for Germany party.

"We must raise the awareness of our fellow citizens that something is wrong. I believe that if enough pressure is exerted on the streets, this will also motivate politicians to act and not remain silent, as they have done so far," Ulrike Hartmann, a protester against the extreme right, told Reuters.

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And why has Germany, namely its economy, come to this state?

For Radio Free Europe's Expose program, Sander Tordoir, economist at the Center for European Reform in Berlin, gives an answer:

"The German model of the 2010s, which has been successful, does not work for the future. The factors that helped it, such as cheap Russian gas or demands from China, have ended."

Carsten Brzeski, chief economist at the financial services company ING Research, describes these as cyclical factors, but says that some structural factors have also influenced the stagnation of the German economy. For Expose, he explains more:

"Structural factors are: the lack of investments during the last 10-15 years, the losses in international competition for a long period, the energy transition that has lagged behind due to dependence on Russia. Germany is very dependent on global trade and now, when global trade has changed, Germany's economy suffers."

"And, last but not least - we have a lack of investment in education and also demographic changes," says Brzeski.

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Situations like these always happen, Oliver Holtemoeller, from the Institute for Economic Research in Halle, tells Expose.

He recalls that at the beginning of the 80s there was a difficult economic situation that led to the change of the then German Government. The unification of Germany says that it also brought economic problems in the 90s. So these are problems that happen from time to time, until the world changes, says Holtemoeller.

"It is too early to talk about the 'sick of Europe'. I think this is not the case, especially if you look at the development since the financial crisis. Germany has had very strong years after the financial crisis, while other countries in Europe have been weaker. So if you look at it over a longer period of time, starting after the financial crisis, you realize that Germany is still in good shape," he says.

Since it was rebuilt after the Second World War, Germany, with its large factories, has been the main driver of economic growth in Europe. It has become rich by selling its goods to the world and accumulating a high trade surplus. But geopolitical crises and industrial rivalries in China and the US have already weakened demand for German-made products abroad.

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Economists warn that spending cuts by the Government could drag the economy further. They favor the opposite of savings.

"Germany's long-term strategy should be investment in the country, which has been missing for at least 15 years, and some reforms that have been neglected for a long time," says Tordoir.

"Give the industry long-term certainty that energy prices will remain stable." We need more investments in digitization, in infrastructure, in education. These are more public investments, but we also need private investments. And, to have more private investments, we need tax incentives, reduction of bureaucracy, so less administrative burdens", says Brzeski.

Holtemoeller, from the Institute for Economic Research, mentions another factor that the German economy would need: migration.

"The German population is aging and shrinking. Without additional migrants, it will be difficult to fill job positions and there will be a further decline in economic activity," says Holtemoeller.

Germany, for years, has opened its doors to migrants from different countries, who have been involved in the labor market there. In 2021, it also approved a regulation that gave "privileged work access" to the German market to the citizens of the Western Balkans.

There are no data for 2023 yet, but in 2022 the German Embassy in Kosovo has issued over 9,300 work visas for citizens of Kosovo.

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During the same year, over 11,700 work visas were issued in Serbia, while in Bosnia and Herzegovina over 10,500.

Experts agree that it is impossible to come up with a solution that fixes everything overnight. However, remember that Germany has proven that it can move quickly when there is no other choice.

When Russia cuts off natural gas flows in 2022, the German government has approved the procurement and construction of several terminals to provide liquefied natural gas. Within months, it has managed to fill storage facilities with natural gas, while encouraging companies and consumers to conserve fuel.

"It is really time for Germany to start and invest in its economy and rely more on European and domestic demand for its products," says Tordoir.

Brzeski, from the ING Research company, does not expect that this year the German economy will begin to recover.

"We know that the Government is undertaking savings measures. So there won't be any major progress in terms of investments. This means that in 2024 we will continue to have an economy that will struggle with stagnation. I think we will have a recession of 0.2 to 0.3 percent. But, of course, a lot also depends on developments in the world", he says.

Germany's way forward requires a delicate balance between addressing immediate concerns and implementing long-term strategies. Experts are watching it closely, as its economic trajectory has implications beyond borders.

The hopes are that, at least, the invigorating aroma of freshly brewed coffee will start and be smelled as soon as possible./ REL