Has the German economy turned into the "sick man of Europe"?

BERLIN – Every time the Federal Statistical Office announces the new growth figures, observers – both those on the team of optimists of Europe's largest economy and those pessimistic about its ability to weather crises – begin to debate the strength or weakness of growth data and its impact on the performance of the economies of Germany, the eurozone, and the world.

When the competent office recently announced that the German economy contracted in the first quarter of this year by 0.3% after a contraction of 0.5% the previous quarter, the team of optimists began to provide convincing reasons, most notably the strength of employment, the sobriety of labor markets and low wage rates, saying that this "technical contraction" is nothing more than a transient situation that will be overcome in the coming months, while pessimists began to warn of the decline of the largest economy in Europe and the third in the world.

The office attributed this contraction in two consecutive quarters to reasons including the consequences of the war in Ukraine, which confused companies and pushed them to reduce their investments and citizens who were reluctant to consume, which contributed to reducing demand, in addition to the reluctance of the federal and state governments to invest as well, not to mention the high inflation rate, which reached the summer of last year to nearly 10%, but the past months returned to decline.

Despite this contraction, those confident in the performance of Germany's economy and some economic players, such as the Bundesbank, give good reasons for the economy to return to growth. In its latest report, the Bundesbank said the economy would recover in the second quarter.

The bank attributes this optimism to reasons in part the improvement in supply chain conditions that during the pandemic damaged the manufacturing and export sectors, lower energy prices compared to the first months of the Ukrainian war and the start of sanctions, but also wage hikes that will stimulate consumption, in addition to the start of the recovery of the export sector, the backbone of the German economy.

Uncertainty of the economy

On the other hand, the reasons for those who doubt the readiness of the German economy to overcome the current crisis also seem convincing, as the latest report by the state bank, the Bank of Credit for Redevelopment (KfW), predicted that the economy will contract in the whole of 2023 by 0.3%. The bank itself forecasts that Germany's economy will return to growth of 2024% in 1.

Beyond the two groups' rivalries, resorting to one of Germany's seven impartial economic institutes is essential for an objective look at the new figures, one of which is the Kiel Institute for the World Economy (IfW), whose growth research department is headed by Professor Stefat Kutz.

Coates did not hide in an interview with Al Jazeera Net "surprised" by the recent contraction figures, saying that experts at the Institute did not expect growth in the past years, but at least to keep the growth figures at zero.

He pointed to the obstacles to the ambitious growth of Germany's economy, saying, "The ship of the German economy is sailing in shallow waters," and said that the most prominent obstacles to growth are "the rise in energy prices, the security situation, the aging of society, the great shortage of qualified workers, the obsolescence of the educational system and the brain drain, all of which threaten the end of the German economic model that prevailed in the past decades."

Europe's Sick Man

This situation is reminiscent of the headline of The Economist, which in 1999 accused the German economy of being "the sick man of Europe."

Jan Hildebrand, deputy editor-in-chief of Handelsblatt, Germany's first economic newspaper, says that the headline "does not apply strictly to the current situation of the largest economy in Europe," but adds – in an interview with Al Jazeera Net – that the recent growth figures are a "warning" to Germany, which is at the bottom of the list of European Union countries regarding growth rates, according to a report issued by the European Commission last October, warned that the contraction will harm not only Germany but all European economies.

For his part, the head of growth research at the Kiel Institute for the World Economy commented on the title by saying that the description "fits" the state of the German economy, blaming previous governments - the past two decades - for neglecting the country and failing to address the reasons mentioned, especially making Germany attractive to qualified workers for which competition has become great in global markets.

The German economic model of the past decades is "over", Hildebrand said, noting that the times when Germany relied on "cheap Russian energy and the opening of Chinese, American and other markets to goods made in Germany are over."

He added that the pressures on the German economy will be great in the medium term, given its dependence mainly on industry, which requires large amounts of energy and open markets, at a time when countries that are important markets for German goods are moving towards economic protectionism.

As for the impact of this deflation on citizens, Hildebrand says that citizens feel that high inflation rates and energy prices are directly affecting their pockets and losing the prosperity to which they have been accustomed in the past decades, especially since the assistance measures provided by the government to citizens are either over or nearing completion.