Germany’s many challenges

Germany has again been in the news for the wrong reasons. This time, a deranged man from Saudi Arabia, living in Germany since 2006, drove a car into a German Christmas market and killed at least five people. The Saudi government had several times warned Germany about this man, but Germany deemed it to risky to send the man back to Saudi Arabia. The Saudis might have jailed him. This illustrates the idiocy behind Germany’s failed immigration policy. There are simply too many immigrates, in particular Muslim immigrants, to have a peaceful coexistence with the German population. There are about 6-7 million Muslims in Germany. Islam is the largest minority religion in the country, with the Protestant and Roman Catholic confessions being the majority religions.

This has resulted in growing political discontent and instability. Germans will go to the ballot box on February 23 for a federal election, following the collapse of Chancellor Olaf Scholz’s three-party government with social democrats, liberals, and greens, in November. The anti-immigration party Alternative for Germany (AfD) is polling in second place ahead of the election, potentially setting it up to become the largest opposition party in the next parliament.

The German election will be nasty, and it is easy to see why so many voters gravitate towards the anti-establishment AfD. SPD Chancellor Olaf Scholz, in a TV interview this week, referred to his main conservative opponent and frontrunner to become the next chancellor, Friedrich Merz, as “Fritz,” a moniker perceived as belittling. Merz’s ally, Bavarian conservative leader Markus Söder, in turn called Scholz the “most embarrassing chancellor our country has ever had.” It might be true though.

There are other problems for Germany than immigration, Muslims and political elections. Germany’s economy is struggling due to several factors. Germany is facing a shortage of skilled workers, especially in high-growth sectors. The government is trying to address this by increasing salaries to attract people from other EU countries. Despite the efforts, the export-oriented industrial sector is expected to see production fall for the third year in a row in 2024. This might get even worse as Trump has threatened the EU with tariffs, which would import German export. China’s economy has been slowing down, also impacting the Germany economy as China is a major export market. Anemic growth could unfortunately be the norm in coming years, because of three structural challenges: an overreliance on external demand, unfavorable demographics, and stagnant productivity.

As the world’s third-largest economy and constituting about a quarter of the European Union’s collective GDP, Germany has an outsized impact on Europe’s economic health. The spillover effect from lackluster growth in Germany will act as a drag even if other European economies continue to grow. The German economy is highly dependent on exports. Germany’s economic weakness in the second half of 2024 can largely be attributed to a significant drop in external demand, particularly from China. But this dependency also extends to imports that go into making German goods. Indeed, about 43% of German industrial sectors depend on Chinese imports. Although 81% percent of German manufacturers acknowledge that replacing critical inputs from China would be “difficult” or “very difficult,” the majority say they have taken no measure to reduce their dependency on China. That leaves Germany vulnerable to growing global trade restrictions, on both the import and export sides.

As in other developed countries, aging demographics are also not in Germany’s favor. Over the past decade, immigration has offset a shrinking native labor pool. But this supplemental labor supply could diminish in coming years with potential policy changes. And weak productivity growth is holding the economy back. A lack of investment in technologies such as artificial intelligence (AI), an inflexible labor market, and red tape are all inhibiting innovation and the efficient allocation of resources.

It’s tempting to draw a comparison to Japan in the early 1990s, that Germany could be on the cusp of its own Lost Decade. But there are mitigating factors. First, the government’s recent move to relax its fiscal constraint, the so-called debt brake, the law mandating a balanced budget, is a welcome one, especially if it allows greater investment in new technologies such as AI to support productivity growth. Second, structural reforms, particularly those targeted to improve business and labor market dynamics, hold the key to a more vibrant economy.

Some other items that come to mind and impacting Germany negatively are that public infrastructure is chronically underfunded and Germany’s bureaucracy is overly burdensome, which is slowing down productivity and investment.

Also, Germany has faced an energy crisis in recent years, which has impacted the economy, energy supply, and citizens’ lives. Energy prices have spiked, affecting many sectors of the economy, from large industrial mills to small bakeries. In 2023, the number of households paying more than 10% of their income on energy increased from 26% to 43%. Germany’s energy crisis was made worse by several factors, including a heavy reliance on Russian gas, a slow transition to green energy, and resistance to nuclear power. Citizens are concerned about rising living costs and inflation, which is mainly driven by energy prices.

The discontent with the economy, politicians and immigration will set the stage for the February election. Germany has also wasted much money on Ukraine and kept supporting Ukraine and has not been interested in finding a peaceful solution to the conflict. It is clear that Germany is not on the right path, and it will not be an easy task to fix it.