European Central: German Economy Slips Into Recession
Peter Zelei Images
Germany has long been the largest national economy in Europe and the EU and has a higher GDP per capita than the average European nation. Germany's economy is starting to show signs of weakness however as it shrank for the second quarter in a row. Simultaneously, the EU's member states famous for their economic struggles such as Greece, Spain, and Italy have seen economic growth. At first it was predicted that the German economy avoided recession by growing by 0.2 percent in the first quarter of 2023 but this was proven to be false and the economy actually contracted by 0.3 percent. As a recession is defined as two straight quarters of economic contraction, it is clear Germany’s economy has entered into a recession. The bright side is that during the past two quarters employment still grew by 0.3 percent each quarter even while the GDP contracted.
Germany’s Energy Dilemma
The German economy shrank the past two quarters partially due to a decline in consumer spending, which fell by 1.3 percent. Due to the invasion of Ukraine causing energy prices to skyrocket as Germany and other EU nations sought to replace Russian energy with other sources, consumers have had to buy less goods in order to cope with higher prices. Germany in particular has struggled with the energy debate. While other European Union nations are developing the infrastructure necessary to produce nuclear energy, Germany shut down the last plant earlier this year and instead is expanding a coal plant. Germany has even been dismantling a nearby windfarm to expand the Garzweiler lignite mine along with razing a nearby village. For a nation that was considered to be the leader of the European Union under Chancellor Merkel, this is becoming a fleeting memory.
The reliance on coal also risks the EU member state’s reduction in emissions goals. In 2022 German energy consumption fell 4.7 percent but emissions did not due to the use of coal and oil. Germany strives to cut carbon emissions from its 1990 level by 66 percent by 2030 and to be carbon neutral by 2045. This will be difficult to accomplish as C02 emissions increased by 3 percent last year due to the use of coal to meet the nation's energy needs.
It is important to remember that a mild winter meant Germany avoided the worse that some predicted. A harsher winter would have potentially led to the temporary closure of factories in order to ration gas. This however did not happen, and Germany’s GDP only had a minor contraction the past two quarters. This, however, does put some pressure on the government to urgently find an energy solution that aids the economic economy even if next winter is worse.
European Central Bank And Rising Interest Rates
Another reason is the European Central Bank has raised the interest rate multiple times in an attempt to reign in the inflation rate. While it is possible to control inflation by raising the interest rate, this has a side effect on Germany, higher interest rates cause German exports to be more expensive for other nations. As German exports were responsible for 47 percent of the economy in 2019, this shows how a decrease in exports can easily cause a decrease in Germany's GDP. In December, German exports dropped by 6.3 percent in December 2022. This contributed to Germany's trade surplus dropping for the fifth year in a row.
As the European Central Bank sets interest rates based on what it feels is best for the Eurozone economy on average and not for individual member states, Germany unfortunately will continue to feel economic pains. When member states give up their old currencies in order to adopt the euro currency, they give up their right to control their own monetary policies. During difficult economic times, nations can normally manipulate their monetary policies to stimulate economic growth but for Germany this is no longer an option. Instead, Germany will have to try to find ways to make its economy less dependent on exportation.
Decline of German Manufacturing
Germany’s manufacturing sector is known for producing high quality goods but with inflation being high worldwide this makes it harder for citizens in less wealthier nations to be able to afford to purchase these goods. Exports fell to China by 19 percent not only because of inflation but because China is now directly competing with German manufacturing. China and Germany were once economic partners yet they are now economic rivals. China’s low wages and other production costs worked hand in hand with German investors and technical knowledge. Chinese companies now however are prepared to replace German midsize manufactures which are a major player in the German economy. While nothing is yet set in stone, this scenario has occurred before between Germany and China a decade ago in the solar power sector. Chinese competitors surpassed German manufacturers in solar power and crushed Germany’s solar power industry. Now the size of the Chinese auto manufacturing industry may surpass Germany’s as well. While partnering in China in the past led to strong economic growth for Germany this is no longer the case.
There is no quick solution for Germany’s economic challenges. While the economy may not be in as dire circumstances as Greece, Italy, and Spain faced, the next couple years will be difficult, nonetheless. Germany will have to redevelop its strategy of economic growth to no longer be reliant on China which has now become a direct competitor. German reliance on coal will also make it difficult for the nation to meet its emission targets. As the coal mine only has enough for about 10 more years, the nation must act with some urgency to come up with a new energy strategy that helps the nation reduce emissions while also does not burden an already struggling economy.
