Slowing German Economy Teeters on the Brink of Recession

(CN) — The German economy is slowing down — and possibly entering a recession — and that’s giving rise to calls for the economic locomotive of Europe to start spending more to ward off a crisis.

A worker cleans machine parts of press manufacturer Schüler AG in Goeppingen, Germany. Germany’s export-dependent economy has been rattled by U.S.-sponsored trade wars. (Marijan Murat/dpa via AP)

For the past year, the global economy has been perturbed by the trade war between the United States and China, political instability, rising regional conflict and poor economic data.

All of this has many in Europe concerned about a new crisis — one that could be deeply traumatic for the eurozone, the area that uses the euro as official currency.

This week Germany’s central bank, the Bundesbank, said it appeared Germany’s economy has contracted for a second consecutive quarter due to a continuing fall in exports, which are the engine for Germany’s economy. If so, this would mean Germany has entered a “technical recession.” Growth forecasts are better for 2020.

The health of Germany’s export-based economy depends heavily on the state of world trade — so when it’s going badly, Germany too suffers. As economists describe it, when world trade sneezes, Germany catches a cold. In other words, demand around the world is falling for German cars and car parts, machinery and drugs.

Germany’s industrial production this year has fallen by about 5% and its exports by 8%. More businesses are turning to part-time work and discussion of recession is getting louder.

The Bundesbank warned that the slowdown in exports could begin to hurt Germany’s economy more widely, though the central bank said it did not expect a long-term recession.

Still, there is a sense among many economists that it is only a matter of time before Europe enters troubled economic waters — again. Europe was hit hard by the 2008-09 financial crisis and is still recovering from that shock.

To ward off the threat of recession, the European Central Bank said in September it was cutting interest rates and maintaining a policy of buying government bonds. In other words, it will keep trying to keep the EU economy primed with an economic strategy known as quantitative easing.

In the meantime, many are urging Germany to overhaul its economic model — for its own good and for the good of the EU.

“The German economy for years was a role model for other nations and pulled them along,” the Süddeutsche Zeitung newspaper reported this week. “But in 2019 the country suddenly finds itself as the brake again.”

First of all, Germany is being pressed to open up the purse strings and invest.

Germany enjoys a balanced budget and surpluses, in large part because of government commitments not to rack up debt, limiting federal structural deficit to 0.35% of GDP and enacting a policy of balancing the budget, the schwarze Null, or “black zero,” policy. The German public and, according to a recent survey, a majority of the country’s economic experts support Germany’s tight fiscal policy.

But advocates for a looser fiscal policy are growing. They say Germany needs to fuel demand by spending more, and that doing so could help the struggling economies of southern Europe.

Up to now, German policymakers have argued that spending more would simply make an already robust low-unemployment economy go into overdrive and overheat. They say there are perils in abandoning fiscal discipline.

“The government should respond to any slowdown by increasing spending and/or cutting taxes,” urged Jeffrey Frankel, a professor at Harvard University’s John F. Kennedy School of Government, in a recent column in The Guardian newspaper. “In particular, it should spend more on infrastructure maintenance and modernization, and it could cut payroll taxes.”

Frankel warned that sticking to a tight fiscal policy during a recession could see Germany joining a “club of foolishly pro-cyclical politicians” who spend when times are good and cut back when times are bad.

In an interview this week with the Financial Times newspaper, Christian Kastrop, an architect of Germany’s “debt brake” constitutional requirement, also argued in favor of more spending.

These experts say that Germany also must spend, and therefore borrow, more to achieve newly announced climate change goals to reduce carbon dioxide emissions. In September, the government announced a $60 billion plan to cut emissions.

For many, it’s more than Germany’s economy at stake: They want more liberal spending to give the rest of the EU a boost too.

“The only route out of the post-crisis stagnation, and the only way to rebalance the competitiveness gap between the north and south of the currency bloc, is for Eurozone states to undertake a huge coordinated program of investment,” said Grace Blakeley, an economist, in a piece for the New Statesman magazine.

Blakeley said that a “looming recession” even has the potential to “lead to the break-up of the European project altogether.”

But to grapple with Germany’s problems it might mean more than simply loosening the purse strings, experts say.

The past few years have been brutal for some of Germany’s commercial giants. Germany’s automotive industry was found cheating on emissions ratings. Deutsche Bank was caught up in scandal, including allegations of being at the center of money laundering. Bayer has been embroiled in lawsuits since it took over Monsanto. Thyssenkrupp, an industrial giant, was dropped from Germany’s blue-chip stock index in September because of problems there. In other words, the “Made in Germany” brand has taken a serious hit.

“After Dieselgate, the German bank scandals and the lawsuits against Bayer and Monsanto, confidence in German companies has fallen sharply,” Richard Edelman, the head of the U.S. public relations firm Edelman, said in a recent interview with Handelsblatt, a German news outlet.

Roderick Kefferpütz, a top official at the Baden-Württemberg state ministry, said in a piece for the Institut Montaigne, a French think tank, that the Germany model is “out of date.”

After a decade of growth, he said, “Germany feels like it is experiencing the final moments of its golden age.”

He added: “The economic miracle is coming to an end: Economic storm clouds are gathering over the German sky.”

Kefferpütz said Germany may be “entering a structural crisis” where a “new economic order is emerging and Germany has yet to find its place in it.”

He wrote: “Germany’s core industrial sectors — automobiles, machine tools — are industries from the Kaiser era.”

German companies are losing their competitive edge, according to experts, and lagging in the race toward digitization and artificial intelligence.

Kefferpütz said Germany’s future is threatened because “the international trading order is breaking down.”

“We are the world’s export champions and we are proud of it,” he said. “But this propensity to export makes us disproportionately dependent on the international situation.”

And the danger for Germany is that the economic paradigm may be shifting: An era of globalization and open trade may be coming to an end.

World trade is under pressure from protectionism and the rise of rival economic blocs, trade wars and a paralyzed World Trade Organization, he said.

“This is the new normal. And it destroys Germany’s understanding of economics,” he said. He added that Germany needs to become more aggressive on the world stage.

“We need a shift in strategic culture, integrating economic policy into a more global geopolitical rationale,” he said. “It is time for Germany to lose its innocence.”

(Courthouse News reporter Cain Burdeau is based in the European Union.)

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