After a mild recession in late 2022 or early 2023, it was satisfied with zero growth in the 2nd quarter, and the Bundesbank expects even worse in what remains of 2023.
"Sick" again
For two decades, we have not heard of a sick Germany. At the time, with his back to the wall, Chancellor Gerhard Schroeder launched a labour market reform, which sharply reduced the cost of labour per unit produced in Germany and laid the foundation for two decades of growth. But since then, almost nothing.
The Merkel years were marked by excellent stability and priority for the financial consolidation of the country but also by a considerable lack of vision. While it has long had meagre (and even negative) interest rates, Germany has not taken the opportunity to upgrade its infrastructure, boost future sectors or even finance the energy transition so desired. It chose to stand still and run a zero deficit. Now, it is paying the price.
A model under siege…
The industry has made Germany successful, and the recipes for its success are simple. Turning to a large part of cheap energy from Russia, it then produces high value-added goods, on which the Teutonic companies invested a lot and on which they had a unique know-how. The quality of Made in Germany then makes export markets fond of German products. For a long time, the German model seemed impossible. Today, however, the three ingredients of this successful recipe are threatened.
Cheap energy from Russia is no longer and will not return anytime soon. And since, at the same time, the nuclear fleet has been shut down. Investment in renewable energy has been insufficient. We see today a Germany that is turning to liquefied natural gas, much more expensive, or even coal, and which seems resigned to the idea of separating from the most energy-intensive sectors of activity, including Chemistry.
In addition, many sectors in which Germany was dominant (combustion engines, industrial machinery, among many others) are changing. An electric motor is far less complex than a combustion engine, especially if it is sober, powerful, and complies with the latest European standards. It is on these that Germany had a unique know-how. On the other hand, software plays a significant role in energy management, assisted driving and many other technological advances that consumers are fond of. However, in these sectors, such as those of the energy transition (semiconductors, batteries, sensors and many others), Germany does not offer a particular advantage; the know-how is in the United States or Asia.
Finally, it is difficult not to mention the increasingly tense relations between the West and China.
With Germany and China among the strongest supporters of global trade and adopting a mercantilist policy, trade is essential. But today, faced with China's dominance over all sectors related to the energy transition and geopolitical tensions, German companies are asked to reduce their exposure to this market.
The challenge is all the more important because, in China as elsewhere, fashion is more about economic patriotism and buying local production. At the same time, Beijing promotes the energy transition, the transition to electricity, while consumers are fond of products with high technological content. In addition, China incorporates the production chain of many Teutonic companies. Reducing the links that have been patiently forged for decades will not be easy.
So here is a Germany that has let all its competitive advantages slip one after the other. Hampered, it no longer has cheap energy or particular expertise in a sector of the future and is asked to do without privileged access to a vast market.
…that will need to be replaced (but it is not apparent)
The question is whether the country has the means to offer itself a new growth strategy that is likely to make it take off as it did 20 years ago. As one of the least indebted economies in the G7, it has the financial means to do so. But it will not be easy. First, there are challenges within the country itself. Germany's workforce is ageing, and its demographic profile is unfavourable. Second, the ruling coalition members do not agree on much and certainly do not have a shared vision for the country's future. There is also the fact that a defence of the national interest pure and complex, like an America is Back proposed by Biden, would not necessarily be well received, either in Europe or elsewhere.
Finally, it should be remembered that the necessary measures to get the country out of the rut (investment in future sectors, education reform to better prepare young people for the challenges of tomorrow, improvement of infrastructure, digitalisation of public services, ensuring the attractiveness of the country in the eyes of foreign skilled workers, ) will take time to bear fruit. In addition, there are international challenges: we must not forget that competitors (United States, China) are not at a standstill, have a head start and a significant competitive advantage, and will fight to dominate the sectors of the future.
Germany will also have to conquer new markets, weighing all its weight so that, at the European level, new free trade agreements are signed with Latin America, South Asia and many others. But it is unlikely to succeed in a Europe that believes in protectionism and thinks of managing decline by closing its borders.
Berlin has a lot of work to do to get back on its feet, and, at this point, it is hard to believe in a rapid rebound in the German economy, cornered on all fronts and unable to defend its national interests or offer a vision for the future.
We do not invest in it as part of our fund portfolios, nor do we invest in a eurozone that is increasingly dominated over all future sectors and has a gloomy economic outlook. We selectively look at individual actions in this region.