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Germany faces into recession with little sign of an immediate turnaround

Main political parties can’t agree steps to reinvigorate economy

The golden Angel Victoria stands on the Victory Column in Tiergarten park in Berlin. The German economy is in a downturn, with little signs of recovery soon. Photograph: Sean Gallup/Getty Images

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Derek Scally
Fri Feb 23 2024 - 06:00

Mayor Arne Christiani of Grünheide, 40km southeast of Berlin, has the kind of problem many mayors would kill for. A Tesla factory on his doorstep that employs hundreds of locals and turns out 6,000 electric cars a week – 300,000 annually.

But Tesla’s plan to go to 500,000 vehicles, making it Germany’s biggest car factory outright, hangs in the balance. A referendum of 9,000 Grünheide locals this week vetoed expansion plans amid fears of even greater pressures on local infrastructure and water supplies.

“Clearly it wasn’t possible to explain things to people,” said Christiani, adding that “the reporting about Tesla’s plans drifted last year into negative territory”.

Not even Tesla billionaire founder Elon Musk, it seems, can counter the negative spiral gripping Germany. Aggravated by fiscal and psychological self-flagellation, and a ruling coalition’s defined by ideological contradictions, the Bundesbank finally admitted this week what the dogs in the street have known for months.

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Europe’s largest economy is officially in recession or – as federal economics minister Robert Habeck put it more poetically – “in troubled waters”, with no bridge in sight.

“The situation is challenging, extremely challenging,” said Habeck, presenting an economic growth forecast for 2024 that has sagged from 1.3 per cent to just 0.2 per cent. “We need to do more to tackle the reforms in order to maintain Germany’s competitiveness in a completely changed environment.”

[ Germany has a problem with a rigid constitutional rule that narrowly limits the permissible budget deficit ]

Last week, the liberal Free Democratic Party (FDP) finance ministry, led by finance minister Christian Lindner, presented its own report with similar conclusions to Habeck’s: pruning back bureaucracy and investing in public infrastructure are key to restoring German economic health and competitiveness.

Some here wonder what competitiveness Germany has to maintain. Geopolitical tensions and export challenges are matched by low consumption at home and, dragging everything down, a home-grown political crisis over how best to reform.

Fundamental ideological disagreement between the Habeck and Lindner ministries means fundamental agreement – that Germany needs to act after a lost reform-free decade – is blocked by ideological disagreement.

Green ministers want a debt-financed “reform booster” stimulus to encourage company investment, particularly in climate-friendly industrial transformation. That has attracted a firm no from Lindner, who wants to close the door on state-backed giveaways and return instead to balanced budgets.

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Without political agreement here the respective ministries are instead tinkering with tax rates and subsidies for a future reform package. And this while the last “growth chances” package – to cut company taxes and red tape – is limping through parliament. Opposition by Christian Democratic Union (CDU)-controlled federal states – who will largely foot the bill – saw the bill’s efficacy slashed on Thursday evening by more than a half to €3.2 billion.

That prompted Lindner to take a break from attacking his coalition partners and instead accused the CDU of creating reform standstill for political gain. In a lively Bundestag session on Thursday, opposition CDU politicians accused the government of providing its own opposition and operating in two modes: “brawling and refusal to acknowledge reality”.

“All our neighbours have the same crises but higher growth, this is your responsibility,” crowed Bavarian conservative Alexander Dobrindt on Thursday, describing this week’s economic forecast as the coalition’s “declaration of bankruptcy”.

While Berlin coalition politicians fiddle, Germany’s economic foundation burns. Its key industrial sector – already hobbled by interest rates, labour shortages and low orders – shrank 0.3 per cent last year. As inflation drops from nearly 6 per cent in 2023 to a forecast 2.8 per cent this year, wider industry is reporting an uptick in orders in the last weeks.

Germany’s key construction sector remains deep in crisis, however, with a slump in planning applications and the sharpest property market correction in 60 years. Average residential prices slid by between 9 per cent and 20 per cent last year for apartments and single-occupancy houses, while the commercial sector is gripped by uncertainty through the staggered insolvency of the multimillion Signa group.

For chief business lobbyist (BDI) Siegfried Russwurm, this week’s 2024 economic forecast is a further “disastrous signal” for German companies, already battling skilled labour shortages and a tax burden one third higher than the EU average.

Asked on national radio if he had confidence in the current government to turn things around, he sighed audibly: “We have no choice. We can’t just wait another two years as economically Germany slides still further.”

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