Why Germany’s economy struggling and can government fix it?

The Guardian has examined the challenges Germany faces as railway staff, lorry drivers, farmers and others threaten to strike in the country. Caliber.Az reprints the article.

Railway staff, lorry drivers and farmers are among those threatening strike action across Germany from January 8 in nationwide protests over grievances ranging from pay and conditions to cuts in agricultural subsidies and higher road tolls.

Long Europe’s powerhouse, Germany is struggling with a potent mix of short-term and deeper structural problems that – along with a divided and seemingly ineffectual government – have prompted economists to talk of the “sick man of Europe”.

Here is a look at some of challenges confronting the EU’s most populous state.

Why is Germany’s economy suffering?

Sweeping labour reforms in the late 1990s followed by surging demand in China and developing markets helped to create millions of jobs and drive strong economic growth in Germany for more than two decades.

Now, however, the country’s famed economic model appears to be faltering. The IMF predicts Germany will be the only G7 economy to have shrunk in 2023.

In part, the problems are circumstantial and so, hopefully, temporary: a weaker Chinese economy, for example, and the impact of Russia’s war on Ukraine.

Demand for the goods Germany’s export sector mainly produces – machinery, cars, tools, chemicals – fluctuates according to the state of the wider economy.

But the current downturn has also exposed longer-term issues affecting the country’s economic efficiency. Economists point to the country’s rapidly ageing population, lack of recent major investment in infrastructure and high corporate tax rates.

Output is expected to decline by 0.5% in 2024. Longer-term, threats include Chinese competition in the electric car market and the cost of reaching net zero, higher in Germany because of its huge, energy-intensive industrial base and rejection of nuclear power.

Is the state up to the job?

Navigating rapid economic, social and geopolitical change generally requires openness, adaptability and fast decision-making on the part of state institutions – which are hardly the characteristics of Germany’s bureaucracy.

Digitisation lags behind much of the rest of Europe. Germany still relies heavily on cash, which accounted for about 40% of point-of-sale payments last year against 8% in Sweden. Fast broadband connectivity is improving, but it is still patchy.

The head of Germany’s digital industries association, Bitkom, has called the country a “failed state” in terms of digital government services. Building permits, operating licences and company registrations all take far longer to process than the EU average.

All of this has a structural impact on productivity, as does an administration often criticised as excessively slow, overly legalistic, unnecessarily cautious and in need of far-reaching reform. German red tape, as a consequence, is legendary.

What’s the government doing about it?

More than halfway through its four-year term, 82% of German voters are less than happy or not at all happy with the performance of Olaf Scholz’s embattled and divided coalition, made up of the centre-left SPD, Greens and neoliberal FDP.

Scholz’s SPD has fallen to third place behind the centre-right CDU/CSU opposition and the far-right Alternative für Deutschland (AfD), while approval ratings for the Greens are at their lowest in five years and the FDP has lost a third of its support.

The coalition inherited many of the country’s current problems and promised major reforms to fix them – but Covid, support for Ukraine and an energy crisis have put huge strain on its promise to modernise without harming individual sectors.

Already widely seen as ineffective, the government was dealt a further bitter blow late last year when the constitutional court ruled that its 2024 budget broke fiscal rules enshrined in the constitution, triggering a multibillion-euro budget crisis.

The decision meant the government was unable to divert €60bn (£52bn) of borrowing left over from its pandemic emergency fund into a climate and transformation fund (KTF) intended to fuel Germany’s green transition and modernise industry.

Cobbling together a budget without that money will be hard. The Greens are reluctant to compromise on the environment and social spending, the FDP refuses to lift a constitutional debt brake and wants big budget cuts, and the SPD is stuck in the middle.

Amid a spate of state election losses, falling popularity and the alarming rise of the AfD, each party seems increasingly determined to distinguish itself clearly from the others, making agreement on key economic policies even harder to find.

Who’s striking and why?

Germany’s national audit office has described the wholly state-owned rail network, Deutsche Bahn as being in permanent crisis, with debts of €30bn and punctuality levels at their lowest in eight years.

Decades of underinvestment are to blame, according to unions. The train drivers’ union (GDL) has called for “unlimited strikes” from 8 January, causing potentially major disruption, mainly over its demand for a 35-hour, rather than a 38-hour, week.

Despite a partial government U-turn on January 4, farmers are going ahead with their protest against plans to reduce diesel subsidies and tax breaks for agricultural vehicles as part of €900m of planned cuts to farming sector support.

The farmers say the planned cuts will threaten their livelihoods and German agriculture’s competitiveness, and have warned that from 8 January they will be “present everywhere in a way that the country has never experienced before”.

Hauliers are up in arms over higher tolls, while some doctors – including, from 9 January, specialists – could decide to close surgeries in support of the medical profession’s demands for more state support for an overloaded system.

Later in the year, collective bargaining rounds are due in the retail, construction, air transport, chemical, metal and electrical industries. In a faltering economy and as the cost of living crisis continues, all could prove further flashpoints for strike action.