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Arrogant Germany is incapable of saving itself

Chancellor Olaf Scholz’s (R) coalition appears to have no clue how to fix the economic mess
Chancellor Olaf Scholz’s (R) coalition appears to have no clue how to fix the economic mess - ANNEGRET HILSE/REUTERS

The days when the CEO of Deutsche Bank could lecture the rest of the world on the secrets of the German economic model, built on brilliant engineering, an unstoppable export machine, and a smooth consensus between unions and managers, are a long time in the past.

In a speech in Frankfurt this week Christian Sewing, the Bank’s head, said his country “will become the sick man of Europe” if it does not address its structural issues.

It was hardly a vote of confidence from an institution that had always been regarded as a pillar of the economy, but Germany’s most senior banker is of course completely right. The problem was what he didn’t say.

Germany’s establishment has proved incapable of identifying the key cause of its country’s underperformance: its own disastrous decision-making and political culture. Until it does so, the country will be incapable of the radical reform it desperately needs.

The country’s fortunes have been parallelled by Deutsche Bank, which is now a shadow of its former self. Its market value is roughly 70pc below its 2007 peak, and it is now worth only a third as much as France’s BNP Paribas.

Meanwhile, the economy it provided the finance and capital to build is also struggling. After coasting on an undervalued currency, cheap energy, and a booming China, Germany is stuck in a spiral of decline.

The country fell into recession last year, and it is now flat-lining, with output expected to shrink again this winter, making it the worst performing country in the G-7. Output is still only 0.2pc larger than its pre-pandemic level, a performance that makes British growth look positively sprightly.

Sewing correctly argued that his countrymen had, for too long, erroneously held “the idea that the economy will continue to run itself and that we don’t have to do much to succeed”. But he failed to spot the problem underlying this.

Germany got extraordinarily lucky in the first two decades of this century.

The replacement of the mighty Deutsche Mark with the far weaker Euro meant that its currency was dramatically undervalued, allowing it to build up huge trade surpluses and dominate a vast range of industries where it may otherwise have been unable to compete.

The industrialisation of China, meanwhile, was built on German machine tools creating a huge new market for the country’s formidable engineering firms.

And it had access to what seemed like an endless supply of cheap Russian gas, allowing it to continue with heavy, power hungry industries – the huge BASF plant in Ludwigshafen uses about as much gas as the whole of Switzerland – long after they would have been obsolete elsewhere.

Add it all up, and this happy combination of circumstances created an illusion of permanent prosperity that allowed Germany during the Merkel era to complacently lecture the rest of the world on the brilliance of its consensual model, while racking up trade surpluses as if they would last forever.

That luck has now run out.

The war in Ukraine meant that the Russian gas had to be turned off, and given the ridiculously self indulgent decision to close its nuclear plants Germany only managed to avoid blackouts by paying eyewatering prices for energy on the global market.

Factories are already closing because they can’t afford power.

China seems to have bought all the German technology it needs, and is now turning the tables mercilessly on its former tutor.

Led by the likes of BYD, the Chinese auto companies could well be about to destroy the German auto giants, and the EU’s planned tariffs on Chinese electric vehicles seem like they will be too late to save them.

And while the euro is still weak, the price advantage has long since been exhausted, and the bills for propping up the currency’s weaker members are falling due.

Meanwhile, Germany has failed to digitise, with the fax machine still an everyday piece of kit.

The country that capitalised so well on the first and second industrial revolutions is nowhere in the third.

There are precious few German apps that anyone has heard of, and it may well be too late to catch up now; the gravity pulling entrepreneurs to Silicon Valley, New York and London may be inescapable.

Even worse, the country has somehow managed to fail even more lamentably than Britain in modernising its infrastructure; the construction of the new Berlin airport makes even HS2 seem well-run.

But the real problem is deeper. Germany’s consensual, coalition-based political system, much praised by centrists in this country and elsewhere, is incapable of pushing through the radical change and modernisation the country needs.

Even by the dismal standards of its European peers, Germany appears to be incapable of reform.

For all his faults, and his outsized ego, France’s President Macron has made significant pro-business moves, cut some corporate taxes, and slightly trimmed it’s bloated welfare state.

Italy’s Giorgia Meloni is at least attempting to reform Italy’s stagnant economy. Poland’s economy is easily beating its neighbour, and stealing a lot of its factories into the bargain.

By contrast, Germany is paralysed by a coalition comprising the Social Democrats, the Greens, and the Free Democrats that can agree on almost nothing (think Angela Rayner, Caroline Lucas and Kwasi Kwarteng trying to run an administration together).

The coalition’s one big idea was splurging €10bn on getting Intel to build a new chip factory in the country in an attempt to drag Germany into the 21st century.

Given the coming glut of semiconductors on the global market, it already looks like a white elephant. Otherwise, Chancellor Scholz’s coalition appears to have no clue how to fix the mess.

It is possible that Germany will reform itself one day. It is still a rich country, with a highly skilled workforce, a huge depth of technical talent and a huge presence in global markets.

But it will take a radical overhaul of its political system, and a shattering of the complacent centrism that dominates its internal debate before that happens. And there is little sign of any such move on the horizon.

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