Olaf Scholz during a visit to a German company.
©Photo by Tobias Schwarz/AFP
A strategic stalemate
Germany is facing significant economic difficulties. The German economy has experienced nearly several years of GDP stagnation.
Atlantico: How can we consider that the German economy is paralyzed? Can we talk about an economic disaster? What are the strategic flaws in recent years?
Don Diego de la Vega: For me the German economic situation is not a disaster. It is a major crisis because of the strategic stalemate. The word disaster makes more sense when we talk about Venezuela, Haiti and maybe eventually France.
Yet Germany was one of the instigators of the energy crisis, if we may say so, in Europe, particularly because of its hasty exit from nuclear power. The Germans invested 400 billion euros to replace depreciated nuclear power that was still working very well. They were forced to have poor quality coal for a long time, causing complete chaos in the entire European energy system. This has significantly weakened EDF as new regulations have been imposed. Germany is a country that remains energy intensive, especially for chemicals, so there are climate commitments, very ambitious energy transition commitments, but these have regulations that are almost at odds with maintaining the industry. The Germans are currently at an impasse.
To recover from this totally irrational energy policy, Germany will be forced to cheat by dipping into public finances.
Credit: BEA, DeStatis
So Germany can’t match its energy desires with its budget? Is budgetary rigor really respected?
No, Germany does not have budgetary austerity, that’s for sure. Under Angela Merkel there was a semblance of economic discipline but it was probably pressure on other European partners to be fiscally strict. Germany continued to spend a lot, which we see with its spending breakdown. In addition, she spent the balance sheet. Along with official figures, there are balance sheet structures that are debudgeted and multiplied with a large number of funds. We are talking about 850 billion euros, which is nothing. We will never know the profitability of these expenses, but they must be rebudgeted. So we have a Germany that has lied a lot on the budgetary level. She used her credibility to go far in spending, which gave Angela Merkel the status of guardian for 15 years, by capitalizing on the Schröder reforms, she capitalized on Germany’s reputation fiscally and budgetaryly, and in reality made French policy, spending policy. It goes so far as not to question the shortcomings of the German model, namely the lack of productivity and lack of competition in services. On the surface, this was not noticeable, but now we are starting to see certain realities.
If these problems are more easily identified today, how can Germany upgrade its model in Europe?
To do this, the German economy must focus on three essentials. First, there is a need to identify the mistakes that have been made and perform a “truth operation”. What is hidden in the system we must keep in order, especially from the point of view of public finances. And secondly, we need “capitalized operations” on German transport which remain strong points in Germany, especially this model of industrial family business which is not too close to the state and which is not too dependent on the time bank. There are still plenty of good engineers to capitalize on the nation’s founding assets. And third, we must accept the decline of the euro. If the Germans ever want to change their monetary vision 180 degrees, the euro will fall, because they control the system in Frankfurt. If the euro falls they will be able to save their medium sized industries and regain a sense of competitiveness which will be very useful. Because with the euro as expensive as the dollar or the yen, it is clear that the Germans are going to perish. This devaluation will ease the transition and reforms that are now urgent in Germany. To resist and ease the crisis period, you need money and to succeed in moving towards a less dependent economy.
In November 2023, Germany’s finance ministry imposed a freeze on a large part of the 2023 federal budget to avoid an accumulation of charges in 2024. Has this had good results? Was it well managed?
This decision was taken because there is no growth in Germany. In addition, the Constitutional Court awarded them 60 billion euros, indicating that it is necessary to stop budgeting practices and non-planning structures. Now there is indeed a fitness but it is still too early to judge the effect. What I am looking forward to are real priority areas and investment in the future. I don’t mind if there is a small deficit because Germany has interest rates that allow for that. Now the problem is that for the moment we cannot say whether the Germans are investing for the future in the energy sector this evening or otherwise, I think they are following the accounting logic of keeping money. Credibility.
