Germany's Recession is EU's First Falling Domino
09:00 GMT 27.05.2023 (Updated: 16:18 GMT 27.05.2023)
Germany entered a technical recession in the first quarter of 2023, according to recent figures from the Federal Statistical Office. What's behind the new trend and what does the future have in store for the German economy?
Revised official data has indicated that Germany's economy is in worse shape than previously estimated: it has contracted twice, in two consecutive quarters, meaning that it has been dragged into a recession. As per international economic observers, the unfolding economic slowdown has largely been caused by the disruption of Germany's energy ties to Russia, which exacerbated the already swirling crisis in the country and contributed to gradual de-industrialization.
"Long term, reliable, low cost and abundant energy supplies from Russia have been pivotal to German industrial sector development and strength," Paolo Raffone, a strategic analyst and director of the CIPI Foundation in Brussels, told Sputnik. "This is particularly true since the mid-seventies. In history, the thalassic powers (transatlantic powers) have always opposed the 'easy' energy supplies from Russia to Germany. The scope has been (and still is) to contain the German powerhouse based on the development of its industry."
"The 'mysterious' explosion of the North Stream pipelines was highly symbolic (cutting German energy ties with Russia and Eurasia) and it has had tremendous consequences for the German economy. Without the convenient Russian energy supplies, Germany has entered (again) a period of industrial difficulty that impacts the general economy and the life of people," Raffone continued.
According to the Federal Statistical Office, the nation's gross domestic product (GDP) fell by 0.3% in the first quarter of 2023, with household and government spending plummeting 1.2% and 4.9%, respectively.
Is Germany Heading Towards De-Industrialization?
Germany's looming de-industrialization became the focus of economists' attention late last year. In October 2022 German chemical giant BASF revealed its plans to relocate part of its production facilities to China, citing high energy costs. The decision came after the destruction of the Nord Stream pipelines in September 2022.
At the time, at least 9% of Germany's small- and medium-sized industrial companies stated that they would be moving their production abroad, too, according to the Foundation for Family Businesses in Germany and Europe's survey. Furthermore, BASF announced in February 2023 that it would cut 2,600 jobs, or about 2.3% of its global workforce. Out of 2,600 jobs, 1,800 were scheduled to be cut at the Ludwigshafen headquarters in Germany.
There is a real danger of deindustrialization in Germany
and this process will last for several years, according to Alexander Rahr, a German political scientist.
"Indeed, due to rising prices for energy resources and resources in general, due to the high taxes that exist in Germany, many companies have seriously thought about moving their business to America, where everything is cheaper, where there are other privileges, where there's more encouragement, assistance to large firms than in Europe, less taxes and so on. Or to [move their businesses to] China," Rahr told Sputnik.
Meanwhile, the destruction of Nord Stream
and Berlin's decision to join the collective West's energy sanctions against Russia are "not the only source of Germany's declining economic fortunes," as per Gunnar Beck, a Member of the European Parliament for the Alternative for Germany (AfD) party who is currently Vice-President of the Identity & Democracy Group in the Parliament.
"The German government is pursuing very foolish policies in other regards as well. First of all, there is the so-called green transformation or green agenda. Germany is trying to replace not only Russian energy but all fossil fuels, and it's phased out nuclear energy," Beck told Sputnik, adding that the Scholz government is aggravating the effects of a decline of energy imports from Russia and may soon face even sharper economic decline.
Why German Chancellor's Optimism is Unjustified
Still, German Chancellor Olaf Scholz has shrugged off the latest economic data, claiming that Germany's economic outlook was "very good".
"[Scholz's] extremely optimistic, and I would say unrealistic predictions are based on the assumption that the whole world will switch to green energy and that Germany will develop various sources of such energy rapidly enough to take the competitive lead," said Beck. "Those are highly questionable."
The politician explained that currently Germany is hardly a leader in many areas of clean energy and that it would need to do a lot of catching up. "For example, when it comes to electric cars, Germany is clearly behind the Far East, the economies of Korea, Japan, and to some extent also China," he remarked.
Meanwhile, renewables (wind and solar) and alternative gas supplies (liquid gas) may reduce the energy shortages but not the cost," emphasized Raffone. What's more, neither of those sources are fully reliable or abundant, according to him.
"Renewables investments will need a long time to breakeven and their reliability depends on weather conditions," he said. "Liquid gas supplies entangle high costs (transport and processing) without being independent from geopolitical uncertainties. Next winter (2024-2025) will probably be a moment of truth for these solutions. Several researchers are already ringing the alarm bell for probable energy shortages in Germany."
Raffone warned that the signs of recession could deepen and become structural around the end of the year, leading to social and political consequences for the Scholz government and especially for "the very pro-American Green Party in the Western regions."
"Germany is predicted to have at least between 7% and 8% [inflation] this year," said Beck. "And food price inflation in Germany is running at about 23%. So that's the effect on consumers, the German standard of living, the living standards of the German middle class
are plummeting. It's declining more sharply than at any previous time since the Second World War. Now to the effects on the competitiveness of German industry, where the effects are obvious. The production costs of German industry are rising very sharply. That has a negative effect on Germany industrial competitiveness on the world market."
How Could Germany's Economic Slowdown Affect the EU?
Given that Germany has long been the EU's flagship and a European powerhouse, its decline could backfire on the union, according to Sputnik's interlocutors.
"European economy and monetary policy depend on the German economy," stressed Raffone. "At the Trento Economics Forum, EU Commissioner Paolo Gentiloni said yesterday: 'If Germany does not grow, this is not good news for Europe. Italian manufacturing is closely linked to German manufacturing and therefore the situation in Germany can also affect Italy. This is the reality'."
The experts expect that inflation in Germany and in the EU will continue to go up despite the European Central Bank's (ECB) interventions.
The crux of the matter is that European inflation is the result of not only higher energy costs but also higher non-energy related costs of goods and services. Continuing the policy to support Ukraine and "isolate Russia" will come at a cost for European governments, as per Sputnik's interlocutors. Nonetheless, the EU is unlikely to backpedal on its political course, because the bloc has succumbed under Washington's pressure
On the other hand, the ECB cannot proceed with considerable interest rate hikes to fight inflation: the southern European countries are very heavily indebted and they couldn't cope with the increasing interest rate burden. All of the above may not let the EU curb inflation anytime soon.
"Germany and Europe will face colossal social issues. Germans, Europeans are used to living very well and comfortably. But this life is worth a lot, it's all very expensive. And if resources: energy resources, raw materials - all this will rise in price, and the production of technologies that are sold will be less and not enough. Then social issues will arise, which can then grow into serious problems," concluded Rahr.