Dec. 17, 2024: Behind Germany’s Political Turmoil, a Stagnating Economy

 

News Analysis

Behind Germany’s Political Turmoil, a Stagnating Economy

 

One of Europe’s powerhouses is losing its competitive edge, and the political class can’t agree on why — or what to do about it.

 

Jim Tankersley

By Jim Tankersley

Jim Tankersley, a longtime economic policy correspondent, leads coverage of Germany for The Times.

Dec. 17, 2024

https://www.nytimes.com/2024/12/17/world/europe/germany-government-collapse-economy.html

 

If you are looking for a quick explanation for why Chancellor Olaf Scholz’s government in Germany dissolved on Monday, consider this.

 

Over the past five years, through pandemic recession and its inflationary aftermath, the American economy has grown 12 percent in real terms. The German economy has not grown at all.

 

Germany’s economic engine, the world’s third-largest, has stalled, and its political class cannot agree on why — or what to do about it.

 

Like so many other Western nations in the post-pandemic era, Germany is afflicted with economic malaise, the sort that gives rise to populist revolts at the ballot box and empowers political parties on the far left and the far right. But not all malaise is the same.

 

The American version that helped Donald J. Trump win another term in November was largely about the lingering pain of pandemic price spikes. Voters did not reward Vice President Kamala Harris for the world-beating economic growth on President Biden’s watch. They were too angry about the cost of groceries and rent.

 

German voters, and politicians, would have been delighted if their economy had grown even at a small fraction of the American rate. Their economy shrank in the pandemic, rebounded, then stagnated over the last two years. It narrowly avoided recession this year.

 

Dismal growth numbers helped to sour the public on Mr. Scholz and his liberal-leaning Social Democrats. They helped to drive the acrimonious breakup of the three-party coalition he had led since 2021, paving the way for the failed confidence vote on Monday and snap parliamentary elections in February.

 

The German economy is not in free fall. But its prolonged period of weakness is already the focal point for the candidates vying to lead the next government at a perilous moment for Germany and for Europe.

 

“We’re talking about an economy in downturn, not in disaster,” Amy Gutmann, a former University of Pennsylvania president who served as Mr. Biden’s ambassador to Germany from 2022 until this year, said in an interview.

 

“Germany is the strongest economy in Europe — it still is, that has not changed — and I believe it will be into the future,” she said, “but only if Germany makes changes.”

 

The country’s biggest economic problems include a broad decline in the heavy industries that have driven its growth for decades and a sagging global market for its exported goods. Automakers and other heavy manufacturers have announced layoffs. Business leaders complain bitterly about high energy prices throttling their ability to compete, particularly with low-cost products from China.

 

The government’s attempts to shift the country to lower-emission sources of electricity, and to rapidly replace imported natural gas from Russia after the invasion of Ukraine, are nowhere near complete.

 

The debate over the economy will play out in February’s snap elections, in which Mr. Scholz’s center-left party will battle six others that all have realistic chances of winning seats. The man currently leading the race to be chancellor is Friedrich Merz, who heads the conservative Christian Democratic Union party.

 

There is no direct analogue to Mr. Trump in Germany’s mainstream parties — no candidate promising to supercharge growth through a combination of protectionist economic policies and sheer force of will.

 

So the economic debate that dominated the opening salvos of Germany’s campaign season on Monday sounded less like those during the most recent American presidential election and more like the detailed policy disputes between Barack Obama and Mitt Romney in 2012.

 

As lawmakers prepared to vote to dissolve the government, Mr. Scholz mirrored Mr. Obama and — to an even greater extent — Mr. Biden during his 2020 campaign. He argued that Germany suffered from chronic government underinvestment in critical infrastructure, which threatened its position as a global industrial leader. That applies to its energy supply, its internet, even its railways.

 

His prescription was similar to Mr. Biden’s. He called for an increase in government borrowing to support spending on both existing infrastructure and attempts to gain footholds in emerging industries like artificial intelligence, biotechnology and quantum computing. He pledged a “Made in Germany” tax incentive for companies.

 

“We need more growth,” Mr. Scholz said on Monday. To get it, he said, “it is high time to invest powerfully and decisively in Germany.”

 

Mr. Scholz has chafed at Germany’s ingrained budgetary constraints and has called for changes to a constitutional limit on government borrowing to support more targeted spending. Still, he failed to spur growth during his three years in office, and polls suggest he is unlikely to win another chance to implement economic overhauls.

 

The front-runner, Mr. Merz, scoffed at Mr. Scholz on Monday, accusing him of leaving Germany in “one of the biggest economic crises in postwar history.”

 

Mr. Merz’s renewal plans center on pushing Germans to work longer hours, including by rolling back government benefits for nearly two million people who Mr. Merz said were capable of working but not employed. “We must give them the courage, encouragement and incentive to return to the labor market,” he said.

 

He has also promised to cut some taxes, including for corporations. So have the pro-business Free Democrats, who were members of Mr. Scholz’s coalition until they pulled out in November. Christian Lindner, leader of the Free Democrats, invoked Mr. Trump’s campaign pledges in calling for tax cuts to help German companies.

 

“The American government is considering lowering corporate taxes to 15 percent, while we are twice as expensive at 30 percent,” he said. “Since we are not twice as good as the U.S., we cannot be more than twice as expensive.”

 

Alice Weidel, the chancellor candidate for the far-right Alternative for Germany, or AfD, which has grown more powerful in recent state elections, lamented Germany’s suffering business climate on Monday.

 

Ms. Weidel, who worked at Ernst & Young before going into politics, said that Mr. Scholz’s government had left “the automotive industry, thanks to gigantic bad investments, in free fall; mechanical engineering in decline; the chemical industry fleeing from exploding energy costs.”

 

She drew a rebuke from Robert Habeck, the economy minister and leader of the Greens, who said in the Monday debate that the AfD’s threats to deport immigrants would drain Germany’s work force. The AfD, he said, “poses the greatest threat to the economy in Germany, to competitiveness and to growth. Yes, with your racism, you will lead the country into a severe economic crisis.”

 

There were strong echoes of the back-and-forth between Mr. Biden and Ms. Harris and Mr. Trump, who campaigned on deregulation, immigrant deportation and corporate tax breaks.

 

Mr. Trump also promised a wide variety of individual tax cuts and even floated eliminating income taxes entirely. No one in Germany has waded that far into economic populism, but they have taken steps toward it.

 

The AfD has promised to cut taxes and subsidies and to repeal Germany’s green-energy policies in a bid to reduce burdens on workers. Mr. Scholz called on Monday for reducing taxes on groceries and for raising the minimum wage. And Mr. Merz wants to reduce income taxes for low- and middle-income workers.

 

It is as if they learned a lesson from Mr. Trump’s defeated Democratic opponents: Growth is necessary. But economically, and especially politically, it is rarely enough.

 

Melissa Eddy and Christopher F. Schuetze contributed reporting from Berlin.

 

Jim Tankersley writes about economic policy at the White House and how it affects the country and the world. He has covered the topic for more than a dozen years in Washington, with a focus on the middle class. More about Jim Tankersley