Over the past few weeks, Germany has seen a gradual resurgence of the less than favorable label “the sick man of Europe.” Nonetheless, some economists are skeptical about whether this label accurately characterizes Europe’s largest economy.
The initial attribution of this moniker to Germany dates back to 1998, when the nation was grappling with the costly obstacles of its post-reunification economic landscape. Fast forward to today, and the International Monetary Fund projects a contraction in the German economy for 2023. This would set Germany apart as the sole G7 economy to undergo an official economic shrinkage this year, leading to the revival of the label in various media outlets.
However, the question remains: Does Europe’s leading economy truly warrant this designation?
Holger Schmieding, Chief Economist at Berenberg Economics, voiced his disagreement, stating, “To label an economy with record employment, numerous job openings, and one of the strongest economic foundations among major global economies as ‘the sick man of Europe’ doesn’t seem fitting.” He added that Germany’s situation has not deteriorated to an extent that justifies such a label.
While Germany entered a recession in the first quarter of 2023, there are noteworthy distinctions between its present circumstances and its prior bout as Europe’s “sick man,” according to Jasmin Groeschl, Senior Economist for Europe at Allianz. These distinctions encompass external geopolitical pressures and a worldwide economic deceleration.
The challenges confronting Germany’s economy can be categorized into two distinct fronts, as explained by Stefan Kooths, Research Director for Business Cycles and Growth at the Kiel Institute for World Economy, in an interview with CNBC.
These fronts comprise short-term, cyclical challenges, primarily stemming from the global economic climate, coupled with more persistent, structural issues intrinsic to Germany’s economy.
Dissimilarities between Germany’s present economic state and its conditions in the 1990s and early 2000s are stark. Carsten Brzeski, Global Head of Macro Research and Chief Euro Zone Economist at ING Research, underscored the current cyclical headwinds that Germany is contending with. Unlike two decades ago, the economy is grappling with different forms of adversity, including the effects of China’s post-Covid-19 reopening, which did not yield the expected resurgence, thereby affecting manufacturing economies worldwide. Furthermore, higher interest rates and energy costs are adding to the challenges.
Brzeski noted, “It is a different sickness [compared to] 20 years ago.”
For instance, Germany heavily relies on exporting goods tied to the broader economy, such as automobiles, machinery, tools, and chemicals. In contrast, countries like France are more reliant on service exports, an area that has thrived in the post-pandemic landscape. As Groeschl pointed out, Germany’s struggles are linked to the stumbling of its export sector.
For the first time in many years, Germany reported a foreign trade deficit in May 2022, signaling a shift from a trade surplus to an import surplus. Although Germany has since returned to a trade surplus, indicating a trade surplus of 18.7 billion euros in June, exports continue to show sluggish growth.
These challenges, however, are only part of the story. There are also enduring, underlying structural issues within Germany’s economy that must be addressed to discard its “sick man” image.
Economists emphasized the necessity for comprehensive reforms, including lower corporate taxes, reduced bureaucratic hurdles, expedited approval procedures, increased investment in infrastructure, competitive electricity pricing, and improvements in the education system.
Germany’s decreasing number of working hours since 1991 is a persistent concern, forecasted to continue declining. This trend, as outlined by Kooths, exerts downward pressure on the country’s growth potential. Furthermore, Germany’s aging population presents a challenge, straining an already strained pension system.
Addressing these multifaceted issues requires concerted effort and reform. While Germany’s “sick man” label is the result of numerous factors, it’s clear that a combination of cyclical challenges and long-term structural shortcomings has contributed to its current economic landscape.
