by Ralph Schoellhammer
Thursday, 13
October 2022
Analysis
10:10

Germany’s ‘Mittelstand’ is being killed off

This recession is hitting the core of German innovation
by Ralph Schoellhammer
Credit: Getty

The International Monetary Fund has recently updated its world economic outlook, predicting a global growth rate of only 2.7% (compared to 6% in 2021). One of the worst performers is the Eurozone, which is expected to grow by only half a percentage point — and even that prediction could turn out to be too optimistic.

The problem is particularly acute in Germany, where borrowing costs are beginning to rise and the markets are noticing. The backbone of German innovation and a major source of future growth are its small to medium sized businesses. Almost 40% of total corporate turnover is generated by these enterprises, and they account for 55% of value added in the German economy. They also train the future industry workforce, and are responsible for 1.3 million of the 1.5 million training places in German companies. Keen innovators, smaller companies are often investing twice as much in research and development as their larger competitors. Unfortunately, the current crisis is hitting precisely this sector of the economy hardest, driving up insolvencies among Germany’s so called ‘Mittelstand’.

The tragedy is that the government in Berlin is doing next to nothing to reassure investors. Current proposals are not addressing necessary steps to maintain the country’s industrial base, but instead consist almost entirely of throwing money at the problem. The government wants to spend up to €200bn (almost 5% of GDP) to “shield” enterprises from energy shortages, but it is becoming increasingly clear that no money in the world can increase the supply of energy if, simply, there is not enough. The most important step would be to ramp up domestic energy production, but neither the Social Democrats nor the Greens have any realistic plans in this regard, with the exception of more wind and solar farms, which will not save Germany’s industry.

The problems in Germany go much deeper. As this paper shows, Germany is losing its competitive edge across the spectrum; from education where outcomes are stagnating to entrepreneurship where the number of startups is declining. German universities, once the envy of the world and the role model for America’s Ivy Leagues, have fallen well behind.

So, who will be the future investors in an economy that is losing its entrepreneurs? The answer for many Germans seems to be the state, in the hope that every problem can be papered over by massive government spending, entirely ignoring that more spending with less production will lead to ever more inflation. 

But this is not the 1870s or 1930s, where, despite the economic depression, German companies founded in the 19th century maintained their innovative edge. The problem is that the current recession and its driver, a serious lack of energy, is part of a massive wave of deindustrialisation across the continent. That will be difficult to unwind, making this recession unique. Unless a significant course correction takes place, it will be the final one before a descent into a world of permanent European stagflation and economic decline.

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polidori redux
polidori redux
1 month ago

Same in the UK: Chickens always come home to roost. Perhaps some good will come out of this mess, as we learn that there is a difference between Net Zero fantasy and brute reality. Mad and bad as he may be, even Putin is saner than our own leaders – The ones that we elected all by ourselves.

Last edited 1 month ago by polidori redux
Tim
Tim
1 month ago
Reply to  polidori redux

Putin is indeed mad. Our leaders reacted rationally to a naive and ignorant electorate.

polidori redux
polidori redux
1 month ago
Reply to  Tim

They ignore the working class electorate

Ian Stewart
Ian Stewart
1 month ago

We have two universities in the top 3 in the world (the obvious ones), but given their decolonising and diversity agendas affecting their curricula and culture, and the lowering of entry standards to let the poorly educated in, I don’t understand how they can have such high rankings.

Last edited 1 month ago by Ian Stewart
Martin Johnson
Martin Johnson
1 month ago
Reply to  Ian Stewart

The competition is killing itself faster than is Oxbridge.

Steve Jolly
Steve Jolly
1 month ago

“it is becoming increasingly clear that no money in the world can increase the supply of energy if, simply, there is not enough.”
Bravo to the author for being brave enough to state the obvious. This is, in a nutshell, why the green movement is doomed to fail sooner or later. It was/is bound to come up against the human need for energy/food/etc. sooner or later and a choice between climate change or freezing/starving in the dark is not a choice at all. Even if one or a few extremely creative and/or totalitarian regimes succeed in getting their populations to swallow this particular pill, the chances of this occurring in every nation in the world is basically zero. Simply put, some people somewhere will continue to burn fossil fuels unless and until an equally cheap and reliable alternative is found or we run out of them entirely, which might take quite a while. Whatever the consequences of that will be, they are already well beyond the ability of any government, or all of them, to avoid. Any protestation to the contrary is sheer hubris on the part of elites, who eternally overestimate their ability to control the masses. So, logically, if we’re going to dump money down a hole, we’d be better off dumping it into research into fusion power, hydrogen, or even more exotic technologies that have a small chance of eliminating the need for fossil fuel/nuclear plants entirely rather than reshuffling deck chairs with wind/solar and/or trying to use creative economics to shield people from physical realities.

Last edited 1 month ago by Steve Jolly
Jerry Carroll
Jerry Carroll
1 month ago
Reply to  Steve Jolly

Yeah? Tell that to the people who glue their faces to the streets and public buildings.

Doug Pingel
Doug Pingel
1 month ago
Reply to  Jerry Carroll

When it comes down to survival people who do that just don’t count. Unless they become a food source.

Steve Jolly
Steve Jolly
1 month ago
Reply to  Jerry Carroll

It would be funny and appropriate to just leave them there so the world could gawk at their stupidity for however long it took them to get bored and extricate themselves. People who do that are basically religious fanatics, face gluers instead of suicide bombers, but unlike suicide bombers, they aren’t partially backed by ancient traditions, culture, and one of the world’s major organized religions. They are just voices screaming into the void, cursing the rain, or pick another futility analogy.

Hugh Bryant
Hugh Bryant
1 month ago
Reply to  Steve Jolly

Politics used to be the art of the possible.

Ethniciodo Rodenydo
Ethniciodo Rodenydo
1 month ago

“Unless a significant course correction takes place, it will be the final one before a descent into a world of permanent European stagflation and economic decline.”
You mean like South America 70 years ago?

Matthew Powell
Matthew Powell
1 month ago

It’s possible that the European economy isn’t viable without Russian raw materials. I suspect that behind the scenes, many politicians no long care who wins anymore, just that the war ends sooner rather than later.

Warren Trees
Warren Trees
1 month ago
Reply to  Matthew Powell

…until the next crisis is manufactured emerges. Can’t just have the people out there living their lives as they wish, after all.

Warren Trees
Warren Trees
1 month ago

“…a serious lack of energy, is part of a massive wave of deindustrialisation across the continent.”
A Green dystopia paradise.

joe hardy
joe hardy
1 month ago

Just a heads up from a blue collar guy in America: we will not be donating our children for the cause of German green wokeness. They made their bed and now they can sleep in it. There is a limit on what Americans will support in Ukraine.

Jerry Carroll
Jerry Carroll
1 month ago

Blame the Germans for slacking off with the sly encouragement of the Russians.