Putin can't be blamed for the country's economic malaise
The economist Herbert Stein once wrote that if something cannot go on forever, it will stop. It seems like the German — and with it probably the European — economy is reaching that point. Most of Europe’s 100 largest companies were founded in the 1980s or before, which means that the old continent has entirely slept through the digital revolution of the 1990s and 2000s. There is no European counterpart to American corporations like Facebook, Amazon, E-Bay or China’s Alibaba or WeChat.
This became painfully clear during the Covid pandemic, when the once vaunted German bureaucracy was revealed to rely on paper, pens and fax machines in its health care system due to a complete lack of digitalisation in key areas. Not surprisingly, the German economy shows cracks elsewhere as well. Measured by market capitalisation, only one German company makes it into the top 100 worldwide, and German market capitalisation as a share of global market capitalisation has shrunk to 1.97%, an all-time low. These are devastating numbers for a country that just a few years back was seen as a model for the world with its transition to Green energy and the planned exodus from nuclear power.
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In fact, to add insult to injury, one of the largest German producers of rotator blades for wind turbines has announced it will close down production in Germany and move to India. Similarly, Villeroy & Boch, a company that has produced tiles in the German city of Merzig since 1879 will retire its factory and move manufacturing to Turkey, quoting high energy and labour costs as the main reason. One could argue these are just anecdotes, but it is probably no coincidence that for the first time in 30 years Germany posted a trade deficit of over one billion euros, meaning that Germans are importing more than they are exporting.
With consumer confidence at all-time lows and producer prices rising at record speed, the immediate outlook for the German economy is cause for concern, exacerbated by a recent comment from Robert Habeck, the Green minister of minister of economics and climate protection, that “the whole market is in danger of collapsing at some point.” Electricity prices have been surging to an all-time high, with current 1-year forward electricity contracts clocking in at EUR 340 per MWh. Just to put this number into perspective, for the last three decades this value never surpassed €100 per MWh. In other words, the year 2023 will see electricity turning from a utility into a luxury good for many Germans.
With the war in Ukraine and Germany’s dependency on Russia exposed, energy has become a scarce resource for Germans almost overnight, with major cities like Hamburg already preparing for rationing of gas and warm water supply. And this might well be only the first step, given the fact that Moscow is gearing up its resource war with Europe, cutting not only gas deliveries but also oil from Kazakhstan. So far Russia claims that all of this is for technical reasons that can be easily resolved, but it nonetheless demonstrates the ease with which Putin can squeeze Europe’s largest economy. The sudden awareness of a complete lack of alternatives has also put the major German unions in panic mode, warning that without sufficient gas entire industries could collapse.
One thing, however, remains true despite all these problems: they did not cause but reveal the German economy’s malaise. An ideological fixation on renewables, paired with the rejection of nuclear energy and an addiction to Russian gas, led to a focus on everything except the things that matter. From internet technology to electric vehicles, Germany is behind, and the once-revered label “Made in Germany” rings increasingly hollow. One can only hope that this clash with reality will put an end to a cognitive dissonance that could derail the entire European economy and, with it, the European project.