Han Dieperink: Germany no longer Exportweltmeister

September 26, 2023

^{This column was originally written in Dutch. This is an English translation.}

By Han Dieperink, written in a personal capacity

Germany has been Exportweltmeister for years, but is now in danger of rapidly sliding towards the Dritte Liga. This month, the European Commission lowered its growth expectations for the eurozone for 2023 and 2024 – mainly due to disappointing economic indicators from Germany.

This slowdown is due to a combination of factors, including disruptions in supply chains and high energy prices. Inflation is a major problem for the German economy. German inflation this cycle reached its highest level since 1973.

High inflation reduces the purchasing power of consumers. Economic growth is slowing and inflation is inhibiting investment. Berlin managed to keep unemployment low for the past three years, but now unemployment is starting to rise and stagflation is at risk. According to the IMF, Germany is the only country where GDP will shrink this year.

Ostpolitik and Energiewende

Energy has become much more expensive in Germany in a short time. This is largely due to the Germans themselves. Thanks to the now abandoned Ostpolitik, Germany was heavily dependent on Russia.

Moreover, the country has no problem importing electricity from nuclear energy and LNG from shale gas, but German nuclear energy and the extraction of European shale gas are out of the question (although Germany is willing to allow an experiment with fracking at the border with Groningen). Strangely enough, Germany has continued to use lignite for a very long time, something that must now be stopped quickly in the context of emissions.

Partly due to the early start of the Energiewende, consumers and businesses now have to pay the top price for energy. While the German economy can be described as energy intensive. Other developed countries are mainly growing in areas where Germany is traditionally not so strong: services, software, big data and entertainment.

Exportweltmeister

No less than 99% of Germany's GDP in 2022 consisted of international trade (export 50.3% and import 48.3%). Germany is therefore very sensitive to the development of the world economy and must constantly monitor its competitive position, which is rapidly deteriorating. The most important export product is still cars and car parts (15.6% of the total), followed by machinery (13.3%) and chemical products (10.4%).

In Asia, Japan competes directly with Germany. Thanks to the cheap yen, selling Japanese cars and machines is much easier than before. The yen is so low, among other things, because China is the largest export country for Japan. Without such a weak yen it is difficult to compete with the Chinese.

At the same time, China is now the country with the largest exports of electric cars. It can change. The chemical industry in Germany is rapidly shrinking due to high and expensive energy consumption. Last year output shrank by 18% and this shrinkage appears to be more structural. The German car industry has also shrunk by 26%. The economic stagnation also causes more bankruptcies.

Political change

The economic stagnation in combination with the many migrants in recent years ensures that populism and nationalism can more easily find a breeding ground. A quarter of Germans now believe that there were advantages to national socialism and a third would like a strong leader.

The AfD has already won local elections twice. AfD is popular in the former East Germany. In Bavaria, another right-wing party, Hubert Aiwanger's Freie Wähler, is now the second-largest party. Right-wing parties are also gaining a stronger foothold among the middle class in Germany, because owning their own house and car are no longer self-evident for that group.

Germany's weakness is also the EU's weakness. Moreover, 60% of German exports still go to countries within the EU. Furthermore, Germany has a fairly unique bond with China, where Germany has long benefited from cheap labor and a rapidly growing sales market. Not only is Chinese growth lower, but in some respects (such as cars or the energy transition) China is now threatening to take over Germany's place.

New trade war not the solution

Under the influence of Germany, the European Union is now trying to impose an extra tax on Chinese (electric) cars, but China is guaranteed to take measures that will affect Germany. The same also applies to solar cells and wind turbines for the energy transition. German products are simply too expensive to remain Exportweltmeister. Now we want more chip factories in Europe, but this will only be possible with heavy subsidies. That is not a sustainable model.

The developments in Germany naturally also affect the rest of Europe. Germany's advantage compared to many other European countries is that the country can change from strength. It is not yet the 'sick man of Europe' again. There is almost full employment and the country has a strong fiscal position. Furthermore, there has been a political realization that things need to change.

More columns by Han Dieperink