Han Dieperink: European rescue can only come from Germany

November 12, 2024

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

By Han Dieperink, written in a personal capacity

It was not a good week for Germany. A few hours after Donald Trump's victory, Germany's three-party coalition government imploded. Yet there is still hope.

The German government had been on the verge of collapse for months, but on Wednesday night Olaf Scholz announced that he will sack Finance Minister Christian Lindner over persistent disagreements over spending and economic reforms. Lindner has been the party leader of the fiscally conservative FDP since 2013, making elections in mid-March almost inevitable.

Now Scholz is by far the weakest Chancellor in decades and Trump's victory means Germany can rely less militarily on US protection. German industry also has to compete even more with US industry, helped by higher import tariffs. The FDP is the smallest party in the German coalition and gets 4% of the vote, less than the electoral threshold, according to the latest opinion polls.

Strikes and mass layoffs

Besides Trump's victory, things are not going well for Scholz domestically either. German trade union IG Metall (2.3 million members) started strikes last Tuesday, amid growing concerns about the impending collapse of the EU's largest economy, in an attempt to raise wages.

According to Bild, workers began striking during the night shift, including at Volkswagen's plant in Osnabrück, where they must also fear the plant will be closed. There were also strikes in Hanover and Hildesheim. In Bavaria, strikes threatened at BMW and Audi plants. IG Metall is demanding a 7% wage increase, but Volkswagen had previously announced that at least three of its 10 German plants will have to close, laying off tens of thousands of workers. According to research, some 186,000 jobs will disappear in the German car industry up to 2035, with a multiple of that threatened in the supplying industry.

Recession

That much bad news is enough to ensure that Germany's slow-growing economy will slip back into recession this winter. Moreover, no German party is likely to get an absolute majority after the elections, so a new German coalition is not possible until the second half of 2025. Today, there are seven parties in the German parliament, up from three in 1980. This means that not only in Germany, but also in Europe, important decisions cannot be taken for the time being. As a result, it will be difficult to respond to Trump's higher import tariffs.

No longer Exportweltmeister

German manufacturers have seen their global market share melt away as increasingly sophisticated and cheaper Chinese rivals poach their customers at home and in third markets. The country's carmakers are shedding jobs as their sales in China fall and new electric cars also fail to appeal to Germans. These market losses have led to a steady decline in German industrial production since 2017.

Now the German economy is expected to contract for the second year in a row, leaving it virtually unchanged from pre-pandemic levels. That is even without Trump's new tariffs, which could cost the German economy 33 billion euros in gross domestic product, according to Ifo's calculation. Germany is no longer Exportweltmeister.

Low national debt

Germany has low national debt compared to other European countries. The flip side of this thriftiness, however, is that the country has underinvested in the public sector for years, resulting in a crumbling infrastructure: clogged highways, crumbling bridges (the collapse of the bridge in Dresden is unfortunately not an incident), trains that no longer run on time (that service is even worse than the French SNCF these days), the third-lowest percentage of fibre-optic connections in Europe, a bureaucratic and analogous public administration stuck in the paper age.

Lindner wanted to change all that, but the socialists and the Greens could not live with cutting taxes, cutting social benefits while relaxing environmental regulations.

Reform potential after elections

As the polls now indicate, the FDP will disappear after the elections, and the Socialists and Greens will have to make significant cuts. CDU/CSU may now count on a third of the vote (it was 24%) and then they could (in theory) form a coalition with AfD (now 17% of the vote), although cooperating with the AfD is a big step even for CDU/CSU.

By the way, regular elections were scheduled for September 2025, so in fact the elections in March next year are little more than bringing them forward by six months. That this happened while the current coalition was obviously already not functioning well is a positive rather than a negative. After that, Macron is the only head of government in Europe of old politics.

The elections in Germany are an opportunity to loosen the fiscally squeezing rules (which even the Bundesbank favours these days), turn Germany's nuclear power plants back on, get Germans to save less and consume more combined with more investment in the home, in shares and, of course, in German infrastructure.

Macroeconomically, Germany has enough room to come back stronger than ever. The same cannot be said about many other countries in Europe. Following MAGA's lead, the slogan ‘Make Germany Great Again’ is not sensible from a historical perspective, but MEGA (Make Europe Great Again) does start in Germany.

More columns by Han Dieperink