German economy in crisis: When will it bounce back?

Time of India

23-05-2025

German economy in crisis: When will it bounce back? (AP)
T
he term recession refers to an economy that is shrinking. This has been happening in Germany for two years now, the only country in the European Union experiencing such a decline.
In 2024, more companies closed than in the previous major financial and economic crisis in 2011. High electricity prices have meant that energy-intensive industries have been hit especially hard. In addition, companies are having to close due to a shortage of workers and specialists as society is ageing. Germany's burgeoning bureaucracy is another major factor hampering business.
The new government has set out to improve the situation quickly and sustainably.
But this will not come about overnight. This is the finding of the Federal Government's economic advisory body. In its spring report, the German Council of Economic Experts spoke of a "period of considerable sluggishness" and practically ruled out a rapid recovery.
No longer internationally competitive
For 2025, the five economics professors project stagnation, meaning zero growth. In 2026, they see the economy possibly recovering somewhat with one percent growth.
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However, the experts are far from certain that Germany will be able to get back on track for economic success in the medium and long term.
The German economy has become less and less competitive. A decisive factor was Russia's invasion of Ukraine in 2022 and the halt to Russian gas supplies. The successful German business model of using cheap energy and high engineering skills to manufacture products that are in demand worldwide has been history ever since.
Donald Trump puts the brakes on German exports
On top of this, there are also domestic problems. "Bureaucratic regulations and lengthy approval procedures are slowing down macroeconomic growth," states the report by the economic experts. US President Donald Trump is also having a negative impact. His tariffs are jeopardizing economic growth worldwide, but have particularly negative consequences for the export-oriented German economy.
In order to ease the burden on companies, Federal Economics Minister Katherina Reiche wants to introduce a number of initial measures by mid-July.
The electricity tax is to be reduced, and the labor market will be reformed, Reiche said at an economic forum last week. Growth is the order of the day, she said, and the government will provide the stimulus, also by lowering corporate taxes.
New business models are needed
The panel of economic experts is calling on the federal government to take a realistic view of the future. No attempts should be made to save jobs that are not viable in the long term, they wrote in their report.
"An economic policy that aims to stop structural change through subsidies cannot be successful in the long term," said Monika Schnitzer, Chairwoman of the German Council of Economic Experts. Instead, the transition to new business models and professions should be promoted in a targeted manner.
The multi-billion-euro financial package launched by the governing center-right Christian Democratic Union (CDU)/Christian Social Union (CSU) and the center-left Social Democratic Party (SPD) is a source of hope.
Some €500 billion ($567) are to be invested in the ailing infrastructure over the next twelve years.
Money sparks greed
"If used correctly, the funds can make Germany fit for the future, with considerable positive growth effects," said economist Achim Truger. However, he added, only if the money is actually spent on investments.
The economists suspect that the ruling parties may use extra funds to finance their election promises, such as an increase in pensions for housewives, agricultural diesel subsidies, and a reduction in the restaurant tax.
The economists warn that the €500 billion package must not be misappropriated.
Because this much money cannot be spent quickly, the experts do not expect a positive effect until 2026 at the earliest.
As the €500 billion fund and the massive increase in defense spending are based on fresh loans, Germany will no longer be able to meet the EU debt targets. This is something the experts have also warned against. Only if Germany manages to modernize itself structurally, the experts say, would such expenditures be justifiable.
Many Germans are working part-time
Chancellor Friedrich Merz has repeatedly said that people in Germany need to work more. "We cannot maintain prosperity with a four-day week and a work-life balance," he recently told the CDU Economic Council. He called for more flexible working hours and incentives for people to continue working voluntarily beyond retirement age.
Economics professor Veronika Grimm said it is right that incentives are needed to increase participation in the labor market. She sees great potential in increasing the participation of women, mainly by improving childcare. But how can this be done if there are too few teachers?
Grimm suggests that a shrinking workforce will force an increase in productivity of those who remain.
This, she says, is possible through digitalization and a reduction in bureaucracy.
How to reduce bureaucracy
Despite numerous political initiatives, the burden of bureaucratic costs on companies has not yet decreased noticeably. The experts suggest speeding up application and approval procedures, reducing disclosure obligations that companies have towards the state, digitizing public administration, and setting up a standardized nationwide e-government portal.
New regulations should be effective and user-friendly.
Otherwise, this would only lead to more inefficient bureaucracy.
"Between hope and trepidation" is how the Council of Experts described their outlook. And in their press release, the German Chamber of Industry and Commerce wrote: "Time is pressing, companies are ready. Now the politicians have to deliver."