Industry is a heavyweight in the economy of Europe’s leading power, and is holding back the German economy, which has been stagnating for the past five years. Industry still accounts for almost one-fifth of the German economy, twice as much as in France and the United States. Today, German industry is suffering from three ills that are unfortunately structural and are calling into question the German industrial business model.
The first is the unresolved energy crisis, which has seriously weakened the competitiveness of European industry. The price of gas in Europe is still more than four times higher than in the US. This is because, in order to replace Russian gas, we have had to import liquefied gas from other regions, which is more expensive because of the cost of liquefaction, regasification and shipping, among other things.
Secondly, over the years, German industry has forged close links with eastern European countries such as Poland, the Czech Republic and Hungary, taking advantage of cheap labour, which has given German exporters a significant competitive advantage. Over the last 10 years, the average monthly wage in the manufacturing sector in Poland and the Czech Republic has doubled, narrowing the gap with Germany.
Writing a new story
Finally, the third structural problem relates to China. Although the United States remains the leading international market for German companies (outside Europe), some 7% of products exported by Germany find their destination in China. Cars are the leading product sold by German exporting companies to China, accounting for 20% of total exports to China. German exports to China have increased tenfold since 2001, but are now at the same level as in 2018. Germany can no longer count on this major market as an engine of growth for its exports. In fact, China is competing directly with German products, and the European Union is becoming increasingly critical of the commercial practices of Chinese companies, damaging trade links between the two blocs.
The flourishing German industry of the 2000s is now a thing of the past. The three key elements that made the German economy so successful are becoming headwinds: cheap Russian gas, the use of low-cost eastern European contractors and expansion towards China. Germany is going to have to find other engines of economic growth to get back on the road to prosperity. Some avenues have already been explored (green technologies, semiconductors, software), but the challenges are huge given the investment required--both financial and human--to develop these industries and the fierce international competitiveness in these fields.
Alexandre Gauthy is a macroeconomist at Degroof Petercam Luxembourg.
This article was originally published in .