Ultra Dependent on Russian Gas, Germany Sees the Flaws of Its Model Exposed in Plain Sight.
The hardest part is to come up with the need to build a new model for Germany.
Dozens of giant ships, each loaded with some 150,000 containers, are blocked at the mouth of the Elbe River at the entrance to the port of Hamburg amidst this logistical turmoil, thousands of maritime employees are on strike in response to a call from the Verdi trade union to demand a 1.20 euro increase in their hourly wage as well as full compensation for the 8% inflation rate.
In the land of social harmony and co-management, never before has such a warning strike lasted so long for forty years. The walkouts, which began on July 14, 2022, at 6 am, will continue until the weekend. For professionals in the sector, this is a real economic disaster.
“And now the unions are adding another layer,” the popular daily Bild choked.
The image is emblematic, but it only sums up part of the difficulties encountered by Germany. All the major European ports are indeed seeing their activity slow down, but in Hamburg, the country's window to the world and a symbol of a free trade economy, the sight of container ship congestion is striking.
One indicator after another in Germany does not give any reassuring news about the health of the former European powerhouse, which is becoming the continent's sick lady. According to the European Commission, German growth is expected to reach only 1.4% this year, compared to an average of 2.6% in the eurozone. In May 2022, for the first time in three decades, the “world champion of exports” recorded a trade deficit.
“We are most likely entering the beginning of a weaker period for Germany. If in the past we have always seen this country as a model, perhaps it is time to take a realistic view of its strengths and weaknesses. Nobody is perfect,” Achim Truger, one of the government's official economic advisers, told Reuters.
The prosperity of the Rhineland was built in the aftermath of the war, based on an industrial revival, a dense network of small and medium-sized companies, especially family-owned, encouraged by an attractive tax policy, and supported by a system of co-management between employers and unions that are supposed to guarantee social stability. Politically, pacifism and free trade were the matrix of this development, fueled by the conviction that unfettered trade guaranteed peace. And vice versa.
In a post-Cold War world, Russia became an ally of a reunified Germany, selling cheap gas, the key to future profits, especially for the chemical industry in Germany. At the same time, the automobile industry, the standard bearer of “made in Germany”, was sourcing low-cost Chinese components before selling its vehicles in the Middle Kingdom.
Entire diplomacy was built on these foundations, carried for sixteen years by a chancellor whom the people, fond of conservatism, re-elected three times, with the promise of safeguarding domestic savings and budgetary balances. Today, these pillars are crumbling.
Everything has been sacrificed in the name of zero deficit
In the name of zero deficit, the development of public infrastructure, transport, and communication, was neglected. A part of public opinion is discovering that Angela Merkel, once celebrated in the gazettes, has turned out to be a short-sighted leader.
Finance Minister Christian Lindner, whose liberal party was defeated in the last regional elections, is promising a return to balance in 2023, but based on an unattainable growth forecast (2.5% compared to 1.3% according to Brussels).
“What once made Germany strong is now its weakness,” says Philippe Gudin, chief economist at Barclays. The pandemic and its propensity to block trade had begun to reveal the shortcomings of the German model. Shortages of components were fuelling inflation in a country where price stability is a cardinal value (7.9% inflation in 2022 according to Brussels).
In addition to this material shortage, there is a glaring lack of health workers, teachers, and airport staff, especially in regions with almost full employment.
Gas shortages
The Russian war of aggression against Ukraine, which Berlin refused to believe in, completed the trend, forcing the Scholz government to a painful examination of conscience.
Only one political leader survived, the Minister of Economics and Climate Change, Robert Habeck. The Green Party leader is responsible for deciding whether companies or households will have to make sacrifices given the probable future gas shortages.
Supported by the employers, this green realist pleads in favor of the second solution, unlike the SPD. As usual, the Social Democrat Chancellor almost struck dumb and listless, is observing without deciding. True to party tradition, Olaf Scholz has nevertheless brought together the social partners in an attempt to reach a national consensus on anti-inflationary remedies. But to no avail.
“The famous spiral according to which inflation feeds wage increases and, in return, price increases, does not exist,” said Yasmin Fahimi, president of the DGB, the trade union confederation. After years of wage restraint and social peace, the two main central unions affiliated with the confederation, IG Metall and IG BCE (chemicals), are preparing for a strike and hot autumn.
The model is no longer working properly. Germany will have to reinvent itself.
Some reading
The World Is Heading Towards Chaos in 6 Steps, but a Solution Exists. A solution that above all requires courage on the part of the world’s governments.
The Inflation Wall Is Too High — Can Interest Rates “Increase Lower”? Rates already seem to be capitulating, even though the escalation had barely begun.
The U.S. Dollar King Has Claimed Another Victim With the Euro. One more blow for a European economy, which did not need this.