A silver lining on the horizon for Germany
The German economy is unraveling under the weight of failed policies, but with fresh leadership, there may still be a path to recovery.
Leading German economic agencies have revised the country’s forecast for 2024, predicting a decrease of 0.1 percent in gross domestic product. What is happening to Europe’s largest economy?
Looking at Germany’s situation, one cannot help but wonder. Even the most outlandish fiction would struggle to match this level of absurdity. This comment will not delve into the political farce that is currently unfolding in Berlin, and will focus on the economic aspect of the situation instead. However, it is worth noting that today’s political chaos is a symptom of the same failed policies that have led to economic hardship. This is not a market failure; it is entirely the result of governments attempting to impose flawed industrial policies.
Angela Merkel’s legacy
During her 16 years as chancellor, Angela Merkel presented stagnation as stability, convincing the public that lack of change meant everything was stable.
In a populist bid to maintain her position, Ms. Merkel transformed the Christian Democratic Party (CDU) into a more social democratic entity. Infrastructure investment was neglected, taxes increased and fiscal rigidity was abandoned as early as the 2009 Greek crisis. In response to the Fukushima crisis, the government decided to abandon nuclear power, replacing it with cheap Russian gas. Later in her tenure, Chancellor Merkel took on the role of product manager for one of the country’s biggest industries – the automotive sector – insisting on a transition to purely electric cars while ignoring alternatives. Her immigration policy, summed up in the phrase “wir schaffen das” (we can do it), created chaos and violated Schengen and European border rules.
The current coalition of the Social Democrats, Greens and Free Democrats has inherited this debacle, and the Ministry of Economic Affairs continues to implement increasingly misguided policies.
The backlash resulting from the populist decision to abandon nuclear energy has become evident. Germany has some of the highest energy costs among major economies, now that cheap Russian gas is no longer available.
The CDU is beginning to realize that it must return to the principles it betrayed under Angela Merkel’s leadership.
The backbone of the German economy, the Mittelstand, is weighed down by excessive regulation, bureaucratic red tape, high labor costs, uncompetitive energy prices and a persistent shortage of skilled workers. Unemployment is beginning to rise. The crisis is also affecting larger companies like Volkswagen, BASF and ThyssenKrupp in the steel industry. All three are facing job cuts, and some production sites may have to close. Volkswagen quickly followed the political directives from Berlin and transitioned to electric vehicles. However, the market has not developed as expected, and Volkswagen cannot compete with Asian producers.
Nevertheless, the Ministry of Economic Affairs, defying both common sense and EU rules, is trying to preserve certain manufacturing sectors through subsidies, rather than creating frameworks (fewer regulations, nuclear energy, lower government costs) that would attract new industries or help existing ones stay competitive.
This all sounds grim, but there is a silver lining on the horizon: a new direction for the Christian Democrats.
A blessing in disguise
The party is beginning to realize that it must return to the principles it betrayed under Angela Merkel’s leadership. Conservatives and moderates lost their political home when the CDU shifted toward socialism, creating a vacuum that allowed the right-wing AfD to rise as one of the strongest political forces – shocking the Federal Republic’s political establishment. The AfD has also gained support from traditional workers who were abandoned by the Social Democrats. Along with the Greens, the Social Democrats have seen dramatic losses in recent elections, as their marginal and “woke” ideas appeal mainly to urban intellectuals.
The AfD’s rise may turn out to be a healthy shock, prompting the CDU to reorient itself.
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The current leader of the CDU and likely candidate for chancellor in next year’s elections, Friedrich Merz, is pragmatic but grounded in conservative principles, and has a solid understanding of foreign relations. He advocates for more work, more market freedom and less state interference in the individual and economic spheres. He stands a good chance of becoming the next chancellor, enabling a return to sound policies and a party based on real principles rather than leftist ideology or populist expediency. However, the price German citizens will pay for the mismanagement of the past 18 years will be steep. Ms. Merkel’s policies may well end up in the dustbin of history.
In hindsight, the incompetence of the current government may be a blessing in disguise. It has exposed the full extent of the damage caused by irrational policies over the past two decades, clearing the way for a return to rational and effective governance.
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