In January, Bloomberg editor in chief John Micklethwaite interviewed Germany's Chancellor Olaf Schultz. Despite soaring energy prices caused by Russia's invasion of Ukraine, which have shaken Germany's economy, Schultz said the country would not fall into recession.
Will Germany now avoid a recession in twenty twenty.
Three, Yes, I'm absolutely convinced that this will not happen. That we are going into recession, and we showed that we were, that we are able to react to a very difficult situation.
That turned out not to be the case.
The Eurozone's largest economy, Germany falls into recession as the cost of living crisis bites.
Europe's powerhouse has slipped into recession. Could Germany's economic slowed down drag down the whole continent. Germany unexpectedly goes into recession after a surprise fall in first called a GDP.
Germany has been the economic engine of Europe for decades, but Bloomberg's Jana Rando and William Wilks and Frankfurt report that as the country now works to climb back from the winter recession, there are signs that's economy isn't as resilient as it once was, and that Germany may be losing its innovative edge.
Poverty is increasing, people struggle to pay their bills, They're quite unhappy with the government.
That could mean trouble not just for Germany, but the rest of Europe and beyond.
To have politics increasingly fractured by this kind of frustrating and stumbling economy would be perhaps disastrous for a continent which is looking and needs Germany to step of its kind of role in the security space.
I'm west Kosova today on the big take Germany tries to restart that engine.
Germany, as Europe's biggest economy, has a special place in Europe, and if that biggest economy is struggling, then of course everybody around it gets worried. Germany is very open, it's an expert led economy. It's very relevant in the political context as well. You know, when you say the US is struggling and Europe then catches a cold, you can say the same thing about Germany. Germany is struggling, and everybody else will feel the consequences of that as well.
And of course the problems Germany faces are manyfold. We can talk about the economy just cyclically being you know, or coming out of a winter recession, really feeling a hit to its manufacturing base, which is very important. We can talk about a lot of structural challenges for the German economy. We can talk about supply chain problems, we can talk about demographics, we can talk about the energy transition, climate change, high inflation, like all those things hit the
country and the economy in a very special way. And then of course we can talk about politics as well. We're seeing populist gaining ground, the kind of party that nobody thought was going to be that powerful, you know, of right wing populist party now tying in second place with the Social Democrats, which obviously all of Schultz Chancellor
is a member of. So a lot of things happening in Germany at the moment, a lot of things that are not nice, are not conducive to just stable economic growth that we would like to see.
So will as Janna says, there's a lot in there to talk about. Maybe we can start by just painting a picture of the German economy right now.
The German economy, after kind of ten years of doing pretty well, is now struggling to adjust to this new reality of higher energy prices that's been unleashed by the war in Ukraine, which now makes it it going to be the slowest growing of the G seven big economies in twenty twenty three, and other economists expect Germany to grow much more slowly than some of its peers over
the coming years. And beyond that, energy intensive industries like steel, chemicals, glass making, all these things are going to manufactured products kind of higher up the value chain. And those energy intensive industries, which tend to be defined as sort of an operation where energy costs of a quarter of the input costs, they're really feeling the pinch and squeeze from these higher energy prices. And we're seeing in the chemical sector.
Germany has this huge chemical sectors they'd only to the US and China and proportionally much bigger than those two countries. There's just been immense kind of plants shut downs, lots of companies are turning down output because there's no money to be made in these gas intensive kind of chemical processes, and.
That itself is now being called into question too. Is that right?
Well, in a way, I mean yes, you're right. The German economy is kind of. I like to think of it more as a stabilizing force than a growth driver. So yes, that is still very much the case. Things
move slowly in Germany for many different reasons. Be it risk aversion, be it just you know, meticulous planning, be it bureaucracy when it comes to economic swings, the labor retention plans that we have in place, so the automatic stabilizers is what we call them, the unemployment insurance and also the short time work benefits that keep people in jobs, so that all has a stabilizing effect, and that in
a way will probably remain the case. What's going to be very difficult going forward is to kind of reinvent an economy that rests on very stable or has rested on very stable foundations, and those foundations are being shaken at the moment.
How has this economic slow down and the prospect of Germany kind of losing its historical momentum affecting people in Germany. How is it affecting just the day to day lives of Germans.
There is a lot of uncertainty about the way forward. We are facing a cost of living crisis. Like much of the rest of the world, poverty is increasing people struggle to pay their bills. They're quite unhappy with the government. There is concern over job security, despite unemployment being at a record low or close to a record low, just because people wonder will my job still exist once the economy turns. A lot of people are wondering with the energy transition, how am I going to heat my house
in the future. A lot of things right now that you know, worry people, and a lot of uncertainty really in many forms, which you know, all of us businesses politicians will have to find answers.
For will How does what Yanna is describing at home in Germany impacting the rest of Europe.
There are direct kind of economic impacts from a lot of supply chains begin and end in Germany, and your see a rip will go through there. Even more seriously is the impact that are kind of Germany that's distracted by economic difficulties for a decade or so, what impact that we'll have on its leadership within Europe in the economic space, I think, in the political space, and also
of increasing importance also in the security space. You know, a Germany that is forced by its own economic frustrations and a frustrated populace to kind of turn inward and focus on problems within Germany, and to have politics increasingly fractured by this kind of frustrating and stumbling economy would be perhaps disastrous for a continent which is looking and needs Germany to a step up it kind of role
in the security space. Germany is for decades underspent on defense and as a roll too obvious now there's threats to European security on its eastern flank, and you know, the United States is covering a lot of European defense weakness, but who knows what will happen in the next US election.
And it's also the same if Europe faces another economic crisis like it has several times over the past decade, it has relied in the past on Germany taking a grown up and magnanimous and patient and also kind of opening its wallet and paying for things. Eventually, a Germany that's distracted by its own domestic troubles and frustrations might be less willing to do that, which could have vast implications for the rest of the conton and also the
single currency. Far from having Shardenfreud, I think a lot of other European capitals will be looking on nervously and seeing that, you know, not wanting Germany to fall into an reverted last decade will.
At the beginning of twenty three, Germany's Chancellor, all of Shoals told Bloomberg that he's sure the country would avoid a recession this year. If you fast forward to now and the situation is pretty different, how much of what is happening to the nation's economy can be attributed to the actions of Shoals in his government.
Well, in some ways what's going on now isn't entirely his fault or even arguably at all his fault. You might look at some of the structural problems that Germany has found itself with, with kind of poor it investment and overreliance on Russian energy. Those were problems that came up during past governments.
Yeah, I fully agree there. The reliance on Russian energy goes back a very long time. So the first pipeline, for example, for gas from Siberia was built in the nineteen seventies. Northstream won the pipelin started in the late nineteen nineties. So that just shows you how far or how long those problems have been and that dependency has been in the making. What actually came as a surprise to me, is how quickly Germany under Schaltz was actually
able to win itself off Russian gas. So that is something that with all this criticism we tend to forget. There was concern after the invasion and the decision to do without, that the lights would go off in Germany, that factories would have to shut down, that we would have to ration electricity.
We begin here in Germany, where the government has announced it is activating an early warning plan in preparation for possible shortages and gas deliver raies from Russia.
None of that happened, partially because of energy savings, but also partially because the government was able to work around the problem. We have three ships for liquefied natural gas, you know, in front of the German shoreline at the moment, and more on their way. So that just shows you that there is a determination. It shows you that, you know,
comma crisis, things will fall into place in Germany. And it's always kind of been like that, which is not to say that you know, there are problems and there's a lot to do for the government, and certainly it's fair to say that looking at it from where I said, and where will SIT's probably as well that there are lots of problems. The coalition has lots of homework to do to make sure that it actually can pull in the right direction and pull in the right direction together.
What's perhaps different than really fascinating about the current moment is Germany faces this accumulation of a series of problems. Perhaps it hasn't faced for a long time. Under Angela Merkel, the previous chancellor. Her government faced a lot of challenges, including the refugee crisis and the Eurozone crisis, but there was a bit of space in between them. Now Germany faces competitiveness challenges from Chinese carmakers.
Following years of state investment. China is leading way in electric mobility, with domestic brands outpacing competitors including German bay moths like Volksfang and BMW.
Germany faces an energy crisis steming from Russia's war with Ukraine. Germany faces the competitive challenges of the US Inflation Reduction Act and the fact that that's drawing investment into the US and away from Europe. Germany also faces this worsening geostrategic geopolitical situation of rising tension between China and the West.
And it's this accumulation of problems which is really kind of unique about this moment, and it's going to be very difficult for the German government to deal with all of these things at once. And we haven't even gotten to talking about the demographic challenges. While all this is happening, Germany is looking at a future of a drastically graying and shrinking workforce, which will further challenge its competitiveness.
After the break, Why has Germany lost its edge in tech? Will you and Janna have needed this pretty stark picture of the challenges that Germany is facing. Maybe now we can talk really about some more specifics. What are some of the big problems that German companies, German manufacturers, the drivers of the economy are facing right now.
I think one big one is that they're struggling to keep up on innovation and it's getting harder to innovate. So Germany for years has done there and German companies have done very well from making kind of incremental changes to existing technologies and an example being kind of continuous improvement of the combustion engine. But now what kind of the world product markets are demanding is shift much more
to digital technologies and other things. And because of that, there are signs that Germany's kind of innovation power is weakening. It doesn't have any universities in the top twenty five in the world rankings. It's really low down the league
tables for investment in digital technologies. So you're seeing that Germany, as technologies are changing and we're going down more digital and electrified routes, that Germany's ability to kind of make those incremental improvements in long standing technologies is becoming less and less relevant. And that's a real challenge for Germany. And also you can see it in the startup space.
The number of startups in Germany is also declining. And again it comes back to this thing that you've got a kind of culture that's more risk averse than elsewhere, that quite likes, you know, making incremental changes. And how do you get back on top when your kind of innovation culture is kind of conservative and your approach to risk is very conservative. How do you get back on top of the pile when with those approaches, it's going to really challenge Germany.
That you mentioned risk a version, but even if you were somebody who had an idea. Just getting funding for it is incredibly difficult. So there's one statistic that shocked me venture capital investment. It was under twelve billion last year compared with far more than two hundred billion in the US. That is obviously telling you a lot of stories about how likely it is to see a big startup that could you know, eventually work on the global level. Very very difficult here in Germany.
Janna, you raised that important point about venture capital. A lot of that money tends to go into the technology industries, and you're writing the story that Germany has started to lose its edge in technology. Why is that and what are some examples of that.
A lot of what we have in Germany in terms of technology is quite old fashioned. So there is SAP for example, you know, a software company that goes back to the nineteen seventies. Essentially when you talk about infrastructure, you know digital infrastructure. There is a big joke that's making up the runs in Europe, of course, where everybody is traveling on trains and you know, people ask, you know, how do you know your train has passed the border
to Germany? Well, the Wi Fi connection breaks down and your phone doesn't have any coverage anymore. It's very sad. It's funny, you know, but it's actually true. You can really tell, you know, you're driving on the autobah, which is another symbol of you know, economic strength of Germany. If you were to make try and make a phone call as a passenger, oftentimes you're out of luck because you're in you know, in a blackout zone where there's
absolutely no coverage to have. That is emblematic for the challenges we face. You want to talk about broadband technology. For example, the share of fiber connections in Germany right now is eight percent, and you compare that to the places like Korea or Japan or even Spain where it is a eighty percent, so more than ten times that level. That also shows you something about the state of technology
in Germany. Of course, you know people are trying to fix it, but it's a very very slow moving process.
German car makers have been very aspirational brands for consumers. People have certain and a certain wealth category would have bought Volkswagens and Oples and then aspired to own BMW's and Mercedes later on in life. But now looking forward, people are looking at German cars and thinking hang on that doesn't have any of the tech of the Tesla or any of the kind of range performance of some of the Chinese electric cars, So those brands don't have
this cutting edge lead that they had anymore. What's going on in cars is kind of symbolic of the challenges that bordered German economy faces. You know, markets are changing, other countries are catching up. They're hungry competitors, and can Germany and German companies be nimble enough and can they kind of reinvent their thinking enough to re establish a kind of lead in these technology areas. And I think that question is open, and it's one that's worrying a
lot of executives at Volkswagen and Mercedes and BMW. They're kind of wondering can they do it? How do we compete with tech firms on you know, in car software. And there's billions of yours being spent on it, but it's not guaranteed that that money could end up not returning them to the pinnacle, and then we might just see a slow, over many decades decline in the importance and relevance of German carmakers in global markets.
When we come back, what does all this economic turmoil mean for all off Shultz, Well, obviously we're talking about some pretty serious headwinds that Germany is face seeing, and one that you've both talked about is Germany's need for energy transition. So how do they solve this problem? What needs to happen?
In short, they need to just get lots and lots of renewable energy online, which is going to involve overhauling Germany's kind of a good labyrinthine planning system. And they also need to come up with partnerships to kind of
import some energy from abroad. Again, like a hydrogen which kind of when you burn it, it burns hot and clean, so it could be used as an industrial fuel in Germany, but it's quite expensive to produce if you don't have masses of abundant renewable energy, which Germany's not ever likely to have, so they'll need to agree deals to kind of import it from other countries. But basically they need to unblock kind of bureaucratic roadblocks and really get things
moving in the energy space. But it's very, very hard, and I think realistically what will happen is there will be an acceleration in the construction of kind of renewable energy infrastructure. But at the same time, I think Germany's energy situation means that there will be continue to be a kind of steady the industrialization in Germany.
Yeah, interesting that you mentioned bureaucracy, because that is really something that pulds back the country. A lot of applications for all kinds of construction projects are still done on paper.
It's also an issue for startup. You would have to be a masochist to want to set up a startup with Germany with the numbers of kind of bureaucratic hurdles
you have to cross to get business started. I mean, the government talks about simplifying it, but it's another reason why German with great ideas might look at things and think, actually, I'll go and work for one of the established big companies because starting my own business is just more more trouble than it's worth, which is not something you see in somewhere like the US, where you know, the rewards are so much clearer and you have people like Elon
Musk and like Mark z of Ckbergl. You know, they see the opportunity for returns and it's not so difficult.
There, Jana. In order for Germany to move ahead in the way that you've been describing, it'll take a lot of political will. What do you think we can expect to happen during all off Schulz's term. Does he have the political support to do what needs to be done?
I think his challenge is one where he can technically build on the support of every lawmaker in the country, right because ultimately it's in everybody's interest to make sure the transition works and turns into success and keeps the German economic engine running. So in that sense, the arguments that he will have to face are not so much about the target, but it's more about the road of travel and which detours to take and which projects to
tackle first. So that's in a way a different set of challenges than a leader would have to face in other circumstances. But of course it's not an easy task. He's leading a three way coalition of social Democrats, the Green Party and then the fiscally quite conservative Liberals, and you could argue that those are not exactly the three of them natural coalition partners. And it just already shows you how the political landscape in Germany is getting more diverse.
There's talk about a new party being founded on the left side potentially this year. The discourse is going to get very, very complicated, and everybody is going to have ideas about the best way forward, and I think his biggest challenge will be to field all those ideas, to feel those challenges and putting them into some sort of an order that the majority of people will be able to support and will be able to say this is something that's manageable for us, because, let's face it, it's one
thing to recognize the challenges ahead, and it's a completely different thing to then find strategies to get us there. Because everything that's going to be needed in Germany is going to be expensive. Somebody is going to have to pay for those investments, be it the government through public spending, be it companies, be it consumers. And designing laws and goals in a way that it's affordable to those people and to the public sector and the private sector is going to be a tremendous challenge.
Janna Will, thanks so much for talking with me today.
Thanks Wes, very nice to be here, Thanks having.
Us, thanks for listening to us here at the Big Take. It's a daily podcast from Bloomberg and iHeartRadio. For more shows from iHeartRadio, visit the iHeartRadio app, Apple Podcasts, or wherever you listen, and we'd love to hear from you. Email us questions or comments to Big Take at Bloomberg dot net. The supervising producer of The Big Take is Vicky Bergolino. Our senior producer is Catherine Fink. Federica Romaniello is our producer. Our associate producer is Zeneb Sidiki. Rafael M.
Seeley is our engineer. Our original music was composed by Leo Sidrin. I'm west Kasova. We'll be back tomorrow with another Big Take