Bloomberg Audio Studios, podcasts, radio news. After decades of being known as the growth engine of Europe, the German economy is in trouble. One of the clearest warning signs is coming from Germany's automotive industry, which is struggling to compete with China and it's growing dominance in the electric vehicle market bondust. Outside of Volkswagen plants across the country, tens of thousands of workers have participated in walkouts and protests
over the threat of factory closures and layoffs. In footage that played across German news networks in recent weeks, you can hear the frustration and resolve in labor leaders' voices. The union is continuing negotiations with the company this week, and I'm fogs fine. The Volkswagen business is an iconic German brand, wants a gleaming symbol of its post war strength, and for workers like Deep Martuccier, Volkswang is how.
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The company's struggles represent more than a symbolic blow. Deetmar is a production manager at the Volkswagen a G plant in Emden, and he says that for him and his colleagues. Volkswagen is their entire life. It's the lifeblood of the city. Familia's on an Alpha. The prospect of a diminished Volkswagen is terrifying. Deep Mar says it's existential.
On escape Engstrom.
Existence.
From Volkswagen workers in Emden to business leaders in Munich to government off in the Bundestag, there's this new creeping feeling of anxiety about Germany's economic trajectory. Amy Webb is the CEO of the Future Today Institute, which advises companies on long range planning and does trend forecasting, and she says this sense of malaise has been growing for years. A series of gradual setbacks for Germany and for German businesses are starting to add up.
It's death by a thousand paper cuts. So if you think about the last time you had a paper cut, it's annoying. It might sting a little. If you are a mechanic, it might make it hard to use a tool, but it's a temporary inconvenience. Now imagine your entire body is covered in thousands of paper cuts. Technically you are still alive, but your life is miserable. That describes what's happening to Germany. German companies are in the process of accumulating paper cuts.
Chris Ryder, a senior editor at Bloomberg based in Berlin, worked with a team of economists and reporters to capture why and by how much Germany's growth is slowing.
Our colleagues at Bloomberg Economics have done an analysis and they argue that Germany's economy is now five percent smaller than it would have been if the pre pandemic growth trend had continued.
It's all laid the groundwork for an increasingly fragmented government, a growing fringe movement, and a paralyzed establishment. On Monday, the German Parliament officially took a vote of no confidence in the government, paving the way for a snap election in February. The rest of Europe is watching closely.
Germany's Europe's largest economy, the third largest from the world. If Germany starts getting a cold, the rest of Europe gets sick as well.
Today on the show Germany's sluggish Economy, Why it's fueling political polarization and what could turn things around. This is the big take from Bloomberg News. I'm Sarah Holder. Chris we're talking because the German economy is at a critical moment right now. Tell us what's happening.
I mean, I would say it's more than the economy. I mean that it ripples throughout German society. And the issue is that Germany has been stagnating. Germany is a country that's basically known expansion for decades, survived reunification, the Cold War, obviously post war reconstruction, and so it's at a moment now where all of a sudden the economy is struggling.
Is the economy actually shrinking or is the fear just this stagnation the problems.
It's more stagnation than shrinking, so there's not a sudden shock to the system. It's more a slow, gradual loss of competitiveness.
What's driving the slow down in growth.
Some of the main structural issues are high energy prices. Germany was very exposed to Russian energy, got more than half of its gas from Russia, and so after the war in Ukraine, after the full scale invasion, Russia clamped down on supplies in order to put pressure on Germany to try to halt it from supporting Ukraine. So now Germany is structurally exposed to really higher cost liquefied natural gas that it has to get via ships. So the
energy system is very fragile, it's very insecure. The country is still functioning, but energy intentsive industries like glass making, like autos, like steel are really under threat from this. And then on top of that, the auto industry is heavily under pressure from a competitive standpoint. It's struggling with a transition to electric cars. The technology coming out of China is better and cheaper, and the German cars just aren't being able to innovate as quickly as the Chinese competitors.
And Volkswagen has threatened to close factories here in Germany. If Volkswagen struggles, and it's like a vast community of supplier struggle, it creates like ripple effects all down the supply chain.
In concrete terms, what does a weaker German economy mean for families in the country.
What is different about Germany than other countries and especially the US, is how many people are actually exposed to economic cycles. Because most Germans are tenants, most Germans rent, and so that just creates a different anxiety. Say, for instance, if you are a blue collar worker, if you lose your job at Volkswagen, which is a well paid job at Volkswagen. You probably rent your place, so if you
start missing rent payments, you could get evicted. There's not like you can find a cheaper place to live because there's a shortage of housing. In general. The amount of social housing has collapsed by like seventy five percent or so in the last like twenty thirty years. So it creates a whole snowball effect of anxiety. As the economy struggles, people see their own livelihoods impacted immediately.
An analysis by Bloomberg Economics puts a number to that impact. Germany's loss competitiveness has meant that households there are worse off by about twenty five hundred euros of disposable income each year, and Chris says people are feeling their standards of living get worse.
So you have people basically living from paycheck to paycheck. They're exposed to rising rents, they're exposed to poorhousing policy, they're exposed to economic cycles. The level and intensity of procarity is i would say higher in Germany than it is in many other countries and certainly in the US. So that's an impact that people feel even if they don't know where or why it comes from. And that's what feeds this anxiety and frustration that is pretty evident if you're in Germany right now.
And the kind of loss competitiveness that's slow and gradual, it makes it trickier to respond to, right what's the risk here with this kind of economic malaise.
The risk of that slow, gradual loss of competitiveness is that it doesn't provoke a policy response like it does when there's a unique crisis, say like reunification or in the early two thousands, Germany was considered the sick men of Europe and it had a major unemployment problem, so it had a very targeted solution and that helped it expand for the last twenty years. About so, because of the problems that Germany face is now a slow stagnation
and not a sudden shock or a clear problem. The risk is that the reaction is muted.
Another country faced with this situation might consider upping government spending on things like infrastructure, education, defense, injecting a stimulus to boost the economy, But Chris says Germany has been far less willing than other European nations to make this kind of investment even when faced with less dire circumstances.
Yeah, that's a very cultural trait. Germany itself is usually fiscally rather conservative and doesn't like to spend a lot of money, doesn't like to borrow a lot of money. There's something called the debt break in Germany, which limits the amount of debt spending Germany can allow. Was a
constitutional amendment that was passed during the medical era. After the global financial crisis, Germany spent a ton of money to bail out banks its financial system, like many other countries, but in order to make sure that the government wasn't constantly bailing out industries, they set this step break and that has led to this reluctance to spend. So it's been decades at this point of under investment and everything from infrastructure to digital technology.
And how does that impact the pace of growth or the pace of the slowdown of the German economy? Like how important is it to do this kind of public investment if you really want to turn things around?
It's massive. Just a few weeks ago, there was a bridge collapsed in Dresden, and there's estimates that there's thousands of bridges that are threatened to collapse. So that decaane infrastructure has real world impacts on the economy and how it can breathe, how it just can move equipment around, to be quite frank, like whether you can get goods
and supplies from factories to customer. And then on top of it, there's the whole technology side, like Germany lags in terms of digital infrastructure and broad band rollout, and so the reluctance to invest over time has accumulated to a point of where it's coming up the entire economy.
When we come back how Germany's economic concerns, explain why its government is increasingly fragmented and what the results of next year's election could mean for Germany's financial future. Germany's economy has had to contend with the war in Ukraine, a pandemic, a housing shortage, flagging public investment, and increasing global competition. So I asked Bloomberg's Chris Writer whether this moment was born out of bad decisions or bad luck or a combination of both.
Definitely a combination of both, but certainly like a lot of bad decisions. So Schultz, he'll get a lot of the book because he's been the chance for the last four years when a lot of these problems have really become clear and evident. But there were a lot of bad decisions that go back quite long decades. In some cases, for instance, the dependence on Russian energy started under Gerhard Schrueder. The lack of investment was really like ran in the entire medical era, which was sixteen years.
Is there sort of a finger pointing game going on right now?
There's a lot of fingers being pointed at a lot of different people. I mean, Schultz is certainly on the front lines of it, and his finance minister, Christian Lindner, who's from the Free Democrats. So the dispute between the two was what led to the government collapse.
This week's no confidence vote set the stage for an election in February in which several parties are vying for power. I asked Chris about how these economic conditions we've been talking about are weighing on voters' minds and influencing which candidates are finding a foothold with the electorate.
People look for a scapegoat, So an escape in a lot effects is the establishment parties, and there's only two parties that have fielded a chancellor in the entire post war period. So it's the Social Democrats that Schultz party, and the Christian Democrats was Americal's party. The Christian Democrats are the center right conservatives and they're likely to win,
so they're leading in the polls. But unlike the US, there's lots of other parties that have gathered support, and at the moment there's about twenty five percent for like fringe parties, including the far right Alternative for Germany the AfD. So you have this real, like more fragmented political landscape than you've ever had before.
These parties that are gaining ground, the far right Alternate for Germany, the left leaning BSW, the front runner, the Christian Democrats. Can you break down where each of these parties stands on these economic issues and what's resonating with voters.
Yes, So the Christian Democrats like as being the leading party. They're looking for very traditional sort of conservative policies, so lower taxes, limited regulation, less government and out. And the Social Democrats are very much like a blue collar kind of associated party. They are very close to the unions, so they want to protect jobs in the steel industry, in the automotive industry, and the chemical industry, and so
they want like a bigger role for the state. The only really possible mainstream coalition is between these two parties, and those are two sets of policies and ideas that don't necessarily match well together.
These other parties, like the AfD and the BSW, are offering more radical responses to economic concerns. The AfD, for its part is whipping up anti immigration sentiments, while the left leaning BSW is pro Kremlin and would opt for closer ties to Russia. And as they pull votes from the more mainstream parties like the Christian Democrats, the Social Democrats and the Greens, Chris says there's a risk that the establishment tries to play it safer in comparison to
moderate even more. And Chris says playing it too safe is the last thing a stagnant economy needs.
The risk in Germany is that you have a shrinking center. A quarter of the population is being lured by fringe parties, and so you have the center establishment parties that don't want to lean too far out the window with policies that might scare people, because they know the electorate is already destabilized, is already lured by the sirens song in the AfD's case, really ethnic nationalism. In the bsw's case, it's more like a pro Russia left leaning tax the ridge.
So you get the result is these kind of muddled, play it safe kind of policies that don't go far enough to address Germany's fundamental issues.
What kinds of things could the country actually do to repair its economy and make sure that stagnation doesn't continue.
It's going to cost a lot of money. That's the reality. So our colleagues at Bloomberg Economics had worked out is that just for Germany to get up to speed with the rest of the G seven, they would have to increase spending by about one percent of GDP.
Increasing public investment by more than one percent of GDP means spending about an extra fifty billion euros.
So that's not an insignificant amount. And like a lot of that spending, you can spend it like roads, infrastructure, railways to get the economy moving again, really to like feed out those bottlenecks. Education is a huge issue that hasn't been really properly funded for a while and needs more investment. Housing is a massive issue because it creates like lots of instability for lots of people, and technology just moving more in a direction that the rest of the world is going in.
This is the Big Take from Bloomberg News. I'm Sarah Holder. This episode was produced by Jessica Beck, who also sound designed it, and by Audrian Atapia, who also fact checked it. It was edited by Haitlin Kenny and Ben Sills. It was mixed by Alex Sugia. Our senior producer is Naomi Shaven. Our senior editor is Elizabeth Ponso. Our executive producer is Nicole Beamster. Bor Sage Bauman is Bloomberg's head of Podcasts.
Special thanks to Magdalena del vae. If you liked this episode, make sure to subscribe and review The Big Take wherever you listen to podcasts. It helps people find the show. Thanks for listening. We'll be back tomorrow.