Germany, a global and European powerhouse, has an economy that is facing enormous headwinds that need to be dealt with, according to analysts at the International Monetary Fund.
Pointing out that of the G7 group, it was the only economy to have shrunk last year, and that it was projected to be the worst-performing in the current year, Kevin Fletcher, Harri Kemp and Galen Sher argued that this was not – as was commonly supposed – the consequence of the energy crisis or of deindustrialisation. Rather, they suggested that it arose from a complex of ‘temporary factors and some more structural ones.’
Among the temporary factors were inflation and a post-pandemic rebalancing, which saw reduced demand for German exports.
However, Germany is also struggling with matters that demand longer-term policy attention.
The country’s workforce is ageing at a faster rate than that of many of its peer economies; this is shrinking the workforce and increasing calls on social security payments.
A potential (partial) solution to this would be to increase productivity, but this is being held back by inadequate levels of public investment, which have been on the decline since the 1990s. ‘This puts Germany near the bottom of advanced economies in public investment. Money that has been budgeted for investment is routinely underspent, often because of staff shortages in municipalities,’ the authors contend.
In addition, cutting the country’s legendary red tape could assist in making Germany a more attractive business destination. Permission often takes years to secure, and here the country is far outdone by most of its OECD peers. Digitisation could be a significant tool too.
Fortunately, the authors state, Germany possesses the means to address these difficulties: attracting more skilled immigration, making the labour market more accessible to women, and using consulting services to plug the gaps in state capacity.
[Image: Brigitte Werner from Pixabay]