The OECD, Organization for Economic Cooperation and Development, recently released its global economic outlook. The general predictions for 2025 and 2026 are of the predictably broad-brushed kind—in the long run, everything will be fine—but when it gets to the country level, especially Germany, things get interesting.
The report summarizes Germany’s economic woes accordingly (p. 159):
The economy is projected to stagnate in 2024 and grow by 0.7% in 2025 and 1.2% in 2026. Low inflation and rising wages will support real incomes and private consumption … but policy uncertainty will continue to weigh on investor confidence.
Their list of sources of policy uncertainty is topped by the German government’s irrationally exuberant affinity for the ‘green transition.’ This is the technically and economically unrealistic idea that expensive, unreliable energy alternatives can replace cheap, reliable energy production without negative consequences for the economy.
A close second on the uncertainty list is a mechanism in the German federal constitution known as the “debt brake.” As I explained recently, this policy instrument was the direct cause of the crisis in the German government a month ago. The debt brake forces the government to prioritize budget balancing at all costs; if this means higher taxes and harsh budget priorities on a continual basis, then so be it.
With its fiscal policy focus on short-term budget balancing, the German parliament, the Bundestag, has adopted a habit all too familiar in Europe’s welfare states:
- Year-to-year changes in spending to help with short-term budget balancing; and
- No attention to the consequences for long-term spending responsibilities.
In an insightful, English-language opinion piece for Neuer Zürcher Zeitung, Eric Gujer cites a German-language report from the Kiel Institute on the state of the German economy. It is a terrifying verdict on exactly this kind of budgetary short-sightedness; its foremost consequence is persistent, precision-crafted fiscal neglect. One set of consequences, Gujer explains,
relates to the collapse of the Carola Bridge in Dresden, crumbling highway bridges and the Cologne-Berlin railroad line. The train journey between these two cities now takes about an hour longer than it did 20 years ago. This is because the ICE trains, which are designed for speeds of 250 kilometers [150 miles] per hour, today stutter through the Weser Uplands region at a mere 80 kilometers per hour.
Gujer blames this neglect on politicians with a bloated self-image who
never had enough money for infrastructure because they were always concerned with more important and prestigious projects: the road toll that failed because it contravened EU law, or the dream of a German Silicon Valley.
It is indeed correct that the Bundestag has an insatiable affinity for these types of headline-grabbing projects, as well as all kinds of economically redistributive social benefits. However, there is a deeper reason why the prestige projects have gotten more attention than the infrastructure.
The inescapable stranglehold on the German government’s budget is the very poor performance of the German economy. Table 1 reports the inflation-adjusted annual GDP growth rates for all EU member states since the third quarter of 2022. The red-marked numbers are negative, i.e., GDP is falling; the light blue ones highlight growth rates above 3%.
Table 1
The German economy is not the only one that is shrinking, but it really does not make the German government’s finances better that Austria, Estonia, Finland, and Ireland have weaker economies than Germany. With real GDP in decline for five quarters in a row, and with tepid growth rates before that, the government in Berlin is watching its tax base slowly but steadily become smaller and smaller.
If they are paying attention, of course. The campaign for the February election is in full gear, but so far, there has been almost no attention focused on the structurally stagnant German economy.
This is a major problem. When the new Bundestag goes to work in Berlin after the election, it will find itself right back where it left off when Bundeskanzler Olaf Scholz resigned back in November. The stagnant economy is still winding down tax revenue to a trickle compared to where the spending-happy legislators would like it to be.
Somewhere, though, there is an awareness among Germany’s political leadership that their economy needs to grow more. It is very common that politicians who do come to this insight start looking for a ‘magic bullet’ solution to the growth problem: one big idea that in an instant will turn up economic growth to breakneck speed.
Ideas like a German Silicon Valley are the brainchildren of this kind of political wishful thinking.
The problem with a stagnant economy is no different from the same problem in other countries. It has a simple explanation and a simple solution, both of which are overwhelmingly complex when viewed through the lens of politics:
- The explanation: a government that socializes far too much of the economy; high taxes make it prohibitively expensive to invest, run businesses, and develop a career; big government spending allocates resources based not on the efficient-use principles of the market, but on the virtuous-use premises of politics;
- The solution: stop spending money for the purposes of economic redistribution; return the welfare state to its original purpose of providing a basic but dignified last-resort existence for those without any other means; privatize as much as ever possible of remaining government functions.
As icing on the cake, political obsession with the ‘green transition’ has made these structural economic problems even worse. A sensible approach to energy production, rather than the fundamentalism that has prevailed for the better part of 20 years now, would give businesses large and small back some of their lost confidence in the German economy.
