The rise and fall of Germany after 2000

The economic model is broken due to external factors and incredible blunders in economic policy. Spirits are low. But I think people still underestimate the economic downside.

Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.

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TLDR Summary

• After being Europe’s sick man for many years, Germany launched a remarkable economic resurrection in the mid-2000s. Over the past 20 years, its economic model was to use cheap labor, a cheap currency, cheap Russian energy and their magnificent engineering IP to ride a big globalization wave which was led by China’s seemingly unsatiable economic appetite. German cars, machines and chemicals were highly sought after because they were high quality and cheap.

• But the tides have turned. Labor supply is shrinking as the country is headed for a demographic cliff. Migration won’t pick up the slack. The Eastern European labor pool is drying up and skilled labor from overseas will prefer Anglo-Saxon countries that offer higher wages and a real immigration strategy that is not convoluted with refugee policy.

• Before 2022, Russian natural gas provided for 20% of Germany’s entire energy consumption as an important counterpart to the renewable energy expansion. Now, access to cheap Russian energy is cut off, a self-inflicted wound with grave consequences for the competitiveness for domestic manufacturing and prosperity of German consumers. German politicians have axed their entire energy policy on a whim. Cleaning up the wreckage of the Energiewende will take decades. Betting the entire economy on Russian gas and then siding with the US and Ukraine after 2014 is possibly the greatest geopolitical blunder of any country in recent history.

• The Chinese growth engine is stalling. And even if there’s more life in it, Germany won’t benefit from it anymore because China has initiated a trade decoupling as part of a major shift in their economic policy. The automotive industry is merely the most visible example of this trend.

• The introduction of the Euro has weakened Germany’s domestic currency and made it hypercompetitive in international trade. This drove 15 years of windfall profits for German companies. But very likely, it has impeded innovation efforts. The price for this will be paid going forward. The trade surplus has come down. But not due to domestic strength. Wages and consumption are not up accordingly.

• Most of the benefits from the labor market deregulation of the early 2000s and from the country’s engineering IP seem to be harvested already. The country plays no role in any of the innovation waves out there and their moats in existing technologies are closing fast, in automotive most importantly.

• And to the extent some of these headwinds are surmountable, German politicians stand ready to finish the job of tearing the economic giant down. The list of suicidal policies is endless.

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Germany’s economic resurrection after 2000

In the early 2000s, Germany was known as the sick man of Europe. Economic growth was slow and unemployment was high. The country still struggled with the economic burden of the reunification and it did not have the same debt-fueled housing market boom that was rampant in many other Western countries (most likely high tenancy ratios and a trustworthy pension system restrained citizens from manically bidding up homes).

Germany’s recovery from that misery symbolically started on March 14, 2003, when Chancellor Schroeder introduced his Agenda 2010, a large scale surgery of the country’s economic and social policies. Agenda 2010 deregulated labor markets by reducing long-term unemployment benefits, easing rules to hire and fire workers and reducing taxes for mini-jobs. It also reduced income taxes and cut social welfare by reducing health benefits and pensions.

Agenda 2010 was heavily opposed by unions and the political left. It tore Schroeder’s social democrats apart. The party splintered and a new strong party emerged on the left. It also cost him the 2005 election which he lost to Angela Merkel. It’s somewhat ironic that that the progressives lost power to the conservatives by not being left enough in their policymaking.