German business model not fit for changing times, experts say

The 2023 bump in the German economy is not a short-term phenomenon but shows that many foundations of its business model are no longer suitable for the current rapid shifts in the economy, experts say.

In 2023, the German economy contracted by 0.3%, making the country the only major economy in the world to shrink last year. For this year, the country’s industry association BDI expects an overall economic growth of 0.3%.

“A real recovery in German industry after the crisis-related setbacks of recent years is also unlikely to materialise in 2024,” Siegfried Russwurm, head of the BDI, the umbrella organisation of the German industry, told reporters on Tuesday (16 January). Growth, he added, will be driven mostly by private consumption rather than long-term investments.

This is not only a bump in the economic cycle, but shows more fundamental problems with the German, and by extension, the European economic model, economists and business leaders argue.

“The German model is actually in some ways epitomising the European model,” Jan Mischke, partner at the McKinsey Global Institute (MGI), told Euractiv.

“Europe has been built for stability and continuous optimisation,” he said, adding that “in stable times, this is actually a good or at least meaningful choice”.

While Germany has many medium-sized enterprises specialised in niche markets and focused on incremental innovation rather than breakthrough technologies, this would not lead to success any more, he argued.

“Stable times are over and they are likely over for quite some time to come,” Mischke said.

For instance, to compete in new markets such as in the digital economy, Europe would need to attract more risk capital, instead of predominantly relying on bank loans for companies’ investments, MGI argued in a recent article. 

Similarly, energy prices in Europe are well above American or Chinese levels, and would need to be halved for Europe to regain competitiveness, the authors wrote.

Finally, while Europe has been much more open to international trade than the US or China, “geopolitical turbulence is bleeding over into trade relations, giving rise to more disputes and prompting companies to reconfigure supply chains,” the consultants argued.

EU economy still grappling with long tail of 2022 energy shock

Although gas and electricity prices have receded below their 2022 peak, they are not forecast to return to pre-pandemic levels in the foreseeable future, the European Commission said on Monday (15 January), warning of the long-term economic consequences of high energy prices on the EU’s competitiveness.

A structural problem

Speaking at the World Economic Forum in Davos, business leaders agreed that problems were of structural rather than temporary nature, blaming overregulation and too little room for innovation.

“I think for many years, Europe has been very complacent,” said Belén Garijo, CEO of Merck, one of Germany’s largest pharmaceutical companies. “After the pandemic and many other multi crises, the pressure has increased.”

“Overregulation is slowing us down,” she said, adding that “we spend too much time debating, and probably we have to really act with much more sense of urgency”.

Responding to the remarks in Davos, German Economy Minister Robert Habeck (Greens) said he would “agree completely that there is a problem,” mostly blaming the rise of geopolitical tensions, however, which has in his view complicated international trade.

“I would say the real problem, the world we live in, is even bigger than different aspects like overregulation and lack of investments, lack of innovations and so on,” Habeck said.

Given the importance of exports for its overall economy, “Germany, especially, […] relies on these open markets,” he said.

Issues like the war in Ukraine and the disruptions of value chains during the COVID-crisis have shown that “now we have a fragmented world,” Habeck said.

“Now we see that our own mistakes, European mistakes or hesitations, not being competitive enough, now they become a real problem because the world has changed.”

As EU struggles to finance green investments, French businesses bet on capital markets union

Relaxing state aid rules is a step forward in unlocking new green financing, but “we must move quickly” on the capital markets union (CMU) to reach private investors’ money, French business association Medef’s chief Patrick Martin said on Monday (13 November).

Worsened by political decisions

However, instead of addressing the problems, political choices may have even worsened the situation over the last years, Mischke said.

“Germany has decided to switch off a huge amount of energy supply that was there and still is there,” he said about last-year’s decision to switch off the country’s last three nuclear power plants. “So that is certainly one of the discussions that might need to be resurfaced.”

Similarly, BDI’s Russwurm blamed the German government for not yet rising up to the challenge to improve competitiveness.

Germany’s three-party government of Social Democrats, Greens, and Liberals would “argue endlessly and almost dogmatically about problems instead of coming to solutions together in a discourse of factual arguments,” Russwurm said, adding that this has led to “uncertainty among companies and citizens alike”.

Breakthroughs in energy policy, such as how to create sufficient back-up capacity for fluctuating wind and solar power, were “overdue”, he said.

[Edited by Zoran Radosavljevic]

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