Germany’s economic model wobbles amid energy crisis

Germany’s economic model wobbles amid energy crisis

Germany’s economic model wobbles amid energy crisis

The outlook for Germany, Europe’s largest economy, is clouded by the fallout from Russia’s war in Ukraine.    

A recession in the months to come has a growing sense of inevitability about it, observers say. And it is not just growth that is sputtering - Germany’s entire economic model is being called into question by experts.            

“The war in Ukraine puts an end to the German economic business model as we knew it -- a model which was mainly based on cheap energy imports and industrial exports into a increasingly globalised world,” say analysts from ING bank.    

Less expensive to produce and transport, with prices pinned down in long-term contracts, Russian gas has for decades contributed to Germany’s economic prosperity.    

Industry consumes 30 percent of the gas burnt in Germany. Before the war, more than half of the total supplies came from Russia, a figure which had fallen to 35 percent by the beginning of June.    

To wean itself completely off Russian gas, Germany is looking further afield for new supplies including shipments of liquefied natural gas from the United States and Qatar, as well as moving more quickly to renewable electricity generation.          

“As an exporting nation, Germany has benefited disproportionately from free trade. But it is exactly that which is now in danger,” opined the Sueddeutsche daily earlier this month.    

The coronavirus pandemic and the Ukraine war have shown the weaknesses of open economies as supply chains have been upended and key components have become scarce.     

Germany’s dependence on China is also worrying politicians in Berlin.       

“It’s potentially a new risk,” economist Claudia Kemfert told AFP. While the risk was less acute than dependence on Russia, more needed to be done to “focus on the domestic economy and build resilience”, she said.            

After years of anaemic growth, inflation is back with a vengeance in the European Union. In Germany, the memory of 1920s-style hyperinflation weighs heavy on the public debate.    

The obsession with price stability ensures a “competitive industry and a nation of savers”, according to a recent report by French think tank OFCE.    

Returning to Germany’s strict budgetary rules in 2023 after a three-year pandemic-enforced hiatus is a key aim for Finance Minister Lindner.    

The goal was “as surprising as it is unrealistic”, said analysts at ING.    

Germany is preparing to spend billions again to support households through the coming energy crisis and investing colossal amounts into the switch to renewable energy.    

“Germany will need time and money” to implement “investment and structural change as determined and committed as it demanded from other eurozone countries in the past”, the ING analysts said.