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Germany finally addresses its long-standing economic weaknesses

“Wwe are at On March 6, Olaf Scholz said standing in front of Schloss Meseberg, a Baroque castle in Brandenburg, where his cabinet is meeting for two days. The German Chancellor explained that this is not only because Russia is at war with Ukraine, but also because the environmental crisis requires a transformation. He has pledged to transform Germany into a glitzy, climate-neutral economy at high speed. But can he pull it off?

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This “new German speed” has become Mr Schulz’s mantra. “Before the crisis, we already had huge vulnerabilities,” said Clemens Fuest, head of Ifo, a Munich-based economic policy think tank. The invasion of Ukraine exposed Germany’s dependence on cheap Russian energy, Its inability to defend itself militarily and the pitfalls of close economic ties to authoritarian states—economic ties with China are just as risky as those with Russia. Last year, China became Germany’s largest trading partner again for the seventh year in a row, with imports and exports totaling more than 298 billion euros ($320 billion), about 21 percent more than in 2021. Germany relies on China to import rare earths indispensable in batteries and semiconductors, among other key minerals. BASFThe chemical giant is investing 10 billion euros in a new factory in southern China. Volkswagen, Europe’s largest automaker, relies on China for 40% of its sales.

The fragility of the economy goes well beyond the spotlight brought into focus a year ago by the Russian invasion.Germany is also too slow to decarbonize and digitize its economy and to deal with demographic issues and a severe shortage of skilled workers, which especially affect medium-sized companies in Europe SME.

Does all this mean that the entire business model in Germany has collapsed? Most economists think otherwise, although profound structural changes are needed. “The economy is more resilient than expected,” said Klaus Günter Deutsch of the Federation of German Industries lobby group. Last year there was talk of massive deindustrialisation, as rising energy costs particularly affected the chemical industry, one of Germany’s largest industries and manufacturers of paper, ceramics and other energy-intensive products.this Dax indexGermany’s blue-chip index fell 27% in the first nine months of last year, almost double the rate of Britain’s blue-chip index FTSE 100 or US Standard & Poor’s 500. Some pundits predict a severe recession in Germany in 2023.

The outlook is more optimistic as spring approaches. Thanks to a mild winter, Germany has never needed gas rationing as many feared. According to government forecasts, Germany is likely to avoid recession this year.

Fears of deindustrialization have also subsided. Compared to January 2022, energy-intensive production fell by 13% (see Figure 1), but overall industrial output remained unchanged. This points to a realignment of supply chains rather than a deindustrialized wholesale process. BASF For example, it is restructuring its complex production structure to get rid of low-margin products. Steelmakers already do this. “Demand for commodity steel in the German market has fallen significantly in recent decades. We are focusing on highly specialized steel products that few people can produce,” said Markus Grolms of large steelmaker ThyssenKrupp.

Rüdiger Bachmann, an economist at the University of Notre Dame in Indiana, predicts a permanent change in the geography of German production. A small number of industrial companies using energy-intensive and relatively simple processes, such as manufacturers of ammonia, zinc or aluminum, will relocate abroad. But other companies using more complex production processes may take their place.

Even with fewer energy-intensive businesses, however, Germany will need a lot of green energy if it is to live up to its plans to become a climate-neutral economy by 2045. Its decarbonization efforts are lagging. By 2020, its annual carbon footprint is 9 tons per person, about 50% higher than that of France, Italy or Spain (see Figure 2).For a place that likes to see itself as a climate leader and spends billions on it energy transition, The strategy of replacing fossil fuels with renewable energy is a long way to go to achieve net zero emissions.

Also in Davos in January, Mr Schulz spoke of a “new German speed” in meeting climate goals. A recent law called for prioritizing wind and solar, as well as electricity and hydrogen networks, he said. Under this new system, grid approvals are on average two years faster than before. This year, the Scholz government more than doubled the number of tenders for onshore wind farms. The chancellor’s ambitious target is to install four to five new wind turbines a day by the 2030s. Mr Scholz has pledged that by 2030, 80 percent of Germany’s electricity production will come from renewable sources. This is a daunting task.

Business digitization is another area where Germany is too slow and too bureaucratic.it ranks only around the average European Union Members of the enterprise integrating digital technologies. Its public administration is pathetically simulated. It has primarily responded to the pandemic through the use of fax machines. Many state and municipal governments last year missed a 2017 deadline imposed by federal law to bring nearly 600 public services online.

Progress has been made in some areas, especially in the private sector. According to the government’s gigabit strategy, at least 50 percent of German homes and businesses will be connected to fiber optic networks by 2025, and all homes should be connected by 2030. SME Companies are making progress, especially those in the engineering and machinery industries. But the cultural shift needed to embrace the digital economy will take time.A company’s readiness to embrace technology often depends on its age CEOsaid Matthias Knecht, 41, co-founder of Billie, a Berlin startup specializing in business-to-business payments.

A final overlooked challenge is replacing retired workers. Germany’s working-age population accounts for about 64 percent of the population, similar to that of the United States. But the largest demographic is young adults in their 50s and 60s. Companies are already struggling to fill job vacancies (see Figure 3). The Employment Institute, a think tank, predicts that without more immigration or policy changes, the labor market will lose 7 million workers by 2035, compared with 46 million today. However, it is possible to provide more overtime incentives for older workers and those who work part-time.

Retraining the workforce is a central element of companies’ strategies to address skilled labor shortages. “We plan to have a training program of at least 12 full working days per worker, mainly because of the new manufacturing technology,” says René Wolf of Ford of Europe in Cologne. Higher wages would help attract workers to the best and most productive companies, but Germany prides itself on wage limits.

Germany needs economic policy Zeitenwende (an epochal turning point), as it needs Mr. Schultz to commit to in his military and foreign policy. That’s a daunting task given the backlog left by the previous administration. Mr Schulz must get his coalition government to stop bickering. And he needs to accomplish something perhaps even harder: getting his fellow Germans excited about the future.

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