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Once-Robust German Economy Now Lags

Germany, typically regarded as the powerhouse economy of Europe, is struggling, according to The Wall Street Journal (subscription). 

What’s going on: “German manufacturers are struggling to produce cars and factory equipment because of parts and labor shortages. They face surging energy prices that are making sky-high electricity bills even higher. And they must invest hundreds of billions of dollars over the coming years to meet new clean-energy standards.”

  • In August, German industrial output was approximately 9% lower than its 2015 level, while the Eurozone saw a 2% rise, according to the EU’s statistics agency.

Contributing factors: The German economy was struggling even before the pandemic.

  • “German industrial output and exports began stagnating in 2017, posing a problem for an economy where some 30% of jobs and output are tied to overseas demand, roughly four times the share in the U.S.”

What should be done: Political leaders are debating possible solutions to the problem.

  • “The three parties negotiating a new coalition government following September’s election want to increase public investments, raise wages and streamline planning procedures, which could boost domestic sources of growth and make companies less dependent on foreign demand. If implemented, the plans would represent the most comprehensive economic overhaul in years. Some economists think they also carry significant risks.”

Going forward: Germany’s promised transition to green energy will cost an average of €5 trillion through 2045—some 5.2% of the country’s annual economic output—each year, according to a study by the state-owned development bank KfW.

  • Meanwhile, “Germany’s labor force grew by almost 4 million during Chancellor Angela Merkel’s 16-year tenure, as strong growth sucked in older workers and immigrants. The workforce is now projected to shrink by the same amount over the next decade. Experts say reserves of fresh workers in Germany and Eastern Europe may largely be depleted.”
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