- Andrzej Krajewski
Germany enters a period of chaos.
The history of Germany over the past 75 years has been a story of success. The country has recovered from the shame and devastation of the Second World War and has transformed itself into one of the world's leading economic powers. However, bad decisions, an unstable international environment and technological change have called the German development model into question. After the recession in 2023, there are many signs that the German economy will continue to contract in 2024 as well. This will be the longest economic slump of Berlin in this century. The ensuing growing frustration among citizens foreshadows a political crisis the likes of which the country has not seen since 1945. A new chapter in German history is opening, and no one knows what will be written in it.
National sadness
"I'm not saying this out of emotion, but out of commitment. I am worried about what is happening in this country right now. I have never started a new year as worried as I am in 2024," announced the leader of the Christian Democratic Union (CDU), Friedrich Merz, on the social media platform "X" (formerly "Twitter") on 21 January.
In a brief piece, the leader of Germany's largest opposition party summed up the mood of his countrymen. The Germans are deeply concerned. They even fear that the very existence of democracy in their country is under threat. According to a survey published by the weekly magazine Stern at the end of January, 63% of respondents expressed such fears. The SPD voters (86 per cent) and Greens voters (85 per cent) are indeed very much worried that democracy in Germany is contested and that extremists will take over. The only people who are not afraid of such a scenario are those who intend to vote for the AfD. Only 6% of them expressed the belief that a dictatorship is coming.
However, there is a high degree of consensus when it comes to other fears. According to R+V Versicherung's annual survey, around 65 per cent of Germans are most concerned about the rising cost of living. This is followed by the fear of renting or buying an apartment becoming too expensive (60 per cent of respondents) and the fear of tax increases and cuts in social benefits (57 per cent). In fourth place was the fear of further waves of refugees arriving in Germany, with 56 per cent.
So you could say that the average German is most afraid of becoming poor or poorer and of his country being overrun by foreigners. At the same time, the so-called "fear index" recorded by R+V Versicherung has been rising steadily for five years.
The index has exceeded 45 points before, reaching 52 in 2009. But at that time this was not accompanied by a loss of confidence in the existing political elite. For decades, voters have tended to swing between the CDU/CSU, FDP and SPD or smaller left-leaning parties, among which the Greens have gained ground. Now German voters are looking for different representatives. The biggest beneficiary of this process is the far-right Alternative for Germany (AFD) party.
An economy in recession
"After a year with a poor outlook, we are in for another weak year". - said Michael Hüther, director of the Institute for the German Economy, to the DPA news agency at the end of December. He was commenting on the results of a survey conducted by his institute among 47 German industry associations representing more than 9,000 companies. The results show that ouf of these 47 as many as 23 organisations expect production in their sector to fall, while 15 expect it to remain at the same level as in 2023. Investment is predicted to fall by a similar margin.
"The mood has not been so bad since the financial crisis of 2009. - Hüther recalled.
Back then, the recession that hit the German economy lasted for a year. This time, the recession year is over, but the recession has no end in sight, and Germany is on a path of a 0.3 per cent decline in GDP in 2024.
So why is that? With the gas prices finally back to where they were before Russia's invasion of Ukraine, now they are even a bit cheaper, other factors have started to strangle the economy. The European Central Bank has revised its forecast for inflation in the eurozone for 2024, and unfortunately upwards. That means interest rates will remain high for months to come, before the long-awaited drop in inflation to 2 per cent in two years' time. Until then, the ECB's experts predict: "Economic growth will continue to be held back as the ECB's monetary tightening and adverse credit conditions feed through to the real economy.”
At the same time, the effects of rocket attacks on cargo ships in transit through the Red Sea are increasingly noticeable. The Yemeni Huti militia has managed to paralyse the shortest shipping route between Europe and the Far East, which are vital economic partners for the German economy. According to the Kiel Institute for the World Economy (IfW), around 10 per cent of Germany's foreign trade in goods of all kinds is transported by sea. Most of it via the Red Sea. Now, ships take a two weeks longer path around Africa to avoid the dangerous region. This results in much higher costs and interruptions in the supply of components needed for the production process.
What is means in practice? At the beginning of the year, Tesla management announced that Gigafactory near Berlin would be shut down from 29 January to 11 February. A shortage of components manufactured in Asia has halted the production of electric cars. "Significantly longer transportation times are creating a gap in the supply chain," Tesla executives said in a laconic announcement.
This comes at a time when two-thirds of German companies (67%) say they are in the process of moderately or strongly relocating production to the US or the Far East. And according to Deloitte research, Germany is becoming an increasingly unattractive location for industrial investment.
"There is a widespread fear of deindustrialisation in Germany - and this fear is certainly justified. Energy prices are still high by international standards, much of the infrastructure is in need of renovation and bureaucracy is paralysing us," said Axel Hopner in the pages of Handelsblatt on 30 January 2024.
The alarmist tone of this article by a journalist specialising in economic issues is well grounded.
De-industrialisation means the departure of the most valuable elements of the economy, and thus a reduction in state budget revenues. Not only these companies, but also those who work for them, are the best taxpayers, given the income they receive. New investment stops, jobs disappear and innovation falls. For more than 70 years, Germany's wealth and success have been built on large industrial corporations. Today, there is no other basis for stabilising the entire economy.
Meanwhile, EU industrial production grew by 1 percent in 2023, while Germany's shrank by 0.3 percent.
This should come as no surprise, given that the average price of electricity in the EU is 32 cents per kilowatt hour, compared with 47 cents in Germany. In such a situation, it is difficult to talk about the chances of German industry competing effectively with the Chinese when a kilowatt hour is up to five times cheaper in China.
This, combined with government subsidies, means that Chinese companies are just one step away from dominating industries that were set to become the flywheel of the German economy as the energy transition progressed.
For example, panic gripped photovoltaic panel manufacturers in autumn 2023. Nearly 40 companies, mostly from Germany, including Heckert Solar and Nexwafe, appealed in writing to the EU institutions to block Chinese expansion into EU markets, which could lead to mass bankruptcies. Equally worrying is the fact that China has become a leading producer of energy storage batteries and wind turbines, which are mainly sold in Europe.
Although the German government has decided to freeze energy prices in order to support domestic companies and to provide a huge financial package of EUR 200 billion to support industry in particular, the effects of these measures are not yet visible.
On top of this, in mid-November 2023, the Constitutional Court in Karlsruhe ruled that the use of the €60 billion federal loan for combating the effects of the coronavirus as an additional support package for the economy is unconstitutional. "The Scholz government's attempt to circumvent the German constitution's debt limits is unprecedented in Germany. - Merz said in his speech at the time.
Unsurprisingly, Mr Merz praised the verdict of the tribunal, insisting that it had been necessary and, addressing Mr Scholz directly, he declared: "The shoes you wear as Chancellor of the Federal Republic of Germany are at least two sizes too big for you". The CDU leader had reason to be satisfied. The Constitutional Court's decision meant that the 'red-green-yellow' coalition was in deep trouble for the under-budgeted 2024 state budget, compounded by the fact that a law passed in 2020 had just expired, suspending the so-called 'budget brake' against excessive debt for three years. As a result, it was only in early February that the Bundestag approved a budget of €477bn for 2024, with new borrowing of around €39bn. For the first time since 2019, the “debt brake” provided for in the constitution has been applied again. This has meant a lot of cuts in subsidies, including for farmers.
But it could get worse. According to the German business newspaper 'Handelsblatt', the crisis is worsening and Finance Minister Christian Lindner doesn't know where to find the 20 billion euros needed to cover spending in 2025. "The budget gap will be in the tens of billions," the Handelsblatt quoted an anonymous government official as saying.
Moreover, in December 2023, 10-year German government bond yields averaged around 2.11%. Two years ago it was minus 0.53%. So the days when financial markets were willing to pay a premium for the German government's willingness to borrow are definitely over. Now it is Berlin that is paying the interest on the debt, and at an increasing rate.
This has left the German economy gasping for breath, industry preparing to relocate abroad, and the state budget struggling to find the necessary funding.
Financial support packages for companies and loans are becoming more expensive, at the same time, public anxiety is rising and this is only the beginning of Germany's problems.
Unsolvable problems and social tensions
The German economy is weighed down by problems for which there is a total lack of ideas on how to solve them.
The first is the shortage of skilled workers, which has been worsening for years. There is currently a shortage of 1.73 million skilled workers, mainly in high-tech industries. That is one million more than 10 years ago.
After energy prices, this is the main reason for the widespread relocation plans of German companies. After all, it is much easier to find qualified staff in Central Europe, the US or China than to bring them to Germany. It turns out that the sought-after specialists do not want to settle in Germany, and if they do, they want to leave very quickly. According to the surveys by the Institute for Applied Economic Research in Tübingen, this is because foreigners feel unwelcome and are heavily burdened by local bureaucracy and regulations. The wages are also not very good. So after a few years they pack up and move, mainly to the US. Even the new emigration law for skilled workers, in force since November 2023, does not seem to guarantee a breakthrough. According to labour market experts, it does not simplify anything in the area of bureaucratic procedures, and in order to employ a foreign specialist, employers still have to wait many months for the necessary permits.
At the same time, there are around 2.6 million people registered as unemployed in Germany. This means that for every 100 job vacancies, there are around 150 registered unemployed. However, they are not qualified to work, nor are they willing to undergo specialization. In fact, the German welfare system encourages such attitudes by allowing a relatively comfortable life without the need for employment. But this too is changing, albeit not through planned government action. In fact, the poorest and those most dependent on the welfare system have begun to experience what could be called a loss of access to state resources due to the influx of immigrants, still referred to in Germany as 'refugees'.
The benefits they are entitled to are more generous than in many other EU countries. Adults living in reception centres for refugees have access to free food in their accommodation and €150 a month in pocket money. This is enshrined in law and the Constitutional Court has ruled that it cannot be reduced at will. These costs are borne by the budgets of the municipalities in which the migrants live. So is the obligation to provide them with shelter, clothing and food. In the course of 2023, more than 220,000 new migrants were registered in Germany with a first application for asylum. And of the one million or so Ukrainian war refugees, more and more are registering as refugees in order to receive the same social package. Benefits quadruple once asylum status has been granted, and child benefits are also included. According to official figures, a couple with three minor children receives 1,903 euros per month. This is slightly less than the Bürgergeld (that is unemployment benefit) that the same large family of German citizens is entitled to, which is about €2,263.
At the same time, there are around 250,000 migrants in Germany whose asylum applications have been rejected. It is estimated that more than 80 per cent of them cannot be legally deported across borders because no other country will accept them or they would end up in a war zone. According to a survey of German municipalities carried out by the research company Mediendienst Integration together with researchers from the University of Hildesheim, up to 60 per cent of municipalities described their ability to continue guaranteeing social care for migrants as 'difficult but still feasible'. 40 per cent said that they were "working in emergency mode". Interestingly, 77 per cent of refugees are housed in local authority accommodation. This means that for native Germans, housing is in short supply, as are funds for temporary social benefits.
This year, Chancellor Olaf Scholz wants to change the law to allow the mass deportation of migrants and restrict their access to benefits. Cash is to be replaced by special payment cards that guarantee spending only in places designated by the authorities. But none of this will stop the silent 'war on resources' of the welfare state. The poorer citizens and migrants who use it have become dangerous rivals, as the economic downturn means that resources are dwindling and those who want to use them are rapidly increasing. This leads to frustration and xenophobic sentiments. German citizens, feeling impoverished, are beginning to pay attention to how much of their country's resources serve them and how much serves outsiders.
These social tensions are exacerbated by high energy prices, which are hitting not only industry but also individual consumers. The term 'energy poverty' has entered the lexicon. In mid-2022, it was reported that the number of Germans spending more than 10 per cent of their income on heating, hot water and electricity had risen from 14.4 per cent to more than 25 per cent in just 12 months, i.e. a fifth of the population was considered "energy poor" in Germany.
It was also found that the middle class was increasingly affected by this phenomenon. "Energy poverty" began to threaten up to 41 per cent of Germans in this social stratum. Another year passed and by the end of 2023 the situation looked even worse, as despite the government's freeze on energy prices from March 2022, electricity and heating bills had risen by an average of €52 (around 33 per cent). As a result, around 40 per cent of Germans can now call themselves "energy poor" (i.e. spending more than 10 per cent of their income on energy). In just three years, their number has increased by more than 3.5 times. These people are having to cut back on their spending and live ever more frugally, further hampering the development of a largely consumer-based economy. It has reached the point where, in a previously affluent country, more than 5.5 million people already live in households that lack the financial means to adequately heat their homes.
Meanwhile, rapid improvement - through a significant reduction in energy prices - seems impossible. The closure of the last nuclear power plants by Olaf Scholz's government has made lignite, gas, wind, biomass and solar the main fuels in Germany's energy system.
Gas prices have fallen significantly, but the price of CO2 emission allowances that energy companies have to pay is now three times higher than it was five years ago. So coal and gas will no longer be cheap sources of electricity and heat. It is also debatable whether renewables can save the situation at this stage of the energy transition, given the lack of cheap energy storage facilities and the instability of this source of electricity.
According to an analysis carried out by a group of experts for the European Central Bank in March 2023. - The use of renewables instead of fossil fuels "increases electricity prices by an average of 11%". With up to 46.3% of the electricity in Germany's energy mix coming from renewables in 2023, and with conventional power no longer cheap either, there is no room for manoeuvre to lower the average price. With the Energiewende, Germans have condemned themselves to high bills and will have to learn to live with them.
On the verge of a social explosion
The weakening economy, the impoverishment of citizens, the increasing number of risks and the lack of hope for a rapid improvement - all this is beginning to have an impact on social behaviour in the Federal Republic of Germany.
The discontent was first displayed by farmers whose protests swept across the country. Government announcements to cut diesel subsidies forced them to block roads and cities. On Monday, February 5, around 100,000 tractors took part in the blockades, paralysing traffic in every state. Hauliers and small businessmen joined the protests. Their demands include repealing the increase in the toll for transit included in the Bundestag's budget bill, abolishing the CO2 tax, and continuing the subsidy for agricultural diesel. The Lufthansa ground staff union has also called for a warning strike. The protests are beginning to resemble a snowball that is only gaining momentum.
Interestingly, blockades of the regional headquarters of NDR public radio and television have also begun, as a form of resistance to the false portrayal of the protesters. "The criticism is not only directed at the NDR, but at the media as a whole," reported Die Welt on Monday 5 February.
The growing mistrust of the media and the ruling elite has long been reflected in opinion polls, according to a ZDF analysis of voter preferences conducted at the beginning of February 2024: "The current politically turbulent times are also reflected in the Politbarometer forecast. According to this study, if elections were held in February, they would result in a defeat for the ruling coalition. The SPD would win 15 per cent of the vote and the Greens 13 per cent, while the FDP would fall below the electoral threshold with 4 per cent support and not enter the Bundestag, as would the left-wing Die Linke with 3 per cent.
The CDU/CSU is expected to win with 31 percent of the vote. The AfD, which has been riding high, may be disappointed, as the far-right party's ratings have dropped to around 19 per cent, thanks to the long-announced entry of the Sahra Wagenknecht Alliance (BSW), which won 6 per cent of the vote.
As of today, according to ZDF, a new government could be formed after the elections by "a coalition between the CDU/CSU and the SPD and a coalition between the CDU/CSU and the Greens". But the term of the current parliament is still a year and a half away, and the pool of German crises is only just starting to accumulate and intensify. So a lot can happen before then. Especially since 66 per cent of respondents say the government is doing a poor job, while only 28 per cent think otherwise.
And so the main obstacle to further growth in support for the AfD is the widespread fear of radicals in German society. As many as 79 per cent of respondents think that the demonstrations against right-wing extremism that have been taking place in Germany for several weeks are a good thing. Interestingly, however, only 38 per cent said they were against the AfD and would weaken it.
However, the eastern states are beginning to act as a bit of an icebreaker in this area. With the exception of Berlin, the AfD is firmly at the top of the polls, with a significant lead over the traditional parties. According to the RTL /ntv poll, the party currently has 36 per cent of the vote in Thuringia, 34 per cent in Saxony and 32 per cent in Brandenburg.
In the case of the other parties, the level of support varies greatly from state to state
(I'll save myself a complicated description and just show charts from
https://www.n-tv.de/politik/AfD-in-Thueringen-Sachsen-und-Brandenburg-vorn-article24653031.html).
The growing popularity of the Sahra Wagenknecht Alliance in the three eastern German states is also striking.
This is important because elections for regional parliaments will be held this year in these three states of the former GDR. And it looks like it will be very difficult to form national governments in the state parliaments without the participation of the AfD.
If the party, which has so far been sidelined, were to come to power in one of these states, there would be a risk that the fear of the party among many voters in other parts of Germany would begin to wane. On the other hand, the willingness to support its radical programme as a way of expressing their frustration would increase. This scenario is made plausible by the emergence of a competitor to the mainstream party, but also a potential coalition partner, in the form of Sahra Wagenknecht's Alliance.
Sahra Wagenknecht began her political career in East Germany, joining the SED party that ruled the communist state. The election manifesto she has drawn up for her party is strongly anti-immigrant, Eurosceptic and pro-Russian, while at the same time focusing on the promise to rebuild the welfare state in Germany. So it is not very different from what the AfD is preaching and at the same time it fits in well with the mood of the radicalising part of the electorate.
So there are already two parties on the left and right of the political scene in Germany that reject the political consensus on Germany's key issues, appeal to populism and increasingly frighten the mainstream parties.
In Thuringia, if you add up the support for both parties, you get about 48 per cent of the potential vote. This is beginning to resemble the times of the Weimar Republic, which was hit by the Great Depression in the early 1930s. At that time, the democratic parties in the political centre were simultaneously challenged by the Nazis of the NSDAP and the Communists of the KPD, so that the two extremist movements ended up winning more than 50 per cent of all votes in elections. At the time, however, the Nazis and Communists were fighting each other to the death.
This is why comparisons with the Weimar Republic are increasingly being made in German public debate as a threatening memento. At the end of January, Manfred Güllner, founder and head of the Forsa polling institute, warned that Germany's political scene was heading in this direction. He said that the proliferation of new groupings such as the Sahra Wagenknecht Alliance (BSW) or the planned conservative party Union of Values, creates a situation in which Germany: "is threatened by the fragmentation of the party system and the danger of a return to Weimar conditions". And these conditions favoured the most radical parties in times of economic collapse. So the persistence of the current economic crisis increases the risk of it becoming political.
It is not surprising, therefore, that Friedrich Merz warned in his speech at the beginning of February: that "Germany has become an entity in Europe that is heading in the wrong direction when it comes to energy and climate policy. At some point, the German government will have to realise that no one else is doing what we are doing here in Germany. This is not because of others, but because fundamentally wrong decisions are being made here".
But this diagnosis of the causes of the economic crisis seems half-hearted. To overcome it successfully, the German government would have to undertake a series of decisive reforms that would allow the German economy to regain its former competitiveness. For example, it would have to free it from red tape, make the labour market more flexible, change the benefit system to one that encourages employment, reform migration policy so that mainly economically valuable emigrants stay in Germany, lower energy prices and restore innovation. The list of necessary changes is long and does not look easy.
Meanwhile, the pace of change is accelerating. It is therefore reasonable to assume that in the coming months the crisis in the economy will be transformed into a political crisis. Its extent and impact cannot be predicted today. However, if the economic slump continues, the consequences could prove fatal for the future not only of the Federal Republic of Germany, but also of the European Union as a whole.
