Germany is again 'the sick man of Europe'

Instead of social contribution rates, mass unemployment, and tax burden like in the Schröder years, an ailing infrastructure, investment stagnation, and economic stagnation are holding back the German economy today. The debt fetish is holding the country back, even though it's not necessary.

When opposition politicians wanted to criticize the German government around the turn of the millennium, they often used a succinct image: Germany, as the largest economy in the heart of the continent and supposed economic powerhouse, had become the "sick man of Europe" due to disastrous left-wing debt scandals in terms of competitiveness.

With the vision of tightening belts, consolidating households, and unleashing markets, Angela Merkel and the Union seized power in 2005, ruled for 16 years, and reaped the rewards of Agenda 2010 from Gerhard Schröder: the longest growth phase of the Federal Republic, interrupted only by the financial crisis and Covid-pandemic, driven by flourishing exports to China and cheap gas from Russia. They eventually anchored the mantra of their government tenure in the constitution with the debt brake.

Now, the idea of a country that is held back by its own politics is celebrating a renaissance. But this time, it's under reversed circumstances: "Is Germany again the sick man of Europe?", the British "Financial Times" asks. However, it's not crushing social contribution rates, millions of unemployed, and high taxes that are the cause. The Financial Times judges Germany's aversion to debt to be either madness or hypocrisy.

Behind the gleaming balance, the bridges are cracking

Thanks to Merkel's policy of black zero, Germany today has the lowest debt ratio of all major industrial nations: Berlin is in debt for just under 64 percent of its economic output. In France, it's over 110 percent, in the US more than 120 percent, and in Japan over 250 percent.

However, the beauty prize brings little benefit: Germany is the only G7 nation that shrank economically last year. On paper, it would have a top-notch balance sheet for a company. But in the factories, the machines are groaning from years of austerity measures, there's mismanagement, and sales are not coming in.

In schools, kindergartens, phone and power networks, bridges, roads and railways, police, justice, and military, too little was invested during the Merkel years. This is now catching up with us: the run-down public infrastructure is hindering growth. In its core areas, the state does not function and frustrates the citizens. Anyone who has ever applied for a personal ID at a Berlin city hall, tried to call from the autobahn, or recently traveled by train in Germany knows what I mean.

The short-term symptoms of Germany's illness - the energy price shock from Russia's attack on Ukraine, inflation, and high interest rates - have already subsided or are on the verge of disappearing. Long-term trends are the problem, especially Germany's folly in astronomical savings rates and trade surpluses. "Many German economists see this as proof of Germany's international competitiveness and insist that others, especially in the Eurozone, should follow suit," the "Financial Times" writes. "That's nonsense."

It is no longer just the lament of unions and left-wing economists. The International Monetary Fund (IMF), which in other countries is an advocate for pension cuts, austerity programs, and lean government, now writes that Germany's largest construction sites are "aging, underinvestment, and too much bureaucracy." Public investments have stagnated since the 90s at a level that barely offsets the value loss. Among the large industrial countries, only Spain invests less in its public infrastructure, according to the IMF.

The quasi-religious obsession with debt is evident in the budget that was passed this week. To plug the 60-billion-euro hole caused by a ruling of the Federal Constitutional Court last year, SPD, Greens, and FDP fought for months over cuts and reallocations. And even if investments in the budget are now at record levels, this doesn't change the fact: Germany is giving too little money, unable to maintain its substance and lay the foundation for new growth.

The decay can only be held back - if at all - with extraordinary financial injections. However, the federal government, one of the most creditworthy in the world, must sell its silverware or set up a shadow budget for this. There is a simple solution: "The obvious way" would be for the German government to borrow money where it trusts the most, writes the FT. "It makes no sense for a country with such enormous savings in the private sector not to use them at home."

It is not necessary to revolutionize to overcome the financial masochism. The IMF also advocates for loosening the debt brake by only one percent of economic output to gain more room for sensible investments that stimulate growth. This is not a free pass for unlimited debt making. Only careful dosing would heal Europe's sick man again.

Despite having the lowest debt ratio among major industrial nations, Germany, as highlighted by the IMF, is criticized for underinvestment in infrastructure, leading to the deterioration of public facilities like bridges, roads, and railways, which hinders economic growth.
The International Monetary Fund (IWF) has identified Germany's aversion to debt as a constraint, suggesting a slight relaxation of the debt brake to increase room for investments in infrastructure, which could stimulate growth without fostering unlimited debt.
In contrast to Germany's strict debt policy, its household policy during the Merkel years, like tightening belts and consolidating finances, did not result in significant investments in essential sectors like education, healthcare, and energy, which are now causing issues in ensuring smooth operations and economic growth.