The crisis of the German model

The German economy shows signs of weakness again. The signals that are received on the progress of the German economy in the third quarter are not promising. The situation is serious enough for Olaf Scholz, Minister of Finance of the government of large coalition led by Angela Merkel, to consider a fiscal stimulus package of about 50 billion euros. There is debate about whether Germany is going into recession or can avoid it by this means. But, in view of the causes and characteristics of the slowdown of the German economy, it is worth asking whether we are facing a deeper crisis of the German economic model. If this were so, the impact on the Spanish economy in the long term will depend on whether Germany decides to reorient its economy, and in what direction.

According to Markit, the activity of the services sector continues to grow, but not enough to compensate for the fall in industrial production. The result is the lowest employment growth rate in five years. Inflationary pressures are also relaxed due to the fall in manufacturing sector costs.

The causes of the deceleration of the German economy, and by extension of the European one, are several but generally external. It is not a crisis of competitiveness. The German economy is export-oriented, increasingly outside the eurozone, and is therefore sensitive to the tone of international trade. And international trade has slowed substantially in recent years. Donald Trump’s trade wars are an important factor in this reduction. Trump has threatened to impose tariffs on US imports of all kinds of products from the European Union, particularly German cars. The hard Brexit that is coming more and more likely will also represent a severe blow to German and Eurozone exports.

However, the crisis in the German automobile sector is not only due to Trump, nor of course to a Brexit that has not yet occurred. Since the scandal over the manipulation of diesel engine emissions in 2015 the German car industry does not lift its head. In the third quarter of last year, another quarterly fall in Germany’s GDP was attributed to car industry problems with the adaptation to a new emission certification. But certification problems passed and the crisis remains. German automakers compete, but do not lead in the transition to the electric car.

Thus, Germany’s crisis is caused by a reduction in the volume of international trade. As the German country is an export-oriented economy, this has an impact on a reduction in industrial production. And above all this is seen in the automobile sector, which faces an unprecedented transformation. However, domestic consumption and the service sector still grow and contribute to sustaining the German economy.

That is, all the strengths of the German economy have become weaknesses: exports, manufacturing, and leadership in the automobile sector. And this weakness is due to factors external to the German economy. And it is the sectors of the economy so far less appreciated, services and domestic demand, which gain strength.

That is why it is possible to speculate with the possibility that we are not facing a cyclical recession in Germany but rather a crisis of its economic model. How Germany reacts to this crisis may depend on the future of the German and European economy – and, therefore, of the Spanish economy – in the medium and long term.

If Germany limits itself to protecting its dominant industries hoping to weather the Trump and Brexit storm, it will depend on foreign trade waters returning to their course. But of course Trump and to some extent Brexit represent reactions against globalized free trade from which Germany and the eurozone have benefited. If the US and the United Kingdom cease to be importers of last resort, Germany can hardly remain the world champion of exports.

The same can be said of the relationship between manufacturing and services. The German industry is currently in contraction as services grow. This is in line with the growing importance of information technologies. If Germany protects its manufacturing industry without betting on seeing it give momentum to the services sector, it may lose the train of what is already called the fourth industrial revolution.

That is why it will be very important to see in which direction the fiscal stimulus reluctantly accepted by Scholz, a social-democratic finance minister who has not deviated an apex so far from the path of budgetary stability – and even surplus – marked by his predecessor of Christianity. Wolfgang Schäuble.

And Spain? It is clear that, in the wake of the banking and debt crisis of the beginning of this decade, Spain was forced to reorient its economy along the lines of the German export-dependent model. In addition, the car industry is very important for the Spanish economy as it is in Germany, and is largely in German hands. So, both because of Germany’s influence on the economic policy of the eurozone and because it depends on part of the Spanish industry of decisions made in Germany, how Germany faces its current crisis will have profound effects on the Spanish economy. Hopefully Germany will bet on investing in the future instead of protecting its past glory, although the expectations of it being so are not excessive.

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