The week beginning Monday, November 4, 2024: Germany’s economic woes, fiscal policy, deregulation, and more.
The week beginning Monday, November 4, 2024: Germany’s economic woes, fiscal policy, deregulation, and more.
Germany has slipped deeper into crisis with the collapse of its governing coalition. An unlikely union between the center-left SPD, the Greens, and the free-market(ish) FDP never made much intellectual sense, but the parliamentary arithmetic worked, so that was that.
And that was then. The chancellor, Olaf Scholz (SPD), fired his finance minister Christian Lindner (FDP) before he could quit. A German chancellor cannot call an election, so Scholz then set the stage for a confidence vote in January, which he would be highly likely to lose, meaning elections in March. However, due to pressure from the opposition, the vote may well be held earlier. Commenting on the coalition’s demise, Elon Musk helpfully described Scholz as a “fool.”
Lurking beneath the breakup of the coalition of convenience is the growing deterioration of the German economy. The grinding deindustrialization of recent years has been gathering pace. Recent signs that Germany’s auto sector may be running into severe trouble are setting off concerns that a chronic condition may be becoming acute. There was a 2.5 percent fall in German industrial output in September, worse than expectations of a 1 percent decline. Car production fell by almost three times as much, partly due to the decline in demand that followed the removal of electric vehicle (EV) subsidies, but only partly: The industry’s problems, a good number of which can be traced back to the disruption brought about the coerced EV transition, go far deeper than that.
Overall industrial production is back to where it was 18 years ago. According to some estimates, it may fall by another 20 percent by 2030, no small matter when the industrial sector accounts for about a fifth of the German economy and is its greatest strength. GDP declined by 0.3 percent in 2023 (underperforming all other G7 economies), and, despite earlier predictions of (extremely) modest growth, is now expected to shrink by 0.1 percent this year. It might recover a little (less than 1 percent) in 2025. Large corporate insolvencies surged by 37 percent in the first half of the year, a nine-year high. It is hardly surprising that Germans, a traditionally cautious bunch, continue to save at a high rate. The household-savings rate is 11.4 percent (compared with under 5 percent in the U.S.), another drag on domestic demand.
Lindner had advocated for reforms designed to get the German economy going again, including corporate-tax cuts and a postponement of the EU ban on the sales of new “traditional” cars after 2035, two shibboleths too many for Scholz. The chancellor’s preference is to suspend Germany’s constitutionally enshrined debt limit (a separate debate) to enable higher spending, some of which would be for the benefit of the auto sector. Lindner disagrees with Scholz over the debt limit and regards handing cash to carmakers (or EV buyers) as tinkering at the edges of the problem, thus his call for a change of the “framework conditions” — or, to put it more bluntly, the change in the deadline. Scholz subscribes to the Brussels argument that the EU’s carmakers need the “certainty” that sticking with 2035 will bring, an approach that would, tariffs or no tariffs, hand much of Europe’s car market to the Chinese.
There could be no meeting of minds, and so that was that.
The origins of Germany’s economic woes, as with so many other of its difficulties, lie with Angela Merkel, who squandered the benefits of two legacies, choosing to coast rather than build upon them. The first was the effect of labor-market reforms introduced by her predecessor, Gerhardt Schroeder. The second was the concealed devaluation that arose out of exchanging the Deutschmark, an intrinsically strong currency, for the weaker euro. Together, they meant good times for the country’s exporters, which also benefited from strong demand from China, then on its remarkable ascent. A close trading relationship with China, argued Merkel, echoing the naive thinking of the end-of-history era, would be a “win-win,” good for business, and good for bringing China into the fold. This may have been the conventional wisdom of the time, but it has led to dangerous dependency. Worse, China is rapidly transforming itself from a customer to a competitor in area after area, from autos to capital goods. In 2020, it accounted for 8 percent of Germany’s exports, a number that will probably decline to 5 percent this year, a structural decline exacerbated by the current weakness in China’s economy.
But while Germany enjoyed a lengthy period of good growth (exports amount to around 50 percent of its GDP) few raised questions, and the country sailed along, heavily taxed (something that Merkel, always looking to her left, did nothing about) and complacent. These were years of chronic underinvestment in infrastructure, including in the digital revolution, the latter neatly illustrated by the afterlife of the fax machine in Germany. According to a relatively recent survey, about one-third of German companies use one regularly and eighty percent still have them around. They were also the years in which Germany continued to “invest” billions in renewables, a binge further reinforced by legislation backing Merkel’s reckless “energiewende” (energy turnaround) in 2010. This was a bid to wean the country off of fossil fuels and (after Fukushima rekindled old, irrational fears) nuclear power. Despite Russia’s more aggressive turn, a change signaled in word by Putin’s notorious Munich speech (2007) and indeed by Russia’s invasion of Georgia (2008), Russian gas was to be the bridge fuel to a decarbonized future. What could go wrong?
In 2018, Germany’s Court of Auditors estimated that cost of the switch to renewables in the previous five years had been at least 160 billion euros. The spending, it said, was in “extreme disproportion to the results,” a conclusion that would hold for longer periods too. And this was at a time of underinvestment elsewhere. The opportunity cost of climate spending is too often forgotten. The actual cost (on top of those billions) was to leave Germany with extraordinarily high electricity bills, the last thing its heavily energy-intensive industrial sector needed, and a result hard to reconcile with frequently repeated claims of renewables’ cheapness. And all this was before Germany lost access to “cheap” Russian gas, its second dangerous dependency. Efforts to blame Germany’s economic woes on the loss of that gas and China won’t wash. Both have contributed to the current mess, but the rot was spreading before then. Much of it was green.
German companies have been voting with their wallets.
William Wilkes and Alexander Weber, writing for Bloomberg (my emphasis added):
Companies including chemicals giant BASF SE, auto supplier ZF Friedrichshafen AG and home-appliance maker Miele & Cie. KG have shifted resources outside their homeland, leading to a net outflow of capital of more than €650 billion ($700 billion) since 2010, according to figures from the Bundesbank. Almost 40% of that has taken place since 2021, when Chancellor Olaf Scholz’s fractious coalition was voted into power…
Wilkes and Weber quote Siemens’ global head of tax, who said recently that there was “actually nothing that speaks in favor of investing in Germany.”
“Actually nothing.”
Low growth and high taxes explained why Siemens, one of Germany’s industrial giants, had been making most of its investments outside of the country. Reinforcing that message, it recently agreed a $10 billion deal to buy Altair, a software company based in Michigan, its largest ever acquisition. The runner-up was from 2015, a $7.5 billion purchase of an oil-and-gas equipment maker based in, yes, the U.S.
In 2023, Scholz declared that Germany’s huge investments in green technology would return it to the glory days of post-war economic miracle. That’s not how it’s working out. Energy-intensive companies are moving operations to the U.S., another reminder of the competitive advantages that flow from America’s (relatively) low energy costs. For the U.S. to walk away from them would be nuts. And now, the return of Donald Trump — the tariff man himself — poses a further threat to Germany’s export model. It could also encourage more German companies to relocate more manufacturing to the U.S., behind any Trump (tariff) wall.
Germany is uncompetitive even compared with some parts of the EU, meaning that companies are continuing to move production to cheaper countries such as Hungary and Spain. And when Germany’s car companies do this, so do the companies that serve them.
Wilkes and Weber:
Germany’s vast network of parts suppliers are following suit. A recent survey by the VDA auto lobby showed that 80% are delaying, relocating or canceling domestic investments. Over a third intend to shift resources to other EU countries, Asia and North America.
What’s more:
EVs need far fewer parts than vehicles with combustion engines, with obvious knock-on effects for specialist engineering firms. “[Germany’s] traditional strengths in transmission and combustion technologies are being replaced,” says Holger Klein, chief executive of its second-largest automotive supplier, ZF Friedrichshafen.
ZF Friedrichshafen has made a major acquisition, tellingly in the U.S., to help adjust to a changed market. But it still sees a rough road ahead, and the loss of a quarter of its domestic workforce by 2028.
And then there’s regulation:
Regulations impacting German businesses encompass some 50,000 pages, compared with 34,000 a decade ago, despite multiple rounds of legislation aimed at reducing the burden. A recent survey of more than 1,700 companies by the Ifo economic institute revealed that almost half had postponed projects at home in the last two years because of such issues.
Even (admittedly under Milei) Argentina has a minister of deregulation. It is inconceivable that Germany would go the same way.
Recent polling suggests that the next government will be a more right-leaning version of the current one. The center-right CDU/CSU partnership, now led by Friedrich Merz (no Merkel) is comfortably ahead of the pack on around 32 percent, far short of a majority or even a credible minority. Its most natural partners, the FDP (on 4 percent) may not even make it back into parliament (which requires a 5 percent share of the vote). The CDU/CSU are followed by the right-populist AfD on 17 percent — but, disturbed by some of the party’s more unsavory elements, the CDU/CSU won’t go into coalition (or enter into any other arrangement) with them. The SPD score 16 percent. Then come the Greens at 10 percent, and the BSW (a party of the hard left that takes a conservative view on some issues, including, critically, immigration and net zero) at 8 percent. Both the AfD and BSW look far too fondly at the Kremlin.
If this recent polling is anything like the final election result, it’s probable that the government will be a so-called grand coalition between the CDU/CSU and the SPD with a distinctly un-grand majority (Merz is highly unlikely to work with the Greens) and little to unify it philosophically. It is a stretch to imagine that it would be able to agree to take the steps that might put Germany’s economy back on course. If that turns out to be the case, the continuing downturn — and worsening turmoil in the auto sector — will only strengthen Germany’s outsider parties further. The consequences would not be pretty.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, makes use of another medium to deliver Capital Matters’ defense of free markets. Financier and National Review Institute trustee, David L. Bahnsen, hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 195th episode, David is joined by Jonathan Berry, managing partner at Boyden Gray and a fierce advocate for the dignity of the human person in their work. The two have a robust discussion on where public policy and the lawmaking of the state ought to be a factor in protecting the rights and well-being of workers. They agree on many principles and disagree on some applications but cordially help you prudentially consider the role the state has (or doesn’t have) in worker flourishing.
The Capital Matters week that was . . .
Labor
Journalist unions exist to provide comic relief for news consumers, and the strike by the New York Times tech workers’ union should give you a good chuckle. . .
Inflation
Recently, numerous economists have been forecasting a rebirth of inflation in the United States, depending upon the outcome of the election. These predictions expose the disastrous state of macroeconomics in the economics profession. . .
Fiscal Policy
Neither Harris nor Trump is ready for the fiscal storm that we know is coming next year, let alone any unforeseeable fiscal challenges that may arise over the next four years.
With so much of Election Day coverage this year focused on the presidential race, there is little room in the limelight left for ballot measures — unless they touch on controversial issues. One rejected ballot measure, however, deserves special recognition: Proposition 5 in California. . .
The EU
So much for the hopes of the euro’s founders that the single currency would allow Europe to compete more effectively with the United States. According to IMF data, since 2008, in dollar terms the euro zone economy grew by around 6 percent as against the more than 80 percent for the United States. As a result, while in 2008 the two economies in dollar terms were about equal in size, today the gap between those two economies is some 80 percent in favor of the United States. According to the European Center for International Political Economy, today the average European Union country is poorer per head than every U.S. state except Idaho and Mississippi. . .
Deregulation
And so to Argentina, and the deregulation agenda being pursued by Federico Sturzenegger. He’s the MIT-trained economist and former central banker in charge of the only new ministry established by the country’s President, Javier Milei (who is, impressively, still forging on with his efforts to undo the effects of decades of misgovernment), which is, appropriately, a ministry of deregulation. Mr. Sturzenegger has a lot to do.
A couple of days ago, I wrote about the importance of the incoming Trump administration resuming the impressive deregulatory effort seen in the president-elect’s first term, something that candidate Trump has said that it will do. In that connection, I mentioned the deregulatory drive underway in Argentina under that country’s new(ish) deregulation minister, Federico Sturzenegger.
So it was interesting to read in today’s La Nacion (Argentina’s leading newspaper) that, in a speech to the country’s chamber of commerce, Milei said that he had spoken to Elon Musk after Trump’s election victory, and that Musk is “in contact with” Sturzenegger about “copying his model” (“para replicar su modelo”). That’s good if so. . .
Rumors are swirling that Representative Thomas Massie (R., Ky.) is under consideration to be secretary of agriculture in the incoming Trump administration. A committed libertarian such as Massie would be a good person to lead perhaps our most socialistic government department. . .
The Markets
There have been signs that markets have been beginning to anticipate Donald Trump’s election victory for quite a while. The possibility that he might win probably accounts for some of the strong stock-market performance seen since September as well, in part, for rising bond yields at the longer end (ten years and beyond) in the wake of the Fed’s recent 50 basis point rate cut. Those rates rose again on Wednesday with the yield on the ten-year treasury hitting 4.44 percent. . .
Wind Energy
Such periods of gloom can last a while, but they don’t do any harm other than leave some locals feeling glum. But there is something else about them worth mentioning: Wind levels fall. A few years ago, anticyclonic gloom was of no great significance. A sign of technological advance is (generally) not having to worry too much about the weather.
That’s now changing. Northern Europe’s keen participants in the “race” to net zero are switching to renewables such as solar and wind. In that case, extended periods in which the light is dim and, even more so, the wind is down are . . . not helpful. . .
Climate Policy
Yes, yes, it’s an exaggerated headline (I’m unconvinced that a German government crisis is exactly clickbait, maybe “misinformation” will have to do), but Germany is headed for an early election.
There are a number of underlying causes for this (apart from the fact that the free market(ish) FDP was never a natural fit in a governing coalition made up of the left-of-center SDP and the Greens). But at the bottom lurk the increasing problems dragging the German economy down. In no small part, these can be put down, one way or another, to the climate policies pursued by Angela Merkel and her successor Olaf Scholz.
Opponents of fossil fuels claim to oppose pollution, but they are all too happy to pollute our legal and constitutional institutions in pursuit of their climate-policy agenda. The latest manifestation of this trend is a litigation campaign against fossil-energy producers in state courts under state laws, alleging that the energy producers “knew” decades ago that greenhouse-gas emissions from the consumption of fossil fuels would create dangerous changes in climate phenomena, and that they failed to warn consumers about those risks.
Economics
Daron Acemoglu, Simon Johnson, and James Robinson won the Nobel Prize in Economics this year for their work on institutions and the causes of prosperity. In fact, I recently hosted Acemoglu and Johnson on my Hoover Institution podcast, prior to the announcement…
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