2024-11-11 06:13:00
If we have the impression that everything is going to hell, it’s not what’s happening in Germany that can reassure us. The German economic rock, the model that Quebec has always envied, is crumbling.
Updated November 11
German Chancellor Olaf Scholz called Donald Trump to congratulate him on his election to the presidency of the United States. However, he had other fish to fry because at the same time, his coalition government was breaking up and his country was plunged into chaos.
The call must have required some effort on the part of the chancellor, because the return of Donald Trump with full powers to the United States is probably the worst thing to happen to his country since the last world war and the invasion of Ukraine by Russia.
The 20% tariffs that the next US administration wants to impose on everything imported by the United States (and 60% on products made in China) will hurt Germany more than most other countries , including even Canada.
A study by CESifo, an independent research organization based in Munich, predicts a 15% drop in German exports to the United States if 20% tariffs are imposed by the Americans1.
Like Canada, Germany is a small economy that depends primarily on its exports. The latter weigh even more heavily in German gross domestic product (GDP) (nearly 50%) than in Canadian GDP (33%).
Unlike Canada, Germany has few natural resources. The country has built an economy that has been the envy of the world thanks to its unique model of business-worker collaboration and significant state involvement, also known as Rhineland capitalism.
A winning recipe
The German recipe allowed the country to become a global trading power and the driving force of the European Economic Union. It gave the necessary stability to the European trading bloc, whose economic interests are not always easy to reconcile.
The first misfires in Germany’s economic engine were caused by Russia’s invasion of Ukraine and subsequent boycott of Russian gas. Deprived of its main source of energy, the German economy began to suffer and it still does.
Germany’s main industrial sector, the automobile industry, is also failing. In this case, the cause of the failure is China, which has long been one of the two main markets for German cars (along with the United States), which is now invading Europe with its own electric cars, cheaper and very popular. The duties that the European Union has just imposed on Chinese cars probably mean the end of the Chinese sector for Germany.
The American sector, the main export market for German automobile manufacturers, is also threatened by the import tariffs planned by the Trump administration. Last year, the Germans sold US$37 billion worth of cars to Americans.
Hit on one side by China and on the other by the United States, the German automobile industry is threatened with suffocation. It is also within this industry that the latest signs of the crumbling of the German model have appeared.
Volkswagen, Germany’s leading automobile manufacturer, has decided to close factories on German territory, which has never happened to it in its 87-year history. The iconic brand also ended the pact concluded with its unionized employees which guaranteed them a job guarantee until 2029.
PHOTO FOCKE STRANGMANN, AGENCE FRANCE-PRESSE
German trade unionists hold a banner reading: “Work for all factories” during a demonstration in front of a Volkswagen factory in Osnabruck on November 6.
The crisis in the automotive sector invaded the political sphere last week. Traditional collaboration between parties with divergent interests has been shattered over decisions to get the economy out of the hole.
It is the debt brake, adopted by Germany after the 2008 financial crisis and which limits public spending, which is at the heart of the differences among elected officials. This unique mechanism prevents the government from incurring debt beyond a certain threshold, except in exceptional circumstances.
Without Trump, the Germans might have been able to overcome the crisis. With Trump, the German model will probably no longer hold water.
1. Consult the CESifo study
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Volkswagen has announced factory closures in Germany, marking a significant shift for the company and the industry as a whole.
Looking Ahead
The future of Germany’s economy hangs in the balance as it grapples with competition from both China and the United States, alongside the repercussions of geopolitical tensions. The decline of its automotive sector could have ripple effects throughout the economy, impacting employment and international trade relations.
In response, Germany will need to reassess its economic strategies to remain competitive. Innovations in technology and alternative energy sources, along with fostering new trade partnerships, may be crucial for revitalizing its industries.
The challenges ahead are daunting, but they also present opportunities for transformation within Germany’s economic landscape. How the nation adapts to these challenges will determine its future as a global economic powerhouse.