Germany’s economic catastrophe is a dark warning for Britain
The United States was not the only country to experience a political shock last week. As all eyes were on Trump’s historic comeback, over to our east, Germany’s “traffic-light” coalition was collapsing.
Chancellor Scholz had fired the finance minister, and with no majority in parliament to speak of, will now find it significantly harder to pass budgetary measures including an increase in aid for Ukraine. And with a snap election called for February of next year, the political turmoil is only set to intensify.
Such developments alone are worrying. But I’d argue that Germany’s ailing economy, a trend which this instability will exacerbate, should be of equal – if not greater – concern.
Germany has been facing growing competition from China, a shortage of skilled workers, EU bureaucracy and regulation increasing ad infinitum, and, as we here in Britain can sympathise with, rising prices resulting from Putin’s invasion of Ukraine coupled with the economic aftermath of the coronavirus pandemic.
Worse still, this has been coupled with structural problems which are of Germany’s own making. According to the Tax Foundation, for example, Germany has the third-highest corporate income tax rate in Europe, reducing business profits even further – profits that otherwise would have been reinvested back into a company to make it more efficient and competitive. And I need hardly remind readers of Germany’s energy policy mishaps.
Considering that it is committed to Energiewende, a huge energy transition away from fossil fuels, it is somewhat ironic that its phase out of nuclear energy increased its reliance on energy from its own coal plants and Russian gas. If it had retained its nuclear power in the 20 years leading up to 2022, in some estimates, Germany could have saved just under €700 billion in its energy transition.
All of these factors are responsible for Germany’s two consecutive years of recession. But even more significantly, its great manufacturing industries – chemical, engineering and automotive – are all in crisis at the same time.
The real canary in the coal mine is Volkswagen. One of the most famous brands in Germany – and one of the largest car-makers in Europe – has become symbolic of its economic woes. Last quarter it reported a 64 per cent drop in net profit with a plan to lay-off thousands of workers and, for the first time in its history, close plants in Germany.
In order to try and compete with the growing Chinese market, it pledged $200 billion over the five years of investment in electric vehicle production. To put the size of the challenge facing the company and the amount of money they are prepared to pay out resolving it into perspective, it’s spending around a whopping 80 per cent of its gross annual profits every year for five years on the issue.
To be frank, this is unlikely to cut it. China has the know-how, the economic firepower, the technology and the cheaper manufacturing costs, to massively outperform Western manufacturers. Last year, BYD, which is headquartered in Shenzhen, sold more electric vehicles than Tesla. We should hardly be surprised when you can buy a Chinese EV for about 60 per cent of the cost of an average European EV.
This isn’t just bad news for Germany – it could be catastrophic for the entire EU. Germany is the largest economy in Europe, representing almost a quarter of the bloc’s GDP, and has effectively kept the Euro afloat. In other words, it is the engine of the great ship Eurozone. But if confidence is lost in Germany’s economy, it will become an unseaworthy vessel.
The economic crisis in Germany should be ringing alarm bells back here in Britain. We cannot afford to be making the same mistakes by over-regulating and over-taxing our businesses and employers, or failing to rapidly increase our domestic nuclear energy supply – but that’s exactly what Labour have just done.
Nor should the Prime Minister be spending his time making overtures to the stagnating EU. In this increasingly uncertain economic landscape, we must take advantage of our Brexit freedoms, strengthening our economic and political alliances beyond Europe – and yes, that most certainly includes Trump – and slicing capital gains taxes, fixing the planning system and cutting back regulation to make Britain as competitive as it can possibly be.