Although some friends in Germany said that just strolling and relaxing on the streets of Berlin could not feel the depression and tension of the economic situation in Germany, we can clearly feel their concern about the current state of the German economy and its prospects from the public speeches made by German media veterans and private conversations with them.

In 2024, Germany will be ‘the only developed economy in the world with negative growth’. Originally, all parties believed that Germany would have economic growth in 2024, and the German officials themselves also predicted in this year’s spring report that the economy would grow by 0.3% in 2024, however, the German federal government released an autumn report on 9 October, but the forecast for Germany’s GDP in 2024 was downgraded to minus 0.2%, which means that Germany’s economy will fall into recession for the second consecutive year.

Since the global financial crisis in 2008, Germany has been Europe’s economic development ‘locomotive’, now Germany’s economy in the end what happened? Why is it like this?

German Economy Minister Robert Habeck stated that, aside from the risk factors associated with economic prosperity, certain structural issues within the German economy are more prominent and have impacted growth in 2024. These issues encompass alterations in the demographic structure, the competitiveness of production locations, and the persistent weakness in both domestic and foreign demand. In the view of numerous German experts, there are deeper – rooted causes for the problems plaguing the German economy. For instance, bureaucratic inefficiency leads to a sluggish process. It takes at least 120 days to register a new company in Germany, which is double the average time among Organization for Economic Co – operation and Development (OECD) countries. The inadequate investment in infrastructure, such as the aging railway network, dilapidated highways, and slow – speed Internet, stands in stark contrast to the image of this economic powerhouse. The German economic model has long been highly reliant on the manufacturing industry, with manufacturing accounting for 19% of the gross domestic product (GDP), approximately twice the proportion in the United Kingdom and France. Consequently, the impact of the COVID – 19 pandemic and the Russia – Ukraine conflict on the supply chain has hit the German manufacturing sector particularly hard. As a major global exporting nation, Germany’s heavy dependence on international trade means that the weakening of global demand has had a severe negative impact on its export – oriented economy. Moreover, as an investment destination, Germany’s allure is waning, and many German companies are already at risk of being acquired by foreign capital. Despite the German government’s prediction that the economy will rebound from recession and grow by 1.1% in 2025, with an expected growth of 1.6% in 2026, given the above – mentioned deep – seated issues, it appears that the German economy will struggle to achieve significant improvement in the future. The International Monetary Fund forecasts that the growth rate of the German economy will lag behind that of the United States, the United Kingdom, and France over the next five years. Germany, being the largest economy in the European Union (EU) and the euro area, its economic downturn is bound to impede the economic development of the EU and the euro area.

Transition from Combating Inflation to Securing Growth

The European Commission announced in its spring forecast on May 15, 2024, that the projected GDP growth rate for the EU in 2024 is 1.0% and for the euro area is 0.8%. It is anticipated that the GDP growth rate of the EU will accelerate to 1.6% in 2025 and that of the euro area to 1.4%. This is the spring forecast of the European Commission in 2024 (the autumn forecast has yet to be released). On October 18, the European Central Bank (ECB) disclosed the results of a survey it conducted among some professional forecasting institutions. The surveyed institutions predict that the economic growth rate of the euro area will be 0.7% in 2024, 1.2% in 2025, and 1.4% in 2026. The forecasts from private institutions are even more pessimistic. On October 10, 2024, ING Group published a research report indicating that the euro area’s economy is expected to stagnate in the fourth quarter of 2024 and will only experience a mild recovery in the second quarter of 2025. The institution has also downgraded its GDP growth forecast for the euro area in 2025 to 0.6%. Nevertheless, there is a glimmer of hope among the gloomy situation. On October 17, 2024, Eurostat announced that the inflation rate in the euro area in September decreased by 1.7% year – on – year, exceeding the initial estimate of 1.8%. This marks the first time since the summer of 2021 that the inflation rate in the euro area has fallen below the 2% target set by the ECB. In October 2022, the inflation rate in the euro area soared to 10.6%. On the same day, the ECB further cut interest rates by 25 basis points. The deposit facility rate was reduced to 3.25%, the main refinancing rate to 3.4%, and the marginal lending rate to 3.65%, effective from October 23. This is the third interest rate cut by the ECB in 2024 and the first consecutive cuts in 13 years. The ECB’s interest rate – hiking cycle began in June 2024, preceded by several consecutive rate hikes. The ECB’s previous interest rate hikes successfully curbed inflation in the euro area. However, this came at the cost of a sharp slowdown in economic growth. The three consecutive interest rate cuts by the ECB signify a shift in its focus from reducing inflation to safeguarding economic growth.

The ECB’s Shift in Focus from Inflation Reduction to Growth Promotion

As previously mentioned, Germany, the largest economy in the EU and the euro area, experienced an economic recession in 2023 and is projected to face another one in 2024. If the final data confirm this projection, it will be the first time in over 20 years that Germany has endured two consecutive years of economic recession. Another significant EU and euro area country, France, witnessed the first slowdown in private enterprise production in seven months in September 2024 following the end of the “Olympic boost effect”. The governor of the Banque de France predicted in early October that the French economy has a tendency to continue declining. On October 4, 2024, the Italian National Institute of Statistics (ISTAT) revised downwards the year – on – year GDP growth rates for the first and second quarters of 2024. The institute reported that the “achieved growth” at the end of the second quarter was 0.4%, lower than the previously estimated 0.6%. This implies that if there is no growth in the third and fourth quarters, the year – on – year GDP growth rate for the entire year will be only 0.4%, making it difficult to achieve the 1% economic growth target set by the Italian government for 2024. The United Kingdom, having withdrawn from the EU and never joined the euro area, is nonetheless a major European economic power. In the fourth quarter of 2023, the UK’s GDP declined by 0.3% on a quarter – on – quarter basis, marking the second consecutive quarter of decline, which economists regarded as a “technical recession”. Although the UK narrowly averted an economic recession in 2024, the momentum of economic growth remains extremely weak. However, various experts’ forecasts for the UK’s economic prospects in 2025 are not overly pessimistic. First, they predict that the likelihood of the UK falling into an economic recession in 2025 is relatively low, and the UK economy may experience relatively healthy growth in 2025, with an increase ranging from 1.2% to 2%. Second, they expect the Bank of England to gradually cut interest rates in 2024 and 2025, which will assist in supporting economic growth. Third, they anticipate a recovery in the UK’s commercial investment, which will further stimulate the economy. Nevertheless, economists generally concur that although not all European countries are currently in an economic recession, the European region is confronting significant economic challenges. Due to persistent inflation, tight monetary policies, and sluggish industrial recovery, more countries may fall into economic recession during the remaining months of 2024 and throughout 2025. Even in countries that avoid recession, economic growth, if any, will be minimal, reflecting a widespread trend in Europe as many European countries struggle to cope with the consequences of the energy crisis, high interest rates, and global geopolitical uncertainties. Moreover, inflation in Europe will not continue to decline indefinitely. Eric Dor, the director of economic research at the IÉSEG School of Management in France, warns that the sustainability of the decline in euro area inflation is “highly uncertain”. Any further large – scale geopolitical turmoil that triggers a spike in energy prices and supply chain disruptions will cause industrial product prices to rise again, leading to a rebound in euro area inflation.

The “Competitiveness Crisis” in Europe

Europe was once at the forefront of industrialization worldwide and was the first continent to achieve prosperity. However, currently, the European economy lags far behind the United States. From 2010 to 2023, the cumulative GDP growth rate in the United States reached 34%, while in the EU it was only 21% and in the euro area only 18%. In 2008, the economic magnitudes of the United States and the euro area were approximately equal. Now, the economic scale of the United States is nearly twice that of the euro area. The average income of Europeans is now 27% lower than that of Americans, and the average wage is 37% lower. Mario Draghi, the former president of the ECB, pointed out in a recently released report that the EU is facing enormous economic challenges and “may soon become insignificant on the global economic stage”. According to Draghi, compared with the United States, the core of Europe’s problems lies in its “competitiveness crisis”. There are multiple reasons for Europe’s “competitiveness crisis”, including an excessive number of regulatory regulations within the EU, an overly fragmented financial market, insufficient public and private investments, and the relatively small size of enterprises that hampers their ability to compete globally. Draghi wrote in his report: “Our organizational structures, decision – making processes, and financing mechanisms are all designed for the ‘pre – pandemic, pre – Ukraine conflict, pre – Middle East conflict eruption, and pre – great power confrontation era’.” Patrick Artus, the chief economist at Natixis, believes that the primary reason for the widening gap between the European and American economies is the insufficient investment in new technologies and research and development (R&D) in Europe, which has led to a growing divergence in productivity between the two regions. Artus recently expressed his concerns in an article: “There are fears that Europe will be entrapped in a vicious cycle: insufficient investment in new technologies and R&D – low productivity – slow economic growth – decreasing attractiveness to foreign investors – reduced tax revenues – weakened ability of European governments to implement policies to support innovation and enhance Europe’s appeal – further reduction in investment in new technologies and R&D…” Michael Spence, a Nobel laureate in economics and a senior fellow at the Hoover Institution, also holds the view that the long – term productivity improvement of developed economies depends on structural reforms driven by technological innovation. Spence noted: “In numerous fields ranging from artificial intelligence to semiconductors to quantum computing, the United States and even China are far ahead of Europe.” Spence attributes Europe’s insufficient innovation capacity to insufficient investment in the already decentralized R&D field, incomplete integration of the single market, a lack of crucial infrastructure such as computing power, and limited availability of venture capital and private equity funds. Spence believes that Europe has significant advantages, such as the talent pool from local universities and a social security system that provides necessary economic safeguards for risk – taking entrepreneurs. However, he warns that if Europe lacks a new economic vision, the traditional industrial sectors with insufficient innovation will continue to dominate, and the brightest minds will emigrate to other countries. Fareed Zakaria, a renowned American political commentator, recently wrote in an article titled “Why Europe Is So Far Behind the United States” that the remedy for the “European malaise” can be summed up in one sentence: A more integrated, more united, and more strategic Europe.

The Difficulty of Implementing Change: Easier Said Than Done?

 In fact, Europeans are not averse to listening to the suggestions of these American experts. On the contrary, the informed individuals in European politics, business, and academia all recognize that without pooling public funds and establishing a unified capital market, Europe will be unable to compete effectively with the United States and China in areas such as national defense, energy, and supercomputing. Without integrating the numerous small companies in Europe, European firms will be devoured by the giant corporations outside Europe, particularly the American tech behemoths. Over the past decade, the EU has been endeavoring to create a single capital market to facilitate cross – border investment. However, these efforts have been met with opposition from multiple fronts. Firstly, many small countries, including Ireland, Romania, and Sweden, oppose ceding power to the EU authorities and are reluctant to amend their national laws, fearing that this would place their financial sectors at a disadvantage. Secondly, civil society organizations are also concerned about the concentration of power. Earlier this year, 13 civil groups in Europe issued a public letter warning that greater market integration would harm the interests of consumers, workers, and small businesses, bestow excessive power on corporate giants, and lead to price hikes. Perhaps because of this, Simone Tagliapietra, a senior fellow at the Bruegel Institute, lamented helplessly: “If we continue to have 27 markets that are poorly integrated, we will be unable to compete with the Chinese or Americans.” During the China – Germany Media Forum, a German media professional confided to me with concern that the prosperous days Germans enjoyed in the past were built on three pillars: cheap energy from Russia, inexpensive exports from China, and military protection from the United States. Germany has already lost access to cheap Russian energy. In the future, with the intensification of China – Europe trade frictions and the possible return of Trump to the White House, the latter two elements may also be at risk. The same situation applies to the entire continent of Europe. In the rapidly changing international environment, nothing can be taken for granted any longer. The complex web of economic challenges facing Europe, from the individual country – level issues in Germany, France, Italy, and the UK to the broader regional concerns such as inflation, growth prospects, and competitiveness, all point to a need for urgent and comprehensive action. However, the path forward is fraught with obstacles, both internal and external, making the task of revitalizing the European economy an arduous one. The internal obstacles within each country range from bureaucratic inefficiencies that hinder business formation and expansion, as seen in Germany’s lengthy company registration process, to insufficient infrastructure investment that hampers economic productivity. In addition, the over – reliance on specific industries, like Germany’s heavy dependence on manufacturing, leaves economies vulnerable to external shocks such as supply chain disruptions caused by global events. At the regional level within the EU, the lack of a unified approach to economic policies and the resistance to centralization of power and capital market integration pose significant challenges. The concerns of smaller member states about losing control over their financial systems and the apprehensions of civil society regarding the potential negative impacts of market integration need to be addressed. Without resolving these internal frictions, it will be difficult to implement the necessary reforms to boost competitiveness. Externally, Europe is facing a global economic landscape that is increasingly competitive and unpredictable. The rise of new economic powers, rapid technological advancements, and geopolitical tensions all add to the complexity. The United States’ dominance in certain key industries and China’s growing economic might mean that Europe needs to find its niche and develop strategies to remain relevant. The vulnerability to fluctuations in global demand and energy prices, as demonstrated by the recent economic setbacks due to the weakening of international trade and the energy crisis, further highlights the need for Europe to build more resilient economies. Moreover, the issue of inflation is not only a matter of short – term economic stability but also has long – term implications for investment, consumption, and overall economic health. The uncertain sustainability of the current decline in inflation in the euro area means that policymakers need to be vigilant and have contingency plans in place. A sudden resurgence of inflation could derail any nascent economic recovery efforts and further exacerbate the economic woes of European countries. In conclusion, the European economy is at a critical juncture. The problems it faces are multi – faceted and deeply rooted. Addressing these issues will require a combination of bold policy decisions, coordinated efforts among member states, and a willingness to adapt to the changing global environment. Only through such comprehensive measures can Europe hope to overcome its current economic challenges and regain its position as a vibrant and competitive economic region.

Recovery from the epidemic, the volatile international situation and soaring energy prices are all factors that are affecting the German economy With an ageing population and a diminishing labor supply, companies are experiencing difficulties in recruiting and production capacity is constrained. Young people’s interest in traditional manufacturing has waned in favor of the more up-to-date technology sector, which has also left Germany’s manufacturing industry facing a talent shortage.

However, the European Commission also mentioned that Germany’s economic growth will accelerate to 1.3% in 2026. This gives a little relief, after all, the economy always has ups and downs, the key is how to deal with the challenges and seize the opportunities. Germany as the economic engine of the euro zone, the future performance is still worth looking forward to. This suggests that Germany still needs to step up its game on the road to recovery. To achieve higher growth, Germany must invest more in innovation and science and technology promote industrial upgrading and enhance productivity.

By HE Guanli