How has the German economy increased in recent times?

By Soheir El-Sherbiny

Since the beginning of this year, the German economy has been subjected to successive crises that were clearly reflected in the decline in the volume of exports and the sharp decline in stock prices in a country that is the most populous among the countries of the European continent, and the largest economy and is the central pillar of the European Union. In the current period, the German economy stands at a crossroads between the pressures of the geopolitical, climatic and economic crises, constituting one of the most stormy periods in the history of the German economy since the unification of the state. The recent Russian pressure on energy supplies as a result of the European position condemning the Russian war in Ukraine has led to raising the level of alert throughout Europe, especially in Germany, as it is the most dependent on Russian gas and linked to direct common interests with Russia, in addition to the risks posed by the low river level. the Rhineland for the German economy, which threatens the future of the leading German industry.

indicators of the crisis

The German economy is experiencing an economic crisis, the indicators of which are evident through the following:

1- Resorting to production cuts: According to Paul Smith, an economist at S&P Global, the successive events in the month of July pushed the German economy to contraction, and this was reflected in the form of a decline in the volume of production on a large scale as the slowdown deepened in Manufacturing, and service sector activity fell into contraction territory for the first time since December last year. The German chemical giant BASF SE, which depends on natural gas in production and electricity, suffered losses estimated at 30 million euros; This prompted it to announce that it may have to cut production in light of the Russian gas shortage.

2- Exacerbation of fears of recession and low business confidence: The continuous shortage of gas increases the risks of an imminent recession in Germany, which may be supported by the state’s resort to energy rationing, under the weight of the Russian gas crisis and the rise in prices, which is looming on the horizon with business confidence declining to its lowest level in two years; Businesses across Germany are becoming less optimistic about their current situation, and expectations for the next six months, according to the Ifo Institute business climate index, have fallen during the month of July from 92.2 last June to 88.6, the lowest level since June 2020. The results were worse than what economists had expected, that the index would fall to only 90.5; This suggests that the crisis is going in an unexpected direction.

3- The economy shrinks and expectations about growth decline: The German economy contracted for the first time this year as inflation pressured companies and families; Where the S&P Global Purchasing Managers’ Index – an indicator concerned with measuring private sector activity – fell to a 25-month low in July; And that’s more than economists expected, falling below the threshold that separates expansion and contraction.

Despite Germany’s economic outlook, which looked good at the beginning of the year, the International Monetary Fund lowered its forecast for economic growth; It will grow according to the new forecasts by 1.2% in 2022, down from 2% expectations in early May; That is a difference of only two months. It is also expected, according to the International Monetary Fund report, that economic growth will decline in 2023 at a greater rate, reaching 0.8%. In light of this, warnings by trade unions of more strikes to pressure for wage increases, while the International Monetary Fund report criticizes the German austerity model and recommends more fiscal flexibility to tackle the economic crisis.

4- The depreciation of the euro against the dollar: On July 12, the euro fell to record levels against the dollar and reached a rate of 0.999 against the dollar, the lowest level since 2002, which was followed by a decline in the yields of German two-year bonds, which are considered one of the largest Most sensitive to changes in monetary policy, by 18 basis points to 0.50%.

5- Imports increase over exports for the first time: In a precedent that has not happened in nearly three decades, the country with the largest economy in Europe imported more than it exports, thus breaking the chain of victories since the reunification of the state as the exportweltmeister champion, with the result in the end disappointing profits. To hope unlike usual; There is a well-established belief that has been the reason for Germany’s rise to the ranks of the global economic elite, that selling should be more than buying, and therefore the opposite is not easy for the German economy, which is the most superior in Europe.

6- Adopting emergency measures to ration energy: On July 23, officials in Berlin decided to announce an emergency plan in light of the current gas crisis after the reduction of Russian shipments, and against its background, owners, schools and municipalities have already begun to ration hot water, close swimming pools, close air conditioners, and operate Dim lighting of the streets and inducing the benefits of a cold shower. Analysts in this regard expect an imminent recession that may harm social peace and the interests of major companies, with fear that the business environment in Germany will turn into an environment that is repulsive to investments.

two main challenges

The German economy stands between two major challenges. They are: climate changes and the repercussions of the Russian war in Ukraine, and their risks to the German economy can be addressed through the following:

1- Russian pressure on Germany: Germany is one of the economies most affected by the Russian invasion of Ukraine; Given its heavy reliance on the Kremlin for natural gas supplies; The German economy is based on the giants of the chemical, automobile, glass and steel industries, which consume huge amounts of fuel; The chemical and pharmaceutical industries alone use 27% of the gas supply to Germany. Despite the direct German-Russian interests regarding the Nord Stream 1 pipeline, this did not prevent Germany from condemning the Russian invasion of Ukraine, which prompted Russia to pursue a number of pressure policies on Europe, and Germany in particular, to dissuade it from its opposition and condemnation of the war in Ukraine.

In this regard, Russia sought to reduce gas shipments last June when it reduced the quantities of gas shipments to Germany twice, arguing that the gas pipeline could not function normally without a turbine being repaired in Canada. Indeed, Germany and Canada agreed to return the turbine to Russia. On July 25, 2022, the Russian “Gazprom” announced its intention to reduce the daily flow of Russian gas to Germany through the Nord Stream 1 pipeline, which is the most important supply line to Germany, as of Wednesday, July 27, 2022, to 20%, equivalent to 33 million cubic meters of gas, down from 40%.

The reduction came this time under the pretext of repairing another turbine, in a situation that indicates a new Russian escalation after previous threats by Russian President “Putin” to reduce gas supplies through Nord Stream 1, a step that resulted in a jump in European natural gas prices by more than 10% On Wednesday (27 July 2022) set by Gazprom to start reducing gas flows to Germany via the Nord Stream pipeline.

2- The repercussions of the low level of the Rhine on German industry: On the other hand, German industry faces great risks due to the low level of the Rhine River close to it, which is needed by all ships traveling to southwestern Germany, which is known for its heavy industry, to cross through it. And that to only 0.7 meters, which is much less than the 1.2 meters that most river ships require as a minimum, which threatens the German economy in several main aspects, namely:

A- Obstruction of the transport of basic commodities: river transport in Germany represents about 6% of the total volume of transport, but it plays a major role in the transport of basic raw materials; Through it, about 30% of coal, crude oil and natural gas are shipped, and about 20% of coke plants and petroleum products. According to a report issued by the Kiel Institute for the World Economy in 2020, the Rhine River transports the vast majority of those goods, as well as 11% of the chemicals used in German industry.

This puts German industrialization in a bind. And at a time when German manufacturing is already facing a shortage of these basic commodities. Paradoxically, while Germany is trying to find alternatives to Russian energy – which has fueled German interest in coal as a suitable alternative – it is also becoming harder to come by.

B – Harming the interests of the port of Rotterdam: Thanks to the Rhine, the port of Rotterdam on the North Sea has grown to become the largest port in Europe, and the only European port in the list of the 10 largest ports in the world, thanks to which the German, French, Swiss, Belgian and Dutch industrial power has been enabled during the past two centuries from during cheap river transport on the Rhine; This helped reduce the costs of imported raw materials. Hence, the lack of river level impedes transportation, creating disruptions that would significantly reduce economic activity in Germany under the current conditions that are putting strong pressure on the economy.

C – Increased expectations of a contraction of industrial production in Germany: It is expected that within a month, with the decrease in the water level on the Rhine River, German industrial production will shrink by 1%. This situation was noted by the Association for European Inland Navigation and Waterways in a report in 2021; She pointed out the danger of low water levels in the river to Germany; This prompted her to recommend adaptive measures, such as reconfiguring existing ships, building new models and building more dams and barrages.

impending recession

In general, the German industry, industrial production and the future of manufacturing in Germany, as well as its leading position among the exporting countries in the world, face enormous challenges. Although it appears to be more stable than Britain, France and Italy on the political level, economic tensions are pressing strongly at the present time, and it is not excluded that this will create a state of political instability, in light of a gas crisis expected next winter, due to cuts in Russian gas supplies to Germany to 20%, and concerns about the possibility of Russia permanently cutting off its supplies to Germany, which relies on natural gas in its industry at a large rate, which could harm the economic strength of Germany and its enormous wealth that it produced over decades.

SAKHRI Mohamed
SAKHRI Mohamed

I hold a bachelor's degree in political science and international relations as well as a Master's degree in international security studies, alongside a passion for web development. During my studies, I gained a strong understanding of key political concepts, theories in international relations, security and strategic studies, as well as the tools and research methods used in these fields.

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