The State visit of the French president in Berlin and in Dresden did not bring any concrete results but it occurred at the right time. It is not possible to have a strong Europe without a solid relationship between France and Germany. Yet the country is going to be confronted with major difficulties. It is essential it remains mobilized, despite the structural problems it is going to be confronted with, in order the European project goes stronger and has the capacity to cope with a more and more instable international environment.
The German economy has known a recession in 2023 (-0.3%), when France had a 0.9% growth and the 1st quarter figures (+0.2%) do not show the rebound it would have been hoped. Prospects for 2024 and 2025 are not more favorable and it is expected, to the best, a very low increase of the activity.
The German model, so frequently quoted as an example in France, was based until now on a growth enough to guarantee full employment, on large trade surplus which supported this growth and on healthy public finances with a low deficit and an indebtedness rate among the lowest in the euro zone. That was by large resulting from the success of the re-unification in the Nineties and from the enterprise culture which privileged a wealth sharing between the different stakeholders, the shareholders, the employees and the top management. The French writer, Paul Valéry, at the end of the 19th century had made this observation about the country:” everything is done in order that a maximum of wealth created everywhere in the world comes back everywhere in Germany”.
Some of these results were yet less rosy than the comments leave to assume. Full employment was the result of the joint results of the recourse to part-time jobs, much more important than in France, and of the demographic decline which is going to increase in the future: the population between 20 and 64 years old will fall by 10%, i.e. about 5 million persons in the next 10 years, when in France it will be reduced by only 2%. The public finances situation has benefited every year from the low level of military expenditures, i.e. about 1% of the GDP, which corresponds to half the percentage France spends for its national defense as an average for 40 years. The indisputable successes of the foreign trade were made possible by a state of the world where exchanges were not affected by geopolitical tensions. German enterprises had known much better than the others, and especially than the French ones, to take profit of this situation.
Time has changed. The population ageing, which artificially contributes to full employment, will cost more and more to the public finances. The international situation is going to impose an increase of the military expenditures, weighting on the budget balances. The putting into question of the bases of the globalization with the protectionism increase in the United States, the growing competition from the Chinese companies and the break-out with Russia, which could last, will progressively affect the capacity of the German companies to develop themselves and risk to put a large number of them into difficulties.
The German political system had been considered as an advantage in the past, with the decentralization allowed by federalism and the proportional representation. That had leaded to coalition majorities but that could have been a handicap with the adoption of measures deeply damaging for the country economy. Decisions in the energy sector give a good example. Angela Merkel remained in power during more than ten years through the cohabitation of the ecologists and the Christian-Democrats. Chancellor Olaf Scholz, himself, is confronted with the same situation in bringing together in his government Social-Democrats, liberals who are rigorous about public finances and ecologists who are in favor of costly investments to assure the energetic transition.
It is this political system which has leaded Angela Merkel, after the Fukushima catastrophe, which has been used as a pretext, to abandon nuclear power production. She so offered a satisfaction to ecologists and she gave to her party the support of the electors of the regions in the former East Germany where coal is extracted and used in the power plants to produce electricity when the wind farms were stopped due to the lack of wind and when solar panels could not function due to a lack of sun. In the same time, she gave a mandate to a former social-democrat chancellor to secure natural gas supply from Russia with Ukraine bypassed thanks to the construction of North Stream 1 and 2 pipe-lines.
Through deeper relations with Moscow, Berlin was strengthening its central and strategic role in the European continent and was also betting on the advantages German enterprises could get from the new resources generated by the natural gas sales which the Russian economy will take profit. The country pays today for the consequences of these mistakes. The invasion of Ukraine by Russia and the adopted sanctions have contributed to destabilize the power production and have provoked energy prices increase which is going to last. That will affect the German industry competitiveness at a time when the world trade rules are changing.
The political tensions affect supply chains. The new constrains imposed by the reduction of greenhouse gas emissions make necessary the achievements of heavy investments in order to adapt production modes to these new regulations. The rise of protectionism in the U.S. and the emergence of a tough competition from Chinese enterprises which take advantage from a large internal market and from the costs reductions which result from it constitute the new global landscape. That is going to heavily hurt the German industry.
Chemical and steel industries will be affected by the increase of energy costs. The car industry which has generated huge trade surplus is confronted with the challenges of electrification when the country has not at its disposal rare materials to make batteries and when its enterprises will be in competition with Chinese carmakers which, them, have these natural resources and have a several years advance. The artificial intelligence will modify production technics and the enterprises will have to adapt themselves but there too, Germany has not anymore at its disposal any advantage.
Which has made the strength of the German economic model, it is its industrial successes which, thanks to the quality of their products have granted to enterprises a quite justified reputation. But that concerns yesterday industry. Nothing allows to be sure that the heavy industry will be able to cope with the energy prices increase and will have at its disposal enough resources to make the investments in order to satisfy the new environmental regulations. It is going to be the same for the car industry which realizes a substantial share of its activity in China where electric vehicles knows a real success. A severe reduction of the market share of German carmakers is there ineluctable and so of their financial results. That will occur at the worst time because these carmakers with the forbidding of the sale in Europe of vehicles with thermal engines in 2035 will have to make huge investments to comply with that decision.
At a time when, in France, we worry about the fact that the government has only at its disposal a relative majority at the National Assembly, in Germany the challenges to which the country will be confronted with, have all the chances to weaken the coalition which is in power and to impeach it to define a growth model adapted to tomorrow world and to put it into practice.