Germany may be heading into a recession. Its economy shrank .1 percent in the second quarter of this year.
Donald Trump’s trade war with China is partly to blame, but it has also exposed Germany’s home-grown vulnerabilities: an overreliance on exports and weak domestic demand.
Exports generate nearly half of Germany’s gross domestic product. It is particularly reliant on the car industry, which is responsible for 20 percent (PDF) of domestic industrial revenue. The United States is Germany’s biggest customer, accounting for 8.4 percent of exports. China takes 7.1 percent.
Not only are German exports now decreasing; many automotive companies have put investments on hold. They are fearful of further escalation in the Sino-American trade dispute as well as the possibility of American tariffs on German cars.
But Trump isn’t solely to blame. Germany’s obsession with balanced budgets has starved education and infrastructure of investments. The country committed to spending 10 percent of its GDP on education, innovation and research — and then consistently missed that target. The German Institute of Urban Affairs estimates that 15 percent of municipal road bridges need to be completely rebuild. Germany’s 4G mobile network is one of the worst in Europe.
Household consumption has fallen every year since 2012. Germany is a shrinking market and its companies prefer to invest abroad.
Ruling parties reluctant
Despite growing support for higher spending, including from traditionally conservative economists, the ruling parties are reluctant to act.
The Social Democrats worry that if they propose more investments, the center-right Christian Democrats may call for corporate tax cuts and higher military spending. Better to wait for the end of the “black zero” policy, which prohibits new borrowing, in the next government.
Angela Merkel, who has stepped down as Christian Democratic party leader but remains chancellor until 2021, knows that the commitment to fiscal discipline is one of the few things her right-wing supporters like about this government. If she lets it go, it could cause the coalition to collapse prematurely.