Does Germany's Economy Need a Cup of Coffee?

  • By Jonathan Josephs & Jessica Parker
  • Business Correspondent & Berlin Correspondent, BBC News

image source, Good pictures

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Exports have traditionally been a strength of Germany's economy, but have been declining

„I'm afraid we're really missing out on the future because we're taking too few risks.”

Verena Pausder is a successful German entrepreneur who is clear about where she thinks the economy is going wrong.

This week, it was confirmed that Europe's biggest economy shrank by 0.3% last year.

While the country has avoided recession — thanks to a statistical freak — most economists think Germany will be in that position when numbers for the first part of the year are released.

Germany's growth has been held back by the twin shocks of an energy crisis caused by the war in Ukraine and high interest rates.

There are also long-term structural issues such as aging infrastructure, labor shortages and the cost of tackling climate change.

At the World Economic Forum in Davos in January, German Finance Minister Christian Lindner dismissed these problems, calling Germany the „sick man” of Europe.

„After very successful periods since 2012 and after the crises this year, Germany is tired after a short night, and low growth expectations are probably a wake-up call,” he said.

„Now, we have a good cup of coffee, which means structural reforms, and then we will continue to succeed economically.”

image source, Good pictures

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Finance Minister Christian Lindner, Economy Minister Robert Habeck and Chancellor Olaf Scholz are struggling to grow Germany's economy.

Ms Pasteur, president of the German Start-Up Association and founder of kids app developer Fox & Sheep, needs a „change in mindset”.

„I think we're pretty good at listing all the negatives. And I think what we forget is what we actually end up doing.”

Despite the decline, he pointed out that 2,489 start-ups were founded last year and the country is making good progress in transitioning to green energy.

image source, Patricia Lucas / Verena Pastor

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Verena Bauster, president of the German Start-Up Association, says the economy will benefit from a change in mindset.

The younger generation is more willing to take risks, he says. But Germany's pension funds – worth more than $700bn – „are not allowed to invest in asset classes such as venture capital and private equity”.

„We're used to these big brands of the past and we want to do everything we can to have them in the future. Sometimes we put too much energy into protecting what we have. [rather] And then to invest in new things.”

Those big brands have traditionally sold large volumes of cars, machinery and pharmaceuticals overseas, driving economic growth and influencing government policy.

However, foreign demand has been „slowing down for months,” says Dr Klaus Deutsch, chief economist at the Confederation of German Industry (BDI).

Exports to non-EU countries in December fell 9.2% from a year earlier.

Dr. Deutsch explains that Germany's recovery depends on the world's two largest economies and domestic concerns.

About 7.5 million people, or 16% of the workforce, work in manufacturing, and half of what they produce is sold overseas.

That gloom in the manufacturing sector is causing pessimism among German consumers, he says, „a bit worse than most of the world.”

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Germany needs to invest billions to continue the transition from fossil fuels to green energy sources

December's figures showed inflation rose to 3.7%, still lower than in many major European economies. The rate at which prices are rising means people are holding back on spending on everything from cars to furniture.

It's a feeling amid the hustle and bustle of office workers and tourists on Friedrichstrasse, Berlin's shopping hub.

On a cold, but sunny winter day, one says he notices higher prices everywhere, from his rent to energy bills and to restaurants. „Berlin used to be a cheap city. Not anymore.”

One woman says her family of five's weekly supermarket shop came to less than €100. „Now I spend it well,” he says.

A woman who says „good job, good pay” is doing „right”. However, he adds: „I think things generally get worse.”

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People in Berlin's Friedrichstrasse shopping center were pessimistic about the economic outlook

Despite the shrinking economy, the number of people in work has steadily increased over the past two years. This means less productivity.

According to Moritz Schularich, president of the Kiel Institute for the World Economy, „The unhappiness is not mainly due to the current economic situation. It's a deep cultural unease and driven by uncertainty and fear. There's a lot of tension.”

That pessimism about the outlook is reflected in the latest GfK survey of consumer sentiment, which shows that crises, war and inflation are all leading Germans to save rather than spend.

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Carmakers like Volkswagen are driving exports, which have traditionally fueled Germany's economy.

Mr Schularick believes long-term issues that have pushed Olaf Scholz's government into budget cuts and a December court ruling mean that the move away from cheap Russian energy is not a challenge.

„One of the lessons we learned from England and the 1930s is that in these circumstances you don't want to further antagonize parts of the population by making painful budget cuts because that feeds the radicals and the populists.”

Economic discontent has helped fuel the political rise of the far-right AfD, who are considered anti-immigration. Amid labor shortages, this worries business leaders like Christian Klein, CEO of software giant SAP.

„We are now completely against any kind of extremism, because in order to innovate, to develop the economy, those talents must come to us. That is why it is time to speak not only for me, but also for the German economy. .”

AfD vice-president Peter Boehringer denies his party is bad for business, saying the biggest problem for companies is high energy costs caused by bad government policy.

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Christian Klein, CEO of SAP, is one of the business leaders

SAP's Christian Klein says innovation will be crucial if Germany's economy is to return to growth. Germany's most valuable company grew 6% last year to $33.7bn.

„Many companies are really turning to SAP, especially in challenging macroeconomic times.”

He explains that his company helps his clients deal with challenges ranging from supply chains to climate change and productivity challenges caused by high inflation.

„In Germany, I don't see a decline in IT budgets. What I really see is that business leaders want to invest because they see technology as an opportunity to overcome those challenges.”

Additional reporting by Damian McGuinness in Berlin

You can see more about Germany's struggle for economic growth Talking Business with Aaron Heslehurst On BBC News. Viewers in the UK can watch on BBC iPlayer from 23:30 GMT on Saturday. In other countries it is Saturday 23:30 GMT, Sunday 05:30 GMT and 16:30 GMT and Monday 08:30 GMT.

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