Prosperity in Germany is now declining for all to see. The book “Germany’s fat years are over” not only shows the reasons. It also explains what needs to change in order for things to get better again.
The most recent growth forecast from the major economic research institutes for 2024 is 0.1 percent. The number seems as if a negative value had been quickly turned into a positive so that the loss of face was not too great. Things are going better everywhere in Europe. “A growth forecast of 0.1 percent must be a wake-up call for the federal government Bavarian state government announce and called for fewer taxes, duties and bureaucracy. This is going in the right direction, but it is not a relief for the crisis-ridden German economy.
Because the problems are deep, so tinkering with symptoms is no longer sufficient. A clear diagnosis is required as the basis for the correct therapy. This is where my book “Germany’s fat years are over” at. It reminds us of where prosperity in Germany comes from, how the foundations of prosperity began to falter, how the decline, which had begun for a long time, could only be concealed for a limited time and what needs to be changed to secure prosperity.
Prosperity in Germany is based on the West German economic and currency reform of 1948, which brought a stable currency, free prices and competition. The Basic Law of 1949 secured private property, freedom of contract and the principle of liability, so that a free economic and legal system emerged. As Minister of Economics, Ludwig Erhard ensured that the economic environment was stable. “I have as Federal Ministers have to use 80 percent of my strength for this, to fight against economic nonsense,” he said later. This is how an economic miracle emerged. From then on, high productivity gains enabled impressive wage increases and the constant expansion of the welfare state.
The economist Walter Eucken had already emphasized back then that the backbone of an efficient market economy is a stable currency. Accordingly, the decline of the market economy began with the euro because it was gradually converted from a hard currency along the lines of the German mark into a soft currency. The European financial and debt crisis, which can be traced back to a design flaw in the euro, enabled the European Central Bank to purchase government bonds on a large scale, following the example of the Banca d’Italia.
Since 2008, persistently low interest rates have not only made German companies sluggish. The European Central Bank’s government bond purchases have also encouraged successive governments under Angela Merkel to roll back the reforms of her predecessor Gerhard Schröder. Since monetary policy greatly inflated the German state’s income, expenditure was also able to grow immensely. From around 1,050 billion euros in 2008 to over 1,900 billion euros in 2022, as Figure 1 shows.
Nevertheless, investments in infrastructure and defense were neglected. The positive effects of growing government spending on the economy made it possible to push ahead with costly regulations, especially in the environmental sector, because their costs were not clearly visible. During this time of monetary and financial policy bonanza, any opposition to the undermining of market economy principles such as price stability, liability and competition was futile.
Before the Corona crisis, the negative growth and distribution effects of the increasingly expansive monetary and financial policy were only visible upon closer inspection. The productivity gains of the once dynamic German economy plummeted, putting pressure on the wages of broad sections of the population. Steeply rising stock and real estate prices combined with zero interest rates on savings deposits were a redistribution program in favor of rich people at the expense of the middle class.
The loss of prosperity was also concealed for a few years. The sharply increasing state spending scope has allowed employment to expand, particularly in the public sector by more than 2.6 million people since 2008, as Figure 2 shows. In addition, there were more than a million new jobs in other government or regulatory-related services, while employment in industry stagnated. So it was primarily the state (and not demographics) that wiped out the labor market.
With increasing regulation, the German government has supported the competitiveness of German industry by directing energy imports more towards Russia. For a long time, powerful capital inflows from the major industrialized countries to China have driven the development of huge production capacities there. These have not only kept consumer prices low in industrialized countries, but have also provided German industry with an alternative to faltering domestic demand. German exports were additionally boosted by the progressive devaluation of the euro. After all, the low interest rates in Germany since 2010 have driven real estate prices and thus a construction boom that stabilized growth.
However, since consumer price inflation rose sharply in 2021 and the European Central Bank had to increase interest rates, the false economy driven by cheap money in Germany has come to an abrupt end. The traffic light government’s scope for spending is suddenly limited, and the real estate bubbles in Germany and China have burst. With the increased financing costs of companies, the high costs of regulation became visible. The empty labor market has increased the unions’ bargaining power to an unhealthy extent, which is why high wage demands are increasing inflation. And to make matters worse, the Ukraine war brought an abrupt end to the risky strategy of importing cheap energy from Russia.
The economic consequences of the gradual departure from the market economy have since become clear to everyone who wants to see it. The once proud economic nation is at a loss and is wondering what to do. Stress has spread throughout the once transformation-euphoric traffic light coalition. While the SPD and the Greens would like to continue the policy of debt-financed social and climate spending, the FDP is clarifying the economic limits of the costly redistribution policy. This leads to tensions that increase uncertainty even further. What is the solution?
If Germany wants to prevent the drastic social consequences of economic decline, it must return to the foundations of its prosperity. A green transformation does not create growth. Prosperity rests on a stable currency, free prices, competition, private property, freedom of contract, liability and government restraint in economic policy. “The economy is not a patient that can be operated on continuously“Ludwig Erhard once remarked. Wealth is not a mass of distribution, but must be constantly created and defended. According to Hayek, economic freedom is closely linked to individual freedoms. So the path is clear. All that is missing is the new Ludwig Erhard, who will make the necessary decisions.
credentials
Erhard, Ludwig 1957: Prosperity for all. EconVerlag, Düsseldorf.
Eucken, Walter 1952: Principles of economic policy, Francke, Bern and Mohr, Tübingen
Schnabl, Gunther 2024: Germany’s fat years are over. How it came about and how we can create a new economic miracle. Financial book publisher, Munich.