Germany's Economic Model: A Changing Landscape

Larry Elliott looks here at the ongoing problems facing the German economy arguing that whereas it was a role model in the latter part of the 20th century, it's inherent weaknesses have been revealed in the 21st century. He argues that the Germans have been complacent, and invested too little in all forms of infrastructure, as well as human capital. He sees the economy as over-reliant upon sunset industries, and although they've done remarkably well to integrate the former East Germany, current rates of growth are low.

Germany has long been held up as a model of economic excellence. Its blend of good design, skilled craftsmanship, strong business-bank relationships, and a consensus-driven industrial system have been the backbone of its success. Not to mention its standout vocational training programs that churn out a steady stream of skilled workers. This combination has allowed Germany to boast high living standards, sound public finances, and a robust trade surplus, setting it apart from other economic models, like the Anglo-Saxon capitalism seen in the UK and the US.

Historically, Germany's economic achievements enabled it to undertake massive projects, such as the €2 trillion levelling-up initiative in East Germany, which dwarfs similar efforts elsewhere. However, despite its past successes, Germany now faces significant economic challenges that cast doubt on its continued viability as a global economic role model.

The Current Economic Challenges

In recent years, Germany's economy has faltered. Since 2018, it has been the slowest-growing economy in the G7, with an average growth rate of just 0.4% per year. While other major European economies like France, Italy, and Spain have begun to recover from recent slowdowns, Germany remains mired in economic difficulties, teetering on the brink of a technical recession. A key factor has been Germany's heavy reliance on energy-intensive industries, which made it particularly vulnerable to the surge in global gas prices following Russia's 2022 invasion of Ukraine.

While cyclical downturns are not new to Germany, the current problems point to deeper structural issues. Germany has clung to its established economic model, a model that has not kept pace with the rapid technological changes transforming the global economy. The world is moving from analogue to digital, and Germany has been slow to adapt. This reluctance mirrors the challenges Britain faced in the 19th century, as it struggled to transition from the coal and textile industries that had fueled its own Industrial Revolution.

Technological Lag and Structural Issues

Germany's strengths in advanced manufacturing and precision engineering, which once made it an economic powerhouse, have become a liability in the digital age. The German automotive industry, historically a pillar of its economy, has been particularly slow to pivot towards electric vehicles, lagging behind as cheaper Chinese models enter the market. Moreover, Germany's investment in digital infrastructure, education, and new technologies like AI has been insufficient. For instance, Germany has only 1.9 AI startups per 100,000 inhabitants, compared to 5.22 in the US and the UK.

As a result, Germany is beginning to resemble an analogue economy in a digital world, struggling to compete in new growth sectors like electric vehicles and AI. This has led to economic stagnation and a rising threat to democracy, with extremist parties gaining traction amid growing disillusionment.

Learning from Other Models

Germany's story serves as a cautionary tale about the dangers of complacency and the failure to adapt. While the UK and other nations can learn valuable lessons from Germany's past successes, they must also recognize the importance of evolving with technological advancements. The US, for example, has managed to remain economically dynamic by continuously adapting its industrial structure.

Ultimately, Germany's experience underscores the need for countries to embrace creative destruction—the process of allowing outdated industries and practices to give way to new ideas and innovations. For both Germany and the UK, being at the forefront of the fourth Industrial Revolution will require significant investment in physical, human, and digital infrastructure.

Glossary of Key Economic Terms

• Anglo-Saxon Capitalism: A form of capitalism characterized by free markets, flexible labour, and less government intervention, commonly associated with the UK and the US.
• Creative Destruction: The process through which new innovations replace outdated industries, driving economic growth and transformation.
• Digital Infrastructure: The foundational technologies and systems that support digital services, including internet connectivity, data centers, and cloud computing.
• G7: A group of seven major advanced economies: Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
• Industrial Relations: The relationship between employers, employees, and the government, particularly concerning negotiation, collective bargaining, and worker rights.
• Recession: A significant decline in economic activity across the economy, lasting longer than a few months, and typically visible in GDP, income, employment, and production.
• Technical Recession: A period of temporary economic decline defined by two consecutive quarters of negative GDP growth.
• Trade Surplus: An economic condition where a country exports more goods and services than it imports, resulting in a positive balance of trade.
• Vocational Training: Education and training that equips individuals with specific skills for a particular trade or occupation.

Retrieval Questions for A-Level Students

1. What are the main characteristics of Germany's economic model?
2. Why has Germany's economic growth lagged behind other G7 countries since 2018?
3. What are some structural issues facing the German economy in the digital age?
4. How has Germany's automotive industry struggled with the transition to electric vehicles?
5. What does "creative destruction" mean, and why is it important for economic adaptation?

This article provides an overview of Germany's shifting economic landscape, highlighting the challenges and lessons relevant for understanding the evolving global economy.