The economic problems of Germany have been an issue for some years now. Regular readers will recall the period around 2018 when notable downwards revisions to the economic growth or GDP numbers rather changed the mood. Things went from being part of what was considered to be the Euro Boom at the time to what Homer Simpson would described as M’eh.These days even long-term supporters of German policies like the Financial Times find themselves writing things like this.
Executives welcomed the moves but warned that the measures were not enough to dispel fears among business leaders that the country is at risk of a “lost decade”.
Using a lost decade label has both strengths and weaknesses. One strength is the economic growth situation. A weakness is the equity market because the Japanese Nikkei 225 collapsed from a peak around 39.000 eventually reaching below 8,000 before Abenomics kicked in. Whereas the Dax of Germany has been hitting new highs.
On Thursday, the leading index had topped its almost six-month-old high, on Friday it surpassed the 25,800-point mark for the first time, and on Monday it tested the 25,900-point mark for the first time. (cash.ch)
However a fiscal s stimulus is something from that period and also is a policy that Germany kept refusing to apply when what were then called the PIGS asked fr it. The theory was that their economies would be boosted if a German fiscal stimulus boosted consumption and hence demand for their exports. We are back on the territory of yesterday of a successful exporter having weak consumption. The new economic plan is below.
Merz’s coalition government on Thursday unveiled a series of measures including tax cuts for the middle class, labour market reforms, stricter sick-leave rules and initiatives to curb bureaucracy as it aims to kick-start the economy and combat rising voter discontent.
Along the way the Financial Times has caught up eventually with what we were looking at in 2018/19.
The reform package is Merz’s latest effort to boost the economy, which has in effect stopped growing since the start of the pandemic in early 2020. Adjusted for inflation, GDP hovers at the 2019 level in what economists are calling an unprecedented era of stagnation.
Can fiscal policy change this?
This particular move has been rather watered down.
The €10bn in tax relief is the equivalent of about 0.21 per cent of Germany’s GDP in 2025 — less than half of the up to €27bn in tax cuts parties in Merz’s coalition had discussed in April.
That is a familiar refrain as the argument in Japan’s past was that government and Bank of Japan actions were never strong enough. Also it was only yesterday that the Financial Times told us this.
Germany plans to borrow more than €800bn by 2030, breaking with decades of fiscal restraint to bring defence spending to levels not seen since the cold war.
Next year alone, Chancellor Friedrich Merz’s government plans to raise more than €200bn from markets, 12.5 per cent more than this year, finance ministry officials said. Between 2027 and 2030, Germany is expected to borrow about €838bn, according to projections seen by the FT.
Now this is a case of Turning Japanese in the sense that they had a hodge podge of fiscal efforts which in their case did not work. Along the way we see that the German rearmament boost has gone from 500 billion Euros to 800 billion. Is it rude to be worried about Germany and Japan rearming?
The additional debt will mainly fund Germany’s defence budget, which is set to reach €109bn next year and €183.6bn by 2030. Berlin also plans to provide €11.6bn in military aid to Ukraine next year.
You would think it would be a great time to be a tank manufacturer but apparently not.
while the long-awaited listing of German-Franco tankmaker KNDS was postponed last week amid declining investor enthusiasm for the sector.
Perhaps investors fear something like this.
The German government unexpectedly announced last month that it was abandoning the multi-billion-euro project, sending Rheinmetall’s shares tumbling around 20 percent as the company had been expected to take on the work.
“The cancellation of the F126 project was a setback for us, and it caught us completely off guard,” Rheinmetall boss Armin Papperger told the news outlet Der Spiegel. (eurasiantimes)
Really Bad Timing
The present situation is described by the Financial Times like this.
Critics have also seized on the rising costs of servicing Germany’s debt: interest payments are projected to almost double from €42bn next year to €81bn in 2030, according to government officials.
As I type this the German ten-year yield is a bit below 3%.. Whereas if we look back to the Euro area crisis of 2012/13 they could have borrowed at around half that bond yield. Once Mario Draghi began the period of negative interest-rates and large-scale QE bond purchases Germany mostly was paid to borrow ( negative ten-year yield). So rather than borrow when it was cheap Germany has chosen to borrow when it is expensive.
Indeed back then Germany had the policy of the debt brake which means it actively chose not to borrow when it was cheap and instead is doing so when it is expensive. The establishment should be called to task but as we know responsibility is for plebs like us not the German equivalent of the “great and the good.”
Energy Problems
There is rather a skirting of this issue where Germany spent some 700 billion Euros on Energiewende to replace reliable with unreliable electricity sources. Then in a further case of economic vandalism closed its last three nuclear power plants after the Russian invasion of Ukraine. That is why we are seeing this.
Others said companies were cancelling planned investments at home, buying targets in the US to diversify away from the domestic market or considering moving their headquarters abroad. (Financial Times)
Electricity over there is so much cheaper and the claims that the situation will calm when there is no wars collide with the demands of AI and data centres. Germany made itself weak on reliable electricity supply and high on prices at exactly the wrong moment.
Comment
Back in 2015 the Financial Times made German Chancellor Angela Merkel its person of the year. Now it finds itself reviewing the policies she implemented like this.
In manufacturing, the German economy’s traditional strength, the situation is even worse. Industrial production peaked in late 2017 and sits 9 per cent lower than a decade ago, according to Bundesbank data.
With the pressure being applied by Chinese manufacturing exports this seems likely to get worse. This mornings release for May showed a monthly improvement but look at the annual comparison.
Compared to May 2025, output remained unchanged in May 2026 (0.0%) after calendar adjustment.
The catch is that the war in the Middle East boosted production ahead of an expected rise in costs so will that now go into reverse?
But the overall picture as I have been pointing out for some time has features of an economic depression.