Stagflation: Why Germany’s weakness is bad for Europe

Germany seems to be under the weather once again. That might be putting it mildly: much as it did in the late 1990s, Germany is staring down the barrel of "stagflation” – high inflation and unemployment combined with stagnant demand and low growth. A lack of effective political leadership further darkens the outlook for Germany – and for the European Union that depends on it.France might be the EU’s second-largest economy, a nuclear power, and the only member state with a permanent seat on the United Nations Security Council, but Germany is its economic powerhouse, having benefited for years from cheap Russian gas, high Chinese demand for cars and capital goods, and a low defence bill, courtesy of the United States (via Nato). Moreover, it has stood the tallest in European institutions. Former German Chancellor Angela Merkel was so influential over the direction of EU policy that she was nicknamed the "queen of Europe.”But Merkel never relished the spotlight and often was reluctant to lead. Her successor, Olaf Scholz, is even more reticent, making public statements only when necessary and avoiding decisive action, especially where it might be controversial. The newly coined term "Scholzing” – which has been making the rounds on social media – describes "communicating good intentions, only to use/find/invent any reason imaginable to delay these and/or prevent them from happening.”No-one is more affected by Scholzing than Ukraine, which has repeatedly found itself waiting out Scholz’s reluctance to deliver German weapons systems, such as Leopard 2 tanks, to support its fight against Russia. Today, Ukraine needs Germany to send Taurus long-range cruise missiles, as no other country has the capacity to provide a substantive quantity of comparable weapons in the short term. But Scholz has so far resisted pressure to do so.Scholz’s top priority seems to be to avoid an escalation of the conflict – especially a direct confrontation between Nato and Russia. In his view, sending the missiles increases that risk, because it would require him also to send German soldiers to help operate them. A leaked recording of a call involving four high-ranking German air force officers discussing possible Taurus deployment scenarios reiterated this assessment, though experts have refuted the claim that only German personnel on the ground can operate the missiles responsibly.In refusing to send Taurus missiles to Ukraine, Scholz is clashing with members of his own coalition government. Last month, Marie-Agnes Strack-Zimmermann, a leading voice in the Free Democratic Party, decided to break ranks and vote in favour of sending the missiles to Ukraine.The fragility of Germany’s three-party government has undermined Scholz’s ability to make deals with his counterparts in other EU countries. "The German coalition moves slower than the debates within the EU,” lament Brussels insiders.Beyond being fragile, Scholz’s coalition is deeply unpopular. In a December poll, just 17% of respondents expressed satisfaction with it. Scholz himself has the lowest approval rating of any German chancellor since at least 1997 (when the poll was created).Far from spurring Scholz to relent on the Taurus missiles, his weak political position might encourage him to dig in his heels. Dubbed the "peace chancellor”, Scholz has cultivated a pacifist image that resonates with voters. In one recent survey, 61% of Germans expressed support for his refusal to provide the missiles to Ukraine. With European Parliament elections in June and state elections coming later this year – including in Germany’s east, where opposition to any confrontation with Russia tends to be strong – Scholz cannot risk appearing bellicose. As German voters embrace the far right – the Alternative für Deutschland (AfD) appears poised to become the second-largest German party in the European Parliament – the stakes are particularly high.The AfD’s rise reflects growing popular frustration, not least with the economy. It was during last year’s budget crisis that the AfD’s popularity reached an all-time high of 23%. And, by some metrics, Germany has experienced more strikes this year than it has in a quarter-century.People have good reason to be frustrated. In 2023, Germany’s economy contracted by 0.3% – the worst performance of any major economy – and posted the highest inflation levels of the last 50 years. Its industrial production declined by 1.5%, factory orders fell by 5.9%, exports shrank by 1.4%, and imports by nearly 10%. Last November, unemployment reached its highest level since May 2021 (5.9%).A quick rebound appears unlikely. On the contrary, the rapid ageing of Germany’s population is aggravating an already-severe labour shortage, which could reach seven million workers by 2035, and leading German economic institutes recently cut their joint growth forecasts for 2024 from 1.3% to just 0.1%. Last year’s Constitutional Court ruling that the government’s reallocation of unused pandemic-era debt to a new climate fund was unconstitutional did little to strengthen confidence in Scholz and his colleagues.Economic conditions in Germany resemble those in the 1990s, when reunification brought soaring unemployment, declining industrial output, and sluggish GDP growth. Back then, decisive action by determined leaders, bolstered by true belief in the European project, pulled Germany out of its slump. By contrast, while Scholz understands the challenges he faces – including declining exports to China and the possible loss of the US security guarantee – he has yet to chart a clear path forward.This is bad news for the EU and its member states. A weakened, rudderless Germany is in no one’s interest. — Project Syndicate

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