Germany’s economic miracle is now Europe’s malaise

For its own sake and that of the broader European economy, Germany needs to find a new economic strategy.

For decades, Germany achieved great economic success with a strategy uncommon among developed nations: It became one of the world’s leading suppliers of manufactured goods, such as cars and machine tools, relying on a combination of cheap imported energy and extreme frugality to keep prices competitive.

That strategy isn’t working anymore. For its own sake — and that of the broader European economy — Germany needs to find a new one.

Impressive as it was, Germany’s export-led model was never ideal. It preserved manufacturing jobs that were disappearing elsewhere, but also generated vast trade surpluses that forced other euro-area nations to run deficits and build up debt — imbalances that contributed to Greece’s near-exit from the euro in 2015, and that remain a threat to the common currency. Beyond that, it was inherently precarious, depending on natural-gas supplies from Russia, ample demand from places such as China, and harsh restraints on German wages, credit, and government spending.

Now the system is faltering badly. Surging gas prices due to Russia’s invasion of Ukraine have dealt a lasting blow: As of July, output in Germany’s energy-intensive industrial sector was down 18% from December 2021. China has evolved from a supplier and consumer into a competitor: It’s on track to eclipse Germany this year as the world’s second-largest auto exporter after Japan. Employers are struggling to hire skilled workers at prevailing wages. Decades of underinvestment have left physical and digital infrastructure tens of billions of euros behind the times, undermining productivity. As a result, the country has become a drag on the entire European economy, with among the region’s lowest forecasted growth rates.

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Germany has met such challenges before, and it can do so again. With one of the lowest debt burdens in Europe, it has the means. With plenty of innovative firms — such as the Mittelstand, the country’s storied niche manufacturers — and expertise in areas such as green technology, it has the ability. What it needs is to create favorable conditions for new industries to emerge.

The key elements are no mystery. Reform the country’s unduly austere debt brake, to make way for much-needed investments in everything from railways to broadband. Encourage immigration and expand public child care to increase the supply of skilled labor. Adjust collective bargaining practices to allow both real wages and domestic demand to grow. Pursue European capital-markets integration and let insurers and pension funds invest more in venture capital, to make financing more readily available. Break down bureaucratic barriers, such as excessive regulation of professional services.

The government has taken small steps in the right direction. It has so far rejected industrial energy subsidies that wouldn’t improve longer-term competitiveness. It has also moved to expand the tax deductibility of capital investments and proposed easing citizenship requirements for immigrants. None of this, though, comes close to what’s needed. If Germany wants to avoid becoming the “sick man of Europe” once again, its leaders must get more ambitious, and soon.

The Editors are members of the Bloomberg Opinion editorial board. Views are personal and do not represent the stand of this publication.