Germany at risk of becoming the sick man of Europe again

Bureaucracy is a way of life in Germany. For a country that prides itself on efficiency and organisation, getting things done is surprisingly difficult.

Germans spend hours completing forms to obtain permission for everything from getting a passport to driving machinery along the autobahn. And most of it has to be done in person.

“They like a paper trail,” says one Australian executive who recently moved to Munich. “There’s a running joke that most Germans have huge stockpiles of paper and rooms full of folders in their homes.”

It’s also become a major barrier to economic growth, says Ulrich Hopper, director general of the German-British Chamber of Industry and Commerce.

“We need too many permits for so many things. And that of course hinders businesses.”

Germany’s reputation for advanced engineering and punctuality is also quickly becoming a myth.

Switzerland has begun stopping tardy German trains at the southern border that threaten to mess up its carefully co-ordinated timetable.

Meanwhile, the country’s ageing fleet of government planes is also attracting the wrong type of attention.

Annalena Baerbock, Germany’s foreign minister, spent hours waiting in Abu Dhabi this month after a technical problem forced it to return to the airport rather than continue to Australia. That same plane was involved in a fuel system problem in 2018 that resulted in then-Chancellor Angela Merkel delaying a G20 trip to Argentina.

These microcosms of German life reflect a deeper malaise in Europe’s biggest economy.

Combined with an energy crisis, they threaten to turn the country once again into the “sick man of Europe”, 25 years after it earned the title in the late 1990s for dire economic growth and high unemployment.

Germany is expected to be the only major economy to shrink this year, according to the International Monetary Fund.

Hopper says the combination of a shrinking economy and high inflation is a nightmare for the German government.

“It is seeing stagflation at the moment and this slow growth will probably last a few years because it takes time for the country to transition to a different, permanent energy framework. It also depends on how quickly the German government is going to free up the economy with less bureaucracy and making things digital.”

Holger Schmieding, chief economist at Berenberg, who used the term “sick man” to describe Germany in the late 1990s, also says bureaucracy is partly to blame for Germany’s current woes.

“In Germany, it’s rarely a lack of money that holds back investment, but the bureaucratic effort it takes to get all the approvals,” he says. “That is typically what holds up many of the big projects in Germany, including infrastructure.”

Germany was also a victim of bad timing. The energy crisis triggered by the Kremlin’s invasion of Ukraine hit Germany just as it was decommissioning its last operational nuclear power plants.

Berlin used to rely on Moscow for around a third of its gas and electricity needs. Economists are now warning that stagnant growth will continue for years as policymakers wrangle over what comes next.

Monika Schnitzer, head of the country’s Council of Economic Experts, told The Telegraph this month that Germany risked sinking into a prolonged period of decline unless politicians “let go” of some of the country’s prized energy-intensive industries.

This includes ammonia production, pioneered by Nobel prize winner Fritz Haber at the start of the 20th century. But Schnitzer’s ideas face opposition from others who argue that some strategic industries should be protected and even subsidised going forward.

German carmakers have also made the wrong bet. Buoyed by strong sales of traditional diesel and petrol marques to China, many invested heavily in luxury electric models they believed would roll off the forecourts just as quickly.

The problem is, while German and other European executives enjoy driving a luxury marque, rich people in China want to be driven.

This makes rear seat space and comfort more important than fancy leather seats and torque.

Flagging sales spell trouble for some German companies, who have also bet big on China. Around a fifth of BMW and Volkswagen’s income is from the country, according to Deutsche Bank. With China battling its own economic woes, corporate profits are likely to suffer.

Indecision is sending the economy down a path of stagnation that will last for years, warns Hopper at the German-British Chamber of Commerce.

“There will be a prolonged period of stagnation because of demographics, the cost of energy and burdensome bureaucracy that is hindering companies to do business and create economic growth,” says Hopper.

Germany also faces a near-term headache, with official figures showing inflation stood at 6.1pc in August, almost as high as the UK’s headline rate of 6.8pc in July. The latest figures, which showed a spike in energy inflation, are a reminder of how exposed Germany is to fluctuating prices, says Christian Fuertjes, an economist at HSBC.

He says: “The strong rise in energy inflation in August is a reminder that the decline in headline inflation rates over the past few months was probably an overshoot relative to the decline in wholesale energy prices, and has started to reverse. Hence, even though food price inflation continues to ease, there might be some significant upside risks from energy inflation in the upcoming months that both financial markets and – to a lesser degree – some central bankers seem to have underestimated.”

Schmieding at Berenberg believes Germany will experience a “genteel decline” that threatens its status as Europe’s powerhouse.

“The role of power house is gradually being assumed by France,” he says, simply because it’s “more dynamic.”

Schmieding says Germany is becoming “a bit like Japan – declining but seemingly happy about it.”

He adds: “There will be a decline in Germany relative to other economies. It’s not a crisis but it [will go from] being the strongest major economy in Europe to being in the middle and gradually losing in importance on a global scale.

The demographic decline in Germany is also stark. Low birth rates mean Germany faces a bigger demographic drag on growth than many of its western peers.

Today, there are around 25 people aged 65 or older for every 100 workers. In fifty years time, that number will be more like 65.

Schmieding argues that policymakers should offer bigger tax breaks to make work pay for retirees. Germany’s state pension age is already gradually being raised to 67 by 2031. “Up to a certain high-income threshold, I would abolish income tax on employment income,” he says.

He also believes Germany should focus on selling cars and other manufactured goods closer to home. “Poland, Czech Republic, Slovakia and Hungary are a much bigger market for Germany than China,” he says. “Germany is selling almost as much to Poland as to China”.

As for Hopper, he is optimistic that Germany will not return to its “sick man” status, but warns that Germany must bid goodbye to years of plenty. “It’s not the sick, but slow man of Europe.”

If prevention is better than cure, it may already be too late to reverse Germany’s fortunes.