Europe’s economic engine is breaking down

News Desk :
Germany has been Europe’s economic engine for decades, pulling the region through one crisis after another. But that resilience is breaking down, and it spells danger for the whole continent.

Decades of flawed energy policy, the demise of combustion-engine cars and a sluggish transition to new technologies are converging to pose the most fundamental threat to the nation’s prosperity since reunification. But unlike in 1990, the political class lacks the leadership to tackle structural issues gnawing at the heart of the country’s competitiveness.
“We’ve been naïve as a society because everything seems fine,” BASF SE Chief Executive Officer Martin Brudermüller told Bloomberg. “These problems we have in Germany are accumulating. We have a period of change ahead of us; I don’t know if everyone realises this.”

While Berlin has shown a knack for overcoming crises in the past, the question now is whether it can pursue a sustained strategy. The prospect looks remote. Chancellor Olaf Scholz’s make-shift coalition has reverted to petty infighting

over everything from debt and spending to heat pumps and speed limits as soon as the risks of energy shortfalls eased, reports Bloomberg.
But the warning signals are getting hard to ignore. Despite Scholz telling Bloomberg in January that Germany would ride out Russia’s energy squeeze without a recession this year, data published Thursday show that the economy has in fact been contracting since October and has only expanded twice in the past five quarters.

Economists see German growth lagging behind the rest of the region for years to come, and the International Monetary Fund estimates Germany will be the worst-performing G7 economy this year. Nonetheless, Scholz again sounded upbeat.

“The prospects for the German economy are very good,” he told reporters in Berlin after the latest economic data. By unlocking market forces and cutting red tape, “we are solving the challenges that face us.”

The risk is that the latest numbers aren’t a one-off, but the sign of things to come.
Germany finds itself ill-suited to sustainably serve the energy needs of its industrial base; overly dependent on old-school engineering; and lacking the political and commercial agility to pivot to faster-growing sectors. The array of structural challenges points to a cold awakening for the centre of European power, which has become accustomed to uninterrupted affluence.
To its credit, industrial behemoths like Volkswagen AG, Siemens AG and Bayer AG are flanked by thousands of smaller Mittelstand companies, and the country’s conservative spending habits put it on a stronger fiscal footing than its peers to support the transformation ahead. But it has little time to waste.

The most pressing issue for Germany is getting its energy transition on track. Affordable power is a key precondition for industrial competitiveness, and even before the end of Russian gas supplies, Germany had some of the highest electricity costs in Europe. Failure to stabilise the situation could transform a trickle of manufacturers heading elsewhere into a stampede.
Much of the innovation power though is embedded in big companies like Siemens and Volkswagen, and focused around well-established industries. While small manufacturers still thrive, the number of new startups is declining in Germany – in contrast to growth seen in other developed economies, according to the OECD.

Europe’s powerhouse economy looks like it has a well-funded and established system to generate ideas to keep its economy on the cutting edge. Spending on research and development is the fourth-highest in the world behind only the US, China and Japan. Around a third of patents filed in Europe come from Germany, according to data from the World Patent Office.