Enguerrand Artaz

Has Germany got trapped by its own certainties?

“The sound of a train whistle conjures up the whole station.” When writing his “Notes on the Cinematographer,” filmmaker Robert Bresson could not have imagined that these words could be turned into an economic allegory, with the eurozone as the railway backdrop and Germany in the role of the train. A train whose whistle has the air of a lament. Germany’s economy is wallowing in the doldrums, with the knock-on effect of a bleak shadow cast over the eurozone as a whole. With GDP shrinking by 0.4% in 2023, the worst performance – excluding the COVID-19 period – since the 2008 crisis, Germany finds itself bringing up the rear in the eurozone. Unemployment is still very low but has been on a rising trend for a year, whilst it is still declining in countries in the south of the region – Italy and Spain in particular.

It is primarily the industrial sector – the major driver of its economy – that is dragging the country down. Its energy mix, based for the most part on gas and coal since it abandoned nuclear energy, has been hard hit by the conflict between Russia and Ukraine, sending prices for the sector’s businesses skyrocketing. In parallel, export opportunities have deteriorated, primarily due to the economic slump in China. Over two years, industrial orders have collapsed at their fastest rate since 2009 (with the exception of the COVID-19 period).

The real estate segment is also in deep trouble. Over the last decade, Germany has seen the gradual formation of a bubble in residential property. Since the end of 2013, the average price of existing property has risen, due to the structural housing shortage that has been accentuated by the influx of migrants since 2015. It hit a peak in mid-2022, with a rise of over 100%, versus 20% to 25% in France for example. Since that time, in response to the sharp rise in interest rates, the fall in real income and the economic slowdown, prices have fallen by over 15%. This spiral has had a significant impact on the construction sector, which is seeing one of the sharpest falls in activity in its history – even worse than in 2008 – that has caused the first insolvencies of real estate developers.

In response to these setbacks, Germany has – in principle – ample room for manoeuvre. The trajectory of its deficit remains well-contained and its indebtedness stands at just 60% of GDP, placing it among the star pupils in developed countries. But this is before we come to the drawbacks associated with its qualities – with its extreme ordoliberal approach, the German government is unable to find an agreement to suspend its so-called debt brake rule. Lifting this rule would have authorised an increase in the 2024 deficit above the 0.35% threshold of GDP. That would have allowed the government to compensate for the impact of the Federal Constitutional Court’s decision preventing the reallocation of the EUR 60 billion COVID-19 fund to a special Climate and Transformation Fund. The consequence of all this is that Germany is looking at budget cuts at a time when its economy needs support. What’s more, in the corridors of the European Central Bank, the German delegates continue to lobby to keep interest rates high over a long period, thus depriving the economy of another source of support, that of monetary policy.

Without jettisoning its tradition of rigorous financial management, Germany today finds itself confronted with a number of challenges that are begging for more flexibility. Such a shift would be beneficial for the whole of the eurozone – when the engine stutters, the whole convoy risks derailment.


Final version of 2 February 2024 – Enguerrand Artaz, Fund Manager