Germany Faces Economic Challenges, Fueling Right-Wing Populism

Germany, often seen as the economic powerhouse of Europe, is currently grappling with economic challenges that have led some to label it the “sick man of Europe” once again. These challenges, ranging from manufacturing woes to energy strategy dilemmas, have the potential to bolster the rise of right-wing political parties in the country.

The term “sick man of Europe” originally emerged in 1998 when Germany faced the costly adjustments of reunifying its economy after the fall of the Berlin Wall. Today, it resurfaces as Germany’s manufacturing output stumbles, and the nation contends with soaring energy prices. According to Hans-Werner Sinn, president emeritus at the Ifo institute, this isn’t a fleeting issue but rather a more persistent concern.

One of the core challenges contributing to Germany’s economic woes is its reliance on the automobile industry. The automotive sector is the heartbeat of the German economy, accounting for a significant portion of its exports. In 2022, cars constituted 15.6% of Germany’s total exported goods. However, Germany reported a foreign trade deficit for the first time in decades in May 2022, briefly shifting from a trade surplus to a deficit, reflecting sluggish exports.

Investor skepticism about Germany’s sustainability goals also plays a role in its “sick man” status. The German government has set ambitious targets, including becoming carbon neutral by 2045. These objectives have come under scrutiny, particularly in the context of energy security. Europe’s efforts to reduce reliance on Russian gas amid the Ukraine crisis has led to increased energy prices. Critics argue that Germany’s plan to transition to renewable energies like wind and solar is optimistic, given the need for conventional energy sources to fill gaps in supply. This dual approach, some argue, increases energy costs and poses challenges for industry.

The uncertainty surrounding energy prices has dampened business sentiment, and some firms are contemplating moving operations to countries with cheaper energy, such as the United States or Saudi Arabia. This could result in a loss of 2% to 3% of Germany’s current industrial capacity, according to a research note from Berenberg.

While the economic challenges are significant, they are not seen as long-term structural impediments. However, public sentiment about the transition to a more sustainable Europe has been less favorable, leading to a “greenlash” as people feel the cost impacts of these policies.

Hans-Werner Sinn also suggests there are political ramifications to consider. He points to the rise of right-leaning parties like the Alternative for Germany (AfD), which won a district council election in June. While he refrains from making value judgments, Sinn highlights the need for pragmatism in policy, emphasizing that the German population is shifting to the right due to perceived overambitious policies.

As Germany navigates these economic and political challenges, its response will shape the country’s future and potentially influence the broader European landscape.