German industry is grinding to a halt
4 July 2022
The Soviet Union had only just collapsed. John Major was still a relatively fresh-faced Prime Minister. And the internet consisted of a few desktop computers linking together a handful of laboratories. The world was a very different place when Germany last posted a trade deficit way back in 1991. But on Monday, the country recorded that imports outstripped exports for more than 30 years. True, other countries are recording huge deficits, not least the UK. For Germany, though, it matters more. Its entire economy has been built around creating an industrial machine that dominates global markets. That machine is now grinding to a halt.
By the standards of Britain, the United States, or indeed France, the €1 billion deficit that Germany announced today might seem like a mere accounting error. Exports unexpectedly fell, while imports surged as the cost of energy spiked. It is not as if the country is about to go bust or call in the IMF to pay its bills. But here’s the catch. Germany is almost uniquely an export-based economy. Until recently it was racking up surpluses of 8 or 9 per cent of GDP, or €20 billion a month, the biggest in the world. And there are three big problems with that disappearing.
First, the German economy is based on selling high-end industrial goods to the rest of the world. Unlike many other countries, it doesn’t have huge service industries to take up the slack if that goes into decline, nor does it have a major financial centre to bring in invisible earnings if the container ships start to go elsewhere. Take the big exporters out of the German economy and it is a little hard to figure out what is left.
What follows a fall in exports is a fall in those well-paid manufacturing jobs that are the backbone of the German economy. True, given a little time Germany should be able to create jobs in services and retail as many other countries have done. But they won’t be paid as much, nor will they necessarily suit blue collar workers. A whole generation of skilled Germans will have little else to do.
Finally, it is going to mean a massive eurozone deficit as well. Of all the countries within the zone, Germany was the only major surplus country. The result? The currency will weaken and weaken. Indeed, the euro hit parity with the Swiss franc over the weekend and is already close to parity with the dollar.
In truth, the German industrial export machine was fuelled by cheap energy from Russia – and that fuel could soon run dry, as Wolfgang Münchau wrote in last week’s magazine. For most of the post-war era, Germany has prided itself on very low inflation, a stable currency, and a huge trade surplus. Right now, it has a very Italian or Greek mix of 8 per cent inflation, a crumbling currency, and a rising trade deficit. Many other countries are used to that, but for Germans it will come as a shock.