The Battle of the Milky: The Sad End of the German Miracle, the Bradenburg Gate in Germany (Photo: Reuters)
"The German Wonder," a term first coined by THE TIMES IN 1950, WAS BORN OUT OF THE RECONSTRUCTION OF THE GERMAN ECONOMY AFTER THE DEFEAT OF THE NAZI. The postwar regime was led by Chancellor Konrad Adenauer and Economy Minister Ludwig Erhard. In Germany and Austria they worked efficiently and around the clock, received American economic aid (the Marshall Plan) and American military security, in the form of a garrison on German soil. What was left for the Germans to do was to engineer, manufacture – even with the help of immigrants from Turkey and export.
As early as 1957, Germans were among the founders of the European Common Market, the father of today's European Union, designed to increase German competition and efficiency and take advantage of Germany's technological advantage that had been restored after the collapse of its factories in World War II.
The Germans had skilled workers, high technology, including military (which the Americans absorbed, took, adopted, carried, including scientists, shamelessly from yesterday's cruel enemy), including the automotive industry, from metal to missiles, communications and space. The Germans initially found it difficult to convert military technology to civilian, the Americans hindered them, but eventually after stabilizing a new currency, Deutsche Merck, responsible monetary policy and drastically reducing income taxes to encourage consumption, the economic recipe and discipline worked well.
A huge success, Germany became a household name in Europe and later in the world. The defeated country became the leader of Europe in the economic sphere, everyone looked up to it in amazement. German labor productivity won big.
Milky as a parable: Does anyone remember that they once emigrated from here to Germany because of the prices of dairy delicacies? (Photo: Studio Strauss)
Choked on the gas
Until a few years ago, when you talked to colleagues about the economy, standard of living, health, housing, they would say with envy and amazement, "But in Germany it's better." Well, Germany's good days are behind it, this year the German economy is at a standstill, meaning zero growth, next year and until 2026 growth of 1%-2% is forecast, followed by growth for years of less than 1% each year.
In other words, Germany's current GDP per capita is currently $51,380, while Israel's current GDP per capita is $55,540, according to current International Monetary Fund data. The figure is accurate, there is no typographical error or emission here.
So why is this stagnation created, and what are its components? First it is necessary to mention Russian gas. For years, Germany enjoyed abundant Russian gas, regular imports to its doorstep, through overland pipelines and also through pipelines laid on the bottom of the Baltic Sea. The price of gas was discounted and competitive compared to other energy sources.
Germany was so enthusiastic about Russian gas that a decision was made to close the nuclear power plants under the pretext of environmental protection (which did not prevent Germany from purchasing electric power from France during peak hours, in France over 70% of electricity production is nuclear).
Germany succeeded in building a huge export-oriented industry, initially to countries around the world, especially the United States, the victorious power at the end of World War II. Subsequently, after pushing for the creation of the eurozone, exports to neighboring countries in the bloc, which now numbers twenty countries, increased.
German exports are mainly biased towards machinery and equipment whose quality the world has recognized. One of the main buyers of German equipment was China, which for several decades made a fundamental change in the structure of its economy, buying heavy industrial equipment from Germany.
By the way, at the same time, from the United States, China attracted ideas, secrets and patents, whether directly or stealthily, through the hundreds of thousands of students it sent to America for studies. The Germans and the Americans, as well as other countries, were eager to enter the huge Chinese market, which had transformed China from a miserable Third World country to an emerging country to a modern state threatening American hegemony.
Germany prospered, cheap energy and a hungry export destination in the form of the Chinese economy, a winning combination. Germany also flirted with the Soviet Union and the dissolution of the Soviet Union, launching an emphatic campaign of investment in Russia and increased trade with the Russians, while increasing dependence on Russian gas, to which Germany became addicted. All the warnings by U.S. presidents to Germans for years, Democrats and Republicans, to stop flirting and reduce dependence fell on deaf ears, especially on German Chancellor Angela Merkel's refusal to accede to the American demand.
Today, the German miracle is over. There is no more cheap gas from Russia, other gas sources are expensive, the price of energy is expensive. Last winter, luck played out for Germany, the weather was relatively warm and energy consumption dropped dramatically compared to normal winters.
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Former Chancellor Angela Merkel. She was shocked by American warnings not to become dependent on Putin's gas, but she didn't listen (Photo: Paul, Yoav Dudkevich)
The German population is also aging. Germany has been suffering for years from a shortage of skilled workers and workers in general, and the burden of maintaining the aging population is increasing, as happened in Japan. The percentage of the elderly, over the age of 65 according to the accepted international definition, 18.5%, the number of Germans of substantial working age 25-64 reaches 48.4%, not enough to support the aging population, there are no more sources of manpower to flow into the hungry economy into skilled workers.
Germany launched a campaign this week to recruit migrants with professions in demand. It can be noted that one of the main reasons Japan has been close to stagnation in growth since the 1990s, beyond poor economic and monetary management, is the fact that the percentage of elderly in Japan aged 65 and over has already reached 29.1%.
The high productivity of the German economy, the symbol of Germany's "economic miracle" after World War II, has disappeared, according to the International Monetary Fund. Germany, like the United States or Israel, has not succeeded in investing in the ICT industry, which is now dragging it to lag behind other countries on labor productivity.
Bureaucratic barriers, non-digital governance, restrictions, lack of incentive for research and development, lack of an advanced venture capital industry, failure to properly care for young people holding shares in startups and venture capital companies have all severely damaged labor productivity in Germany.
Not only that, the IMF says, Germany is in trouble, it must find budgetary sources for investment. Under the constitution, the deficit cannot exceed 0.35%, but the government has been forced to make concessions in recent years, initially because of the expenses associated with the coronavirus. Now Germany has analyzed another problem it has tried to ignore for years: defense spending. It must now increase its defense budget amid Russia's tangible threat to Western Europe after its invasion of Ukraine.
The threat of the Russian bear is no longer just theoretical. The new security problem has a positive side to Israel, which will benefit from billions of euros in orders from the German government in the coming years. The International Monetary Fund says Germany has no choice but to raise its budget deficit by another 1% of GDP to meet current needs in the coming years. Germany should also increase its support budget for Ukraine, as demanded by the Americans. Just this month, Germany announced that its aid budget for bleeding Ukraine, which guards Europe's eastern border, would be 2.7 billion euros, including the celebrated Lawford tanks.
High energy prices, coupled with the poor financial conditions of a weak banking system, affected by the weak and terribly unstable banking system of all of Europe since the 2008 crisis (and this year also by a banking crisis, so far in miniature, in the US), will prevent a return of Germany to reasonable growth. The German monetary authorities will have to simplify and clarify to the public the state of the banks, not as vaguely as it is today, and establish the safety net for public deposits that the central government has proposed. But this is a trap, as underlying inflation remains high, and interest rate hikes by the European Central Bank or domestic monetary tightening to quell inflation will also depress growth.
For this reason, Germany should not move to an excessively contractionary fiscal policy, even though Germany, traditionally, since the end of World War II, has maintained a restrained fiscal policy in order to prevent the inflation of being raised in the bad memory of the Weimar Republic, the last before the Nazis came to power.
The German Dilemma
In the current situation, the International Monetary Fund says, Germany must use public capital for infrastructure investments, including to support an aging population. Special attention should be paid to efforts to replenish labor productivity that has deteriorated in recent years, as mentioned. It's all about moving to a greener economic policy, which must be limited to market failures in Germany and the EU, including EV charging stations, but not beyond. So says the foundation.
Raising the price of energy in order to save for a rainy day, literally, also has its limits, it may depress economic activity, it is already burdensome. Monetary tightening, as in Israel, is hurting the German housing market, not only from higher capital prices but also from onerous energy prices. There is also damage to commercial real estate, it turns out that the reports of companies in the field, whose shares fell due to the excess leverage they took, were not of a uniform and clear standard, it was difficult to examine or know the extent of leverage.
Germany will have to switch to uniform methods in the banking system, clear, standardized and harmonious in real estate, more visible and less hidden. Everything, including the leverage rate for companies, the debt service ratio of the company taking on the debt and the cost of the debt rate.
The IMF predicts a gray future for Germany largely because of an aging population, declining labor productivity and labor shortages. The million migrants who arrived in Germany in the previous decade, under Merkel, due to the wars in Asia, the Arab Spring and the Middle East wars, were swallowed up and were not known to have reached Germany's vicinity.
Another burden is a continuation of the suffocating lure of inflation in the German economy, perhaps this year inflation will fall to 4.5% after already being 7.6% in April this year, but underlying inflation will remain high because it takes time for the decline in global commodity prices to translate into a decline in prices, while wage pressures are weighing down and preventing a decline in the rate of increase.
Budget growth is a double-edged sword: it increases activity, is required to meet energy targets and the aging population, but is liable to slow the pace of inflation reduction. Trap. Therefore, the German government will be forced to reduce subsidies while changing the tax system, especially in real estate, which distorts economic activity.
Apart from increasing efficiency, especially in terms of the information industry, computers, artificial intelligence and their attachés, all within the framework of a clearer and more open regime, Germany will have to outline a clear plan to reduce its geopolitical uncertainty in order to return to being attractive to an investment destination. It will take years, mentality does not matter at the push of a button, even of the most advanced computers. The Israelis who celebrated in the real estate and residential market in Germany, including the ridiculous ones who found the Milky in Berlin cheaper, folded or folded their tails and returned to Israel.
If Germany manages to cope socially, economically and mentally, it may be able to prevent the disappearance of the "German miracle of wonder." If.