Germany is staring down the economic abyss, but likely has one last chance to mount a turnaround or face below-trend growth until the end of the decade.
"Germany stands at a crossroads in its postwar history. The economic prosperity of recent decades is under pressure from geopolitical and technological paradigm changes," Deutsche Bank economists said in a report Thursday.
The German economy posted the lowest growth rate among G7 nations last year, and a recovery remains elusive as global headwinds threaten to intensify under the new U.S. administration. Without action, Germany risks falling into secular stagnation, with growth barely exceeding 0.5% annually through 2030.
The economists believe that the next legislative term is crucial for Germany’s future, and could potentially be the last opportunity to set the course for growth again. "The next legislative period offers perhaps the last chance to preserve Germany’s prosperity, hard-won over decades, for future generations," Deutsche Bank said.
If the next federal government doesn’t chart a different course for the economy and maintains the status quo, then this would likely "lead to a progressive loss of competitiveness and jobs, as well as greater political fragmentation," they added.
The risks of inaction would not only have grave consequences for the economy, but could pose a existential threat.
Without higher growth, the economists warned that Germany will struggle to maintain its social security systems, finance critical infrastructure investments, and meet its defense and climate change commitments.
"Chronic stagnation threatens not only Germany’s prosperity, but also its freedom and security," they added.
The next government is well aware of the grave problems they have inherited, but what does Germany’s economy need right now to mount a turnaround and avoid this fate?
An economic turnaround would likely require fiscal expansion, with debt-financed investments in defense and infrastructure to boost long-term productivity growth. On the supply-side, the economists flag multiple intervention that would needed, including reducing bureaucracy, cutting taxes, and deregulating to encourage private investment. The labor market, meanwhile, is also in need of a revamp in the shape of better work incentives to prevent a growth recovery from hitting speed limits due to skilled worker shortages.
Implementing this broader reform agenda is likely to demand a "historic effort" from the next government, the economists said, but the good news is that "Germany has its future prosperity and security in its own hands."
