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Sun goes down on German economy as recession drags on and government spending is slashed

Solar industry layoffs are tip of iceberg in a beleaguered German market facing little growth and much-needed fiscal belt-tightening

An employee works on a solar panel at Meyer Burger in Freiberg. Some 400 staff were let go as the company blamed cheap competition from China and a thumbs-down from Berlin for additional subsidies.

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Derek Scally
Tue Apr 2 2024 - 05:45

The sun rises first in Saxony, Germany’s easternmost state likes to boast, but last week it set on another solar industry hopeful.

Some 400 employees of panel manufacturer Meyer Burder were let go in the town of Freiberg, a move the company blamed on relentless cheap competition from China and a thumbs-down from Berlin for additional solar industry subsidies.

“All our fears came to pass, though we hoped to the end for a different outcome,” said Freiberg mayor Sven Krüger to MDR television. “This is the second time that a solar firm has failed in Freiburg, we can’t have a third.”

The slow strangulation of eastern Germany’s solar industry, once a major hope for the region, reflects the wider, grim outlook for Europe’s largest economy.

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According to its leading economists, Germany is – in financial terms – sliding back to Covid-19 times.

“The German economy is beleaguered,” warned Dr Stefan Kooths of the KIW economic institute last week, presenting the spring forecast of Germany’s leading finance think tanks.

After downgrading its previous forecast of 1.3 per cent growth this year, the institute said the German economy would be lucky to grow 0.1 per cent this year – “only barely above the levels from before the pandemic”.

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Germany’s struggles to recover from Covid-era challenges, Ukraine war and inflation have been compounded by high gas and electricity prices. These are hobbling energy-intensive goods-makers while the country’s biggest strike wave in 25 years – particularly among rail and air operators – has thrown their logistics into chaos.

For Germany’s leading economists, however, the country’s biggest problem is political: the warring three-way coalition led by chancellor Olaf Scholz’s Social Democratic Party (SPD) and backed – mostly – by the Greens and liberal Free Democratic Party (FDP).

The latter is pushing for fiscal belt-tightening to bring Germany back in line with its constitutional debt brake – a response to a major court ruling last year.

The rows are visible on a daily basis such as the bad-tempered debate over a solar panel subsidy that might have helped the Freiberg factory. The SPD and Greens were in favour while FDP finance minister Christian Lindner was opposed, meaning no deal.

“The problem is that the government has, in itself, no consensus about the direction of economic and business policy and is not in a position to send any signals about how things will look in the future,” said Dr Kooths.

It’s a complaint you can hear from players across key economic sectors, from chemicals to construction: Berlin’s so-called traffic-light coalition is one long economic, political and ideological traffic jam.

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If things continue this way, expect recession-hit Germany – already the worst-performing major world economy last year – to clinch that crown again for 2024.

Echoing the grim diagnosis, the Bundesbank says no meaningful recovery is likely in 2024 with “industry in particular likely to remain in a weak phase… and no major stimulus expected either from private consumption for the time being”.

Industry orders books remain weak, with back orders keeping companies going and employees in work, but current export demand remains at low levels for most sectors – with some exceptions.

On Wednesday, in a telling sign of the times, Green economics minister Robert Habeck hosted a summit of Germany’s 20 leading arms manufacturers, including tank-maker Rheinmetall and Thyssen Krupp Marine Systems.

Struggling to keep up with orders from customers in European states alarmed by Russia’s invasion of Ukraine, arms company managers were happy to meet Mr Habeck, given his ministry is responsible for arms export licences.

Last year, Mr Habeck’s ministry permitted exports worth a record €12.2 billion, up 40 per cent, a third of which went to Ukraine. In a rueful nod to his party’s pacifist roots, Mr Habeck acknowledged after the meeting that “the arms industry is not like any other”.

“But the global risk situation has changed and not to talk would be naive,” he said. We have to acknowledge that we need this industry.”

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And Germany’s arms industry giants like Rheinmetall are in hot demand. A year ago, its chief executive, Armin Papperger, said that €400 per share was “realistic” for his firm which, in addition to tanks, builds anti-aircraft systems, munitions and military transporters. Rheinmetall shares ended trading last week at €521 a piece, up 472 per cent in the past two years.

Turnover and profit at the arms company are surging from one record to the next: €7 billion and more than €900 million respectively in 2023. With orders on its books worth €38 billion, Mr Papperger expects turnover to hit €10 billion in 2024 and to have doubled again by the end of the decade.

Back in Germany’s more sober real economy, the gloomy spring forecast made another demand for reform of the country’s constitutional fiscal debt brake.

The controversial measure limits fresh borrowing to 0.3 per cent of gross domestic product, but the leading economic institutes back a Bundesbank recommendation to make changes to allow for more debt-financed investment.

In addition to the central bank’s proposal, the spring forecast urges a transition phase for reactivating the deficit limit “instead of an abrupt tightening”.

There is no sign that federal finance minister Christian Lindner is listening, judging from the budget cuts for all ministries bar defence leaked last week.

The foreign ministry will lose one-quarter of its budget while the transport ministry can expect 10 per cent less to finance its ambitious infrastructure investment plans.

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“There are no additional sources of income to distribute,” insisted Mr Lindner in Die Zeit weekly. “Consolidation is the order of the day.”

As Germany’s recession drags on, however, Mr Lindner’s austerity plans – in particular to slash social spending – are facing growing resistance inside the coalition.

Amid growing uncertainties, SPD and Green politicians have warned of pushing any fiscal policies that endanger social cohesion.

Among those expressing concern: Mr Scholz. Last week, in quick succession, he sent two rare shots across Mr Lindner’s bow.

At a town-hall meeting near Berlin, challenged by a student about Germany’s “absurd debt brake”, Mr Scholz said that, while unlimited debts were not a good idea, “one could talk about” adjusting the brake from its current form.

Hours after Mr Lindner’s planned social spending cuts leaked, Mr Scholz was back on the case. Germany’s economy remains frozen but, he warned, Berlin’s coalition agreement “makes clear that we will not allow for any deterioration in the welfare state”.

“That is where we are at,” he said, “and you can count on that.”

Germanysolar powerOlaf ScholzChristian Lindner