In 1999, the mighty German economy was in so much trouble that, based on the work of legendary German economist dr. Holger Schmieding, the Economist magazine crowned the country the sick man of the Euro. And, today, almost twenty-five years later, Germany once again graced the cover of the Economist magazine, as the potential sick man of Europe.

Which, is perhaps not surprising given that Germany was one of the European economies that officially recorded a recession at the start of 2023, and now the IMF predicts for the next five years, that Germany will likely underperform other major economies like the Spain, France, and even Britain.

However, this time around, dr. Schmieding, who is now chief economist at the German bank: Berenberg, is contradicting the arguments made in the Economist, stating that they are way overblown and that Germany is far from the sick man of Europe.

So, who is right? Is Germany again close to being the sick man of Europe, as the economist argues? Or is dr. Schmieding, who originally labeled Germany the sick man of Europe in 1998, now correct in stating that the German economy is far stronger than we think.

Well, to answer that question, we first need to understand

1 Why Germany was labeled the sick man of Europe in 1998

Okay, let’s first talk about this term, the sick man of Europe. It has been used since 1853 to describe a major European power that is rapidly declining. The Ottoman empire was the first sick man of Europe, and since then the term has been used to describe the decline of the Russian Empire in 1917, Britain in the 1970s, and then in 1998, dr. Schmieding published a report labelling Germany the sick man of Europe which was then picked up and popularized by the economist in 1999.

So, why did they label Germany the sick man of Europe?

Well, the main reason is that, in 1998, just like today, the German economy had just emerged from a technical recession and was projected to grow much more slowly than the other major European economies. You see, citing high taxes and a high costs of labor, both Germany’s big corporations as well as its vibrant middle sized companies, known as the Mittelstand, were increasingly moving production to Southern and Eastern Europe, leading to increasingly high unemployment in Germany.

A potentially vicious cycle as increasing unemployment led to increased costs for the German state which in turn led it to consider raising taxes, making Germany even less competitive.

So, how did Germany then, from this situation, end up becoming Europe’s superstar economy in the next decade?

Well, the answer is that Germany was able to greatly reduce its labor costs, enticing Germany’s companies to stay home, and halting the decline of manufacturing in Germany.

How did it do this?

Well, while some credit far reaching government reforms, recent research indicates that instead it was mostly the unique structure of the German economy, in which the unions have a seat at the table in most German companies. As a consequence, they not just fight for higher wages, they also fight to keep companies alive, and union jobs in Germany. Thus, recognizing the threat to German industry, unions voluntarily accepted wage moderation in the early 2000s.

Combined with the benefits of a cheap Euro, these lower wages made Germany much more competitive, which in turn made it perfectly positioned to service a booming Southern Europe in the early 2000s. And, then, after the Eurocrisis, Germany’s industry increasingly sold cars and machines to the Chinese economy, which was quickly becoming the factory of the world. All of this powered by energy that could remain cheap, fairly green, and, importantly for the Germans, not nuclear, thanks to Russian gas.

And, so, Germany’s new economic model—characterized by low wages, high flexibility, and collaboration with former geopolitical adversaries like China and Russia—fueled its golden economic decade.

But, as they say, success breeds complacency, as this golden decade was also the period in which the seeds were already sown for the Economist to now once again propose that

2 Germany Could Again be the Sick Man of Europe

You see, in a series of three articles the Economist argued that, while drunk on success, German politicians, not only failed to anticipate that its key trading partners Russia and China would turn on it, it also forgot to look after itself.

While the German state could borrow at rock bottom interest rates, it developed a strong ideological position that the state should be run like a household, and that it shouldn’t borrow too much to grow its economy. As a consequence, it chose to invest far less into its infrastructure than countries like France, Spain and even the UK.

As a logical consequence, Germany’s once efficient trains are now a national embarrassment, and its roads, waterways and bridges are in such a sorry state that they are projected to hold back the economy for years.

At the same time, while Germany enjoys a reputation for efficiency abroad, the German state is actually one of Europe’s least digitized and most bureaucratic. For example, while it takes 40 days on average for a firm to receive an operating license in Italy, it takes a whopping 120 days in Germany.

Similarly, construction permits take more than 50% longer than the OECD average. And this, combined how easy it is for locals to block any construction, is making it a real headache for international companies like Tesla to build their factories in Germany.

But, perhaps all of this slow rigidity is to be expected given Germany’s rapidly ageing populations, which is one of the oldest in the world. Something that will not only reduce innovation, it also means that there are less and less Germans to make stuff, increasing wages, which now threatens Germany’s legendary competitiveness.

To make matters worse, Germany’s dependence on Russian gas now means, sky high energy costs, which in turn made means that companies in Germany biggest industrial sector, chemicals are increasingly leaving the country.

Finally, while selling machines and technology to China seemed like a smart business model initially, it might have now backfired as Chinese industries are increasingly threatening Germany’s giants, especially in the car sector.

And, while politicians now increasingly recognize these fundamental problems, two of Germany’s ruling parties are still blocking significant reforms. One the one hand, the Greens are making it much harder for the country to shift away from Russian gas by insisting that the country can no longer use nuclear energy while, on the other hand, the liberal FDP party is so focused on Running the state like a household that it is holding back essential public investment that would keep the German economy competitive.

So yeah, a lot of problems, which made it all the more surprising to me that Dr. Schmieding now insists that Germany is

3 Not the sick man of Europe.

Specifically, he points out that critics, such as the journalists from the Economists, make two key mistakes in their analysis of the German economy.

The first mistake is that they don’t realize that Germany’s current poor economic performance is just a reflection of a recession in manufacturing all over the world. While the U.S. economy is doing really well today, it’s manufacturing sector is actually in recession. Similarly, China’s manufacturing sector is in big trouble. This makes the German numbers look particularly bad for two reasons. The first is that Germany just relies way more on manufacturing that most other European economies. The second is that the German manufacturing sector relies on making the tools and parts for other manufacturing sectors, such as those of China and the United States.

Luckily, the current global manufacturing recession is likely to be temporary as it is largely a consequence of the pandemic lockdowns, when people shifted en mass to buy goods, rather than services, while they were stuck at home. The resulting boom in manufacturing helped the German economy weather the Covid storm in 2020. But, as people switch back to services and massive manufacturing inventories are wound down, it now means the German economy is doing relatively poorly.

The second key mistake that Dr. Schmieding believes Germany’s critics are making is that they focus too much on the problems of Germany’s main export sectors, car manufacturing and chemicals. However, if we look at the stuff that Germany is exporting, we can see that while these sectors are big, the German economy is NOT dominated by them. At least, not in the same way that for example the Russian economy relies on exporting energy.

Next, Dr. Schmieding points out that there are two key advantages that Germany’s economy has today which it didn’t have in 1999. The first is that unemployment is now super low in Germany. This means that if a sector, such as car manufacturing or chemicals does poorly, this frees up workers and might actually improve labor shortages that are now holding back Germany’s Mittelstand companies.

The second key differences with 1998 is that Germany is now one of Europe’s best well positioned economies to invest in itself, given that both its government and private debt levels are far lower than that of most economies. Even better, thanks to Germany’s gigantic trade surplus, it has built a lot of international wealth, which can easily be spent to fund a few years of being less internationally competitive.

Finally, while dr. Schmieding recognizes that some of the core arguments of those betting against Germany, such as its terrible bureaucracy, ageing populations, and reliance on China are valid, he gives some very compelling evidence that they are not as bad as they are made out to be.

So, while he recognizes that success has bred complacency, especially when it comes to the government, he points out that German politicians are well aware of these issues and that they already have been moving ahead with various proposals to reduce its bureaucracy and invest more in crucial infrastructure.

When it comes to Germany’s ageing population, he argues that demographics might not be destiny, as it can be offset by increased immigration from for example highly skilled Ukrainian and Russians fleeing Putin’s brutal regime. Indeed, he points out that while in 2006 Germany’s statistics agency had predicted the population would decline from 82.3m in 2006 to around 80m today, it actually, did the opposite and increased to 84.4 million at the end of 2022 thanks to migration.

Finally, when it comes to the China argument, dr. Schmieding points out that while Germany’s big car companies certainly profited a lot from the Chinese growth miracle, these cars were largely made in China, while the profits went to wealthy Germans that didn’t spend them in Germany. What’s more, while the German Mittelstand profited greatly from supplying machines to a rising China, a shift of factories away from China might actually again benefit the Germans who can now sell machines and tools to countries like Mexico, Vietnam, and Poland, where the supply chains are relocating to.

So, yeah, I thought these were some pretty interesting counter arguments from someone who has studied the German economy for years, and with that let’s now answer the main question.

Is Germany once again the sick main of Europe

with a

No. It is not.

Sure, the Economist made a really convincing case that the German economy is dealing with a lot of problems, and that it can no longer be as complacent as it used to be. But, to call it the sick man of Europe is just a bridge too far in my opinion, given that so many European economies are dealing with similar problems, while they don’t have the low unemployment and low debt levels that Germany has to deal with a changing global order.

But, of course, this can only help it if indeed German politicians wake up to a new geopolitical reality, drastically modernize the state and recognize that a healthy economy needs investment in crucial infrastructure to grow.

But, yeah that is my take, who do you think made the most convincing case? Please let me know, in the comments below or in my private Discord server that is exclusively available for Patrons and Members.