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If you
listen to the news, one thing is certain.
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We begin with breaking news here
in Germany, where the governing coalition
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has collapsed and Chancellor Olaf
Schulz has called for a confidence vote
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in mid-January.
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Volkswagen has issued a warning
that has people wondering
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whether it has reached the end of the road
as an industrial powerhouse.
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Germany's economy is going down the drain.
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And yet here you are
about to listen to an economist on YouTube
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telling you don't worry about Germany's
economy.
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It's going to be just fine and may
arguably even have a very bright future
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ahead of it for five reasons
starting with reason number one.
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Germany's
industry is exceptionally resilient.
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To see why, just zoom out a bit
and you will see that Germany
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has been Europe's industrial base
for well over a hundred years.
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Germany's industry has survived two wars.
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It has survived
splitting up the entire country.
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It survived the stagnation
of the early 2000.
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When Germany,
it was coined the sick man of Europe.
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And it, yes, will survive
this minor downturn as well.
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Why? Well,
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besides the fact that its infrastructure
and knowledge is firmly established,
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the German industry stands out by the fact
that it is highly diversified.
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In fact, the Harvard Complexity
Lab has consistently ranked
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Germany in the top
five most complex economies in the world,
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just below Japan,
but well above the US and even China.
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This means that
if there is a crisis in one industry
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or one particularly large firm,
there are many other areas
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of German industry
that may cushion the blow today.
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This is more relevant than ever,
given that the main problem German firms
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have been dealing with the last couple of
years is a massive skills shortage.
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A skills shortage that sounds pretty bad.
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But actually, let's take a step back
and think about that for a second.
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There are not enough
skilled people in Germany to produce
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what the German firms
can potentially produce.
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But you could also say
that there are just too many highly
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competitive, amazing firms in Germany
for its workforce.
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That is a problem
that many countries would love to have.
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It means that news,
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which would be horrible in most countries
like companies wanting to close factories
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and move them elsewhere,
is actually good news for Germany.
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It is the skills shortage solving itself.
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The skills shortage is pressuring
German wages to go up.
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This causes
some less productive firms like Miele
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and Volkswagen
to move factories elsewhere.
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And while this is terrible
for those people
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losing jobs that they may have loved,
it means that on the scale of the economy,
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a bunch of skilled workers
have just become available to help
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the thousands of other great German firms
that cannot grow without them.
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Sadly, German society
does not yet seem to fully understand
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this is how the economy
is supposed to operate.
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That's the news that Volkswagen may
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keep factories open in Germany
in exchange for a 10% pay cut.
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It was celebrated as somewhat good news.
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It is really not.
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Artificially suppressing wages like that
keeps ordinary Germans
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poorer than they need to be,
and it starves smaller
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German companies of the workers
that they so desperately need.
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Allowing the skills shortage
to solve itself
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may even solve Germany's other big problem
its lack of innovation.
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Indeed, the German press has been alarmed
about how new startups halved
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between 2003 and 2019, and then again
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dropped by another 6% since 2019.
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But then again,
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is it any wonder that the young, talented
Germans are not starting new companies?
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If the skills shortage in the country
is so bad that they have their pick
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of amazingly well-paid jobs
straight out of university.
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So the fact that some of Germany's
most well-known companies are in trouble
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today, that may actually be good news,
as it will help companies and startups
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struggling with the skills shortage
to get ahead.
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Although with Trump back in the Oval
Office, deglobalization is likely
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to continue.
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Germany's firms famously profited
handsomely from globalization
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in the past, selling machines
and advanced goods to China.
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So now, with both China and the US
increasingly hostile to German exports,
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could it be that Germany's industry
is facing a big decline after all?
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No, not necessarily,
because the second reason to be optimistic
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about Germany is that Germany is well
positioned to profit from fragmentation.
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Yes, that's right,
I said fragmentation, not globalization.
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You see, there are hopeful signs
that the globalization will mostly take
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the shape of decoupling between
blocks of countries, but that within
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these blocs, countries will keep trading
quite intensely with each other.
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Even so, the fact that
the rise in globalization is over
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will surely still be bad news
for Germany's companies right. No.
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You see, another way to look at this
is that German companies
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had basically already
completed globalization,
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during which they profited
from selling their technology to China.
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However, by doing so, they created
their own biggest global competitors.
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But now, with Trump
back in the white House, China's
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position as factory of the world
looks increasingly fragile.
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Therefore, other countries
like Vietnam, Hungary and India
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have an opportunity
to become the next factory of the world.
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But to do so,
they will need the latest German machines.
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That is, of course, if it wasn't
for Germany's terrible government
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that previously only pissed off
Trump stifled
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German innovation with too much red tape
and foolishly neglected
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to invest in German infrastructure
when it could borrow at 0% interest rate.
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But here again,
Germany will likely be fine because
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reason number three, Germany's
democracy is working as it should.
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That is, if a government fails
to solve the problems
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that the public wants them to solve
in a functioning democracy.
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They should be voted out.
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Indeed, this is exactly why, while
the collapse of the Schulz government
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may look like a sign of weakness,
I see it as a sign of strength.
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His squabbling government
was not able to fix Germany's problems,
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so its popularity plummeted,
which led to more squabbling
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in the coalition,
which then subsequently collapsed.
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Sure, new elections are messy
and they could go wrong.
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But one thing is clear
the German public is fed up with Germany's
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crumbling infrastructure,
inefficient government, cost
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of living crisis and red tape.
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So there is immense pressure
for the next government
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to actually fix these problems
or also fall.
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And then the Germans can try again.
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That being said, there is also one
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glaring weakness that Germany's
politicians have been too slow
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to address Germany's
dramatic demographic decline.
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A problem that could be so bad
that analysts like Peter Zeihan have said
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it is essentially a death sentence
for the German economy.
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Luckily, though, I'm here to tell you
that Germany will be just fine
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because Germany's demographic decline
is actually quite manageable.
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As you can see here, Germany
is facing a big decline in its working age
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population and a corresponding rise
in its population of elderly.
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And as you can see here, Germany's
population decline is more drastic
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than it is in countries
like France and the United States.
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However, it is far less dramatic
than it would be in a country like China,
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where the working age population
will inevitably fall below the number
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of elderly already in 2075.
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But not only will China's working
age population fall faster
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than that of Germany, the UN is also far
more confident in the fact that it will,
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given that the shaded area,
which is the confidence interval,
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is much smaller for its China projections
than for Germany.
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Why is that the case?
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Well, the reason is simply
that in the past, Germany has seen some
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pretty big migration waves that
have caused its population to increase,
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even though it had been predicted
to decline due to low fertility.
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This could very well happen again.
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Sure, there's very little political
appetite for that right now,
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but maybe in 20 years when labor shortages
are much more extreme,
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it could very well be that Germany again
welcomes with open arm
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immigrants from the East
or even the South.
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And even if that does not come to pass,
this chart of Japan's GDP per person
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in terms of purchasing power, shows
that an advanced,
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democratic and well diversified
economy can age gracefully,
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growing more slowly, sure,
but growing nonetheless.
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And unlike Japan, Germany's
government enters its demographic
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decline phase with exceptionally low debt,
meaning that the country has
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an exceptional amount of financial room
to support a rapidly aging population.
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Of course, now you may say,
but even when corrected
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for this demographic decline,
Germany is currently right now,
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performing much worse
than countries already aging faster.
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Like, for example, even Italy.
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Which brings us to my final argument,
which is that
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Germany's
current problem is only temporary.
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As you can see here, Germany is unique
amongst the Western economies
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in that manufacturing still accounts
for a large share of its GDP.
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This means that the German economy
is exceptionally exposed to changes
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in people's preferences
for either goods or services, preferences
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that are usually pretty stable,
except for, of course,
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during the pandemic,
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when the world could not spent
that much on services anymore
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and started ordering way more goods,
causing a global manufacturing boom.
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Not coincidentally,
a Germany's economy did exceptionally
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well during the pandemic.
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But now, with the pandemic well behind us,
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the global manufacture sector
is in recession.
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This also affects the United States,
but the German economy is just feeling it
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much more intensely because it is still
exceptionally dependent on manufacturing.
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So, of course,
where Germany did better than others
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in the aftermath of the pandemic,
it is now doing worse.
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Luckily, the upside
is that when global manufacturing
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inevitably recovers,
Germany will likely do so as well.
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So even though the news about Germany's
seems pretty bad right now,
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and some of these problems, like
demographics will likely lead to lower
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Japan style growth in the future,
I think that Germany will be just fine
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because number one,
its industry is very well diversified too.
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It is well positioned to actually profit
from fragmentation.
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Three it will get a new, potentially
much more competent government soon.
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For its relatively well-positioned
to deal with an aging population and five
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global manufacturing will recover
from the Covid aftermath soon.
00:11:03
Although, just to be crystal clear,
what I've done here
00:11:06
is essentially presented to you
an opinion,
00:11:08
hopefully one with convincing arguments,
but ultimately, any economic
00:11:12
opinion about the future should be taken
with a large grain of salt.
00:11:16
Given that it depends for a large part
on the decisions
00:11:19
of politicians whom are unpredictable.
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For example, if China invades, so
on, or Trump has a fallout with Germany,
00:11:25
many of my optimistic arguments
could become far weaker overnight.
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But of course, it's also many things
that can happen that make my arguments
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stronger.
00:11:35
In any case, therefore,
00:11:36
I always recommend comparing opinions
from economists like me
00:11:40
with those of multiple credible sources,
such as, for example, today's sponsor,
00:11:45
The Economist for the skeptical case
about Germany's economy.
00:11:49
I heartily recommend this article
about how Volkswagen's problems
00:11:54
could be indicative of a broader
trend of deindustrialization in Germany,
00:11:59
followed up by this article
about how many of its problems today
00:12:03
are actually a consequence
of Angela Merkel's policies.
00:12:07
And finally, to better understand
Germany's current political crisis,
00:12:10
I recommend this article to read up about
the fall of Germany's fractious coalition
00:12:16
for its extensive coverage of economics
as well as politics.
00:12:20
Is exactly why I'm excited to share
that money and macro viewers
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for independent thinkers.
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After all, while they have taken
a much more pessimistic stance on Germany,
00:12:47
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Whether you prefer the print edition
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Indeed, you heard it, don’t worry
my dear friends from Germany
