Germany is stumbling towards an uncertain future

Dr Oliver Hartwich
26 July, 2022

It is summer in Germany, and traditionally that is not good news. Or rather, it is not a good time for news.

When non-stories suddenly dominate the front pages in the UK, they call it ‘the silly season’. The German equivalent is ‘the summer hole’, which is an apt term for the hot issue of this year: a party song called Layla.

Layla is a bizarre chart-topper for a country that once regarded itself as a Kulturnation. There is a diametrical difference between Layla’s musical quality and Beethoven’s, and the song’s lyrics insult the language of Luther and Goethe. The little content they contain is crude, rude, and disgusting. This is no wonder because the song is about a brothel and its lead employee, Layla (“She’s prettier, younger, hornier / La-la-la-la-la-Layla”).

Now, Layla should not be worth mentioning, least of all to an international audience. But its tasteless content has led to its banning at some folk festivals and radio stations. And that, in turn, has created a debate on freedom of speech and sexism.

From there, the story is as predictable as if a tabloid had written the script. Well, perhaps it has.

If, like me, you follow Germany’s news, listen to German radio and read German papers, you might have got the impression over the past weeks that it is indeed an ordinary German summer, replete with its usual ‘summer hole’ theatre.

But the irritating thing about the Layla exercise in faux outrage is that nothing else about this German summer is normal. Not even remotely. Nothing is good either, apart from the weather.

For Germany, 2022 could go down in history as a tipping point. It is the year in which old certainties were shattered and the country was forced to pay the price for mistakes made in the past.

Despite its many international and economic crises, the first two decades of the 21st century were good to the Germans. Thanks to labour market and social security reforms undertaken in the final years of the Schröder government from 2003, the German economy became a powerful force once again.

Yes, the Global Financial Crisis and the euro crisis briefly bothered the Germans, but they recovered more quickly than most. And actually, the euro troubles caused by Greece and others even helped boost Germany’s exports. How practical to have a currency with an exchange rate that reflects Greek troubles rather than your own exporters’ strength.

Crises are things that happened to other countries but not to Germany. Or at least so the Germans thought. With their strong car industry, their budget surpluses and their political influence over the rest of Europe, they felt invulnerable.

But after two years of Covid, with the Russian attack on Ukraine, and now a surge of inflation across Europe, all these old certainties have ended.

Germany’s problems are not all new. Most of them have been building for years. The new thing is they are all simultaneously coming to a head – and are now reinforcing each other.

Take energy policy, for example. Germany’s energy situation has been a mess for a long time. Consecutive German governments have sought to decarbonise the economy since the late 1990s. After Fukushima, the Merkel government also accelerated the phasing out of nuclear power. As a result, Germany’s baseload became increasingly dependent on cheap Russian gas.

Russia’s energy exports to Germany decreased after the outbreak of the Ukraine war, while the Germans are also trying to break their decades-long dependence on Russian coal, oil, and gas.

As a result of these developments, German energy prices have skyrocketed. At the same time, the European Central Bank’s loose monetary policy triggered an inflation outbreak. And that untreated inflation outbreak, meanwhile, has caused a plunge in the euro’s exchange rate.

This was a triple whammy for Germany. Imports of energy became more expensive, even more so when they are priced in dollars. The Germans were also forced to pay higher import prices and receive less for their exports as a result, which negatively affected their terms of trade. The result is that Germany just recorded its first trade deficit in more than three decades.

Germany’s economic woes do not end there. For years, its celebrated car industry, which employs (directly and indirectly) one in seven Germans, has been the main engine of growth. But it did not anticipate the speed of the transition to alternative energies, and Tesla’s market capitalisation is now greater than all of Germany’s major car manufacturers combined.

Meanwhile, the German labour market remains disrupted after two years of Covid. Those industries most affected by Covid lockdowns and restrictions downscaled so much they are unable to restart now that a ‘new normal’ has emerged.

Germany is not the only country experiencing disruptions in the labour market. In Germany, however, demographic changes complicate things. The country has one of the world’s oldest populations and is projected to lose seven million working-age people by 2035.

The German labour market has been disrupted on many levels as a result. Increasing energy costs, staff shortages, and inflationary conditions all reinforce each other. A toxic cocktail threatens to derail the economy.

Derailing is an appropriate keyword. During all this, Germany’s infrastructure is crumbling and bursting. Nowhere is this more visible than in the case of Deutsche Bahn (German Rail).

Suffering from underinvestment in rail infrastructure, the company has been in a deplorable state for years. But when, because of the energy crisis, the Government tried to get more people to switch to public transport by offering monthly rail and bus passes for just €9 ($14), the extra demand brought the rail system to its knees.

The economic situation in Germany does not look good, to put it mildly. Moreover, Germany’s defence capacity must be rebuilt after decades of neglect. There are signs of fragmentation and polarisation in the political system. And consequently, the population realises that the good years are over and Germany’s future could be unpleasant and uncertain.

Perhaps, in a weird way, that explains the furore around that Layla song. Instead of facing up to the many painful realities, the Germans are still clinging on to some weird rituals – such as filling their ‘summer hole’ with a staged debate when, actually, there is no shortage of real crises that demand urgent attention.

Stay in the loop: Subscribe to updates