The latest reading of the PMI index for manufacturing in Germany (increased to 50.7 points from 49.1 points in January) brought hope to our western neighbor after months of bad data and gloomy forecasts. An indicator that shows the mood of responsible managers for purchases at manufacturing companies, has finally rebounded, raising questions about a possible recovery.
However, the Onet Morning Financial guest cools down his enthusiasm. – However, I would like to see something more lasting – says Dr. Konrad Popławski, economist and coordinator of the Economic Connections in the Region project at the Center for Eastern Studies. He reminds that the German economy “has basically been stagnant for five years and even has periods of recession” and she still hasn't gotten out of this “loop”.
The economic situation across the Oder is increasingly compounded by structural problems: underinvested transport and energy infrastructure, delays in the digitization of administration and business, as well as energy costs that are among the highest in the world. In such a situation, a single one is better the PMI reading is more of a “swallow” that does not make spring, rather than the beginning of a sustained growth cycle.
Expensive electricity and too short a fiscal blanket
The government in Berlin is trying to stimulate the economy with greater public spending and announces an investment impulse. This is both about infrastructure and supporting the energy transformation and the industry of the future. — The state is trying to stimulate the economic situation a bit through public investments. This is the only thing you can do for a while. Germany also does not have a rubber budget and the question is whether this will bring lasting changes, emphasizes Dr. Popławski.
In practice, this means a dilemma: how to simultaneously maintain the competitiveness of an industry that is struggling with record high energy prices, and not turn conservative fiscal policy upside downj, deeply rooted in German economic culture. High electricity and gas bills become a real drag for companies, especially in energy-intensive industries, which have so far been the strength of German exports.
See also: Terrible data for the German economy. The results surprised experts
Deregulation on the other side of the Atlantic
Another challenge pointed out by the OSW expert is the too slow deregulation of new economic sectors in Germany and the entire European Union. – New industries are not developing because it is much easier, even if you are a startup, to go straight to the United States – notes Dr. Popławski. This is where young companies find a combination of three key advantages: market scale, better access to capital and more flexible regulations, at least at the early stage of development.
Europe, on the other hand, often “prides itself” in regulating new technological areas in a “miraculous way” very quickly and in detail. The effect can be the opposite of what was intended: innovative industries – from fintech to green technologies – often develop faster where the legislator gives them more space for experimentation. As a result, this risks consolidating the role of Germany and the entire EU as a supplier of precise standards, but not necessarily the most important innovations.
The trap of dependence on China
According to Popławski, the German economy has two paths – either a fundamental change in the economic paradigm or continued stagnation.
However, at the heart of Berlin's dilemma today is its export-led economic model. — If Germany does not reflect and does not change this model of excessive openness of the European economy, i.e. excessive involvement in trade agreements, especially with China, it will be very difficult – warns Dr. Popławski.
Over the years, German companies have helped build China's industrial power by investing capital, technologies and know-how in the sectors in which they were strongest – from the automotive industry to the machinery industry. Today, it turns out more and more often that a competitor raised in this way becomes a rival on global markets, including in Europe itself.
Germany is therefore at a crossroads: on the one hand, it remains strongly dependent on the Chinese sales market and the network of factories in the Middle Kingdom, and on the other, it feels the effects of the mass inflow of cheap products from China to the EU market. – We see what a tsunami this is, how much it undermines the competitiveness of many industries – says the OSW expert. He adds that the problem is also increasingly noticed by Polish entrepreneurs, including: in such specialized sectors as glassworks, where Chinese competitors appear in niches previously considered difficult to master.
Between Washington and Beijing
The context of Germany's economic problems goes far beyond Germany itself – it is taking place against the backdrop of growing rivalry between the United States and China and the redefinition of global order. In Europe, the question is increasingly being asked whether America, in the face of growing debt and political tensions, is not withdrawing from its role as the guarantor of the current economic system.
Dr. Popławski does not agree with the thesis that the US is “ceding ground”. – America is not giving up the field, only it would like some systemic and economic correction – he argues. In his opinion, the sudden changes in American policy – from tariffs to pressure on allies – should be read as a signal that “they are no longer able to maintain the world system in its current shape.” In other words: Washington expects that other participants in the global system, including Europe, will shoulder a larger share of the costs of maintaining it.
This can be seen, for example, in the discussion about the division of security responsibilities, but also in commercial and technological disputes. Customs duties and other instruments of market protection against unfair competition become a symbolic manifestation of this phrase. “Either everyone will commit to correcting it together, or it will fall apart because we simply can't cope any longer,” the OSW expert summarizes the logic of the American approach.
A lesson for Europe and Poland
For Berlin and Brussels, this means the need to think about an economic strategy that goes beyond the simple “more exports” model. Europe must build its own technological capabilities to a greater extent, invest in research and development and industrial cooperation within the Union, not only counting on favorable trade conditions from external partners.
This, in turn, challenges the German model, which for decades has been based on cheap imported energy, extensive sales markets and relatively small military expenditure. Now the economic calculation includes security costs, geopolitical risks and the need to build our own supply chains in key sectors such as semiconductors, energy and defense technologies.
The change in the exchange rate in Germany will remain closely watched in Poland, not only because our western neighbor is our main trading partner. The condition of Polish exports will largely depend on the pace and quality of the German transformation, especially in industries strongly connected to German value chains.
“We won't go any further this way”
In the opinion of Dr. Konrad Popławski, the current model of globalization, in which Germany is at the center as the European export leader, is reaching a wall. Europe cannot continue to base its strategy solely on exports and the hope that liberal trade will in itself guarantee prosperity and security.
— Europe in particular must take greater responsibility for its security and focus not only on exports, but also on developing technology in Europe and on technological cooperation – sums up the OSW expert. “We won't go any further this way,” he adds.
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