Germany’s Economic Decline and the Fate of The Eurozone

Ever since the Eurozone was formed, it has depended on the economy of Germany. Germany is the strongest economy amongst all the member nations of the Eurozone. The European Union has blindly relied on this economic strength to be able to combat crisis like Greece and Italy that have routinely been disrupting the operation of the Eurozone. Germany has also been instrumental in providing bailout packages to the above mentioned weaker countries and providing them with the time and support required to recover.

Analysts have always been concerned about this arrangement at the Eurozone. A couple of strong countries led by Germany have been rescuing everyone else. This raises the question about how will the Eurozone function if something happens to the German economy. The problem is that now in 2019, this is no longer a hypothetical question. The cracks in the German economy are visible, and the future of the Eurozone is at stake. In this article, we will have a closer look at the possible impact that a decline in Germany’s economic power will have on the Eurozone.

Is The German Economy Faltering?

2018 was a difficult year for the European behemoth. The German economy has seen its exports decline in this year. This is largely because of the threat of a trade war that engulfs the Eurozone. German exports have started dwindling whereas the imports have started increasing.

Since most goods produced in Germany are exported, falling exports have had a huge impact on the local economy as well. The German industrial output fell by about 2%. This may not seem much, but it needs to be looked at in context. The German output has been steadily growing year on year after the 2008 crisis. This year, the output did not grow but instead went into a decline causing fears that a German recession may be around the corner!

Also, this dip in manufacturing output does not seem to be temporary. Forecasts show that the industrial output is likely to fall further. Surveys conducted by various media houses state that the small and medium enterprises in Germany believe that the German economy will go into a moderate recession in the near future.

Why has The Problem Will Become Worse?

There are a lot of structural changes which are taking place in the German economy. These structural changes will make it impossible for the German economy to recover for some time.

  • For instance, after keeping the interest rates near zero for almost a decade, the European Central Bank will now be forced to raise interest rates sharply. The bank will be under external pressure to raise rates since the Federal Reserve is already doing so. Hence, the favorable monetary situation which the German companies have been operating in for the past decade or so may no longer be present. When interest rates rise, the cost of production becomes much more expensive, and hence exports cease to be competitive.
  • Germany is also facing problems on the demographic front. At the present moment, there is a severe scarcity of skilled workers in the country. Surveys indicate that it takes more than 100 days to fill the position of a skilled labourer. The tech workers are the hardest to find. Studies undertaken by Germany have predicted that there is going to be a shortage of 3 million skilled workers in Germany by the year 2030.
  • Also, the German economy is largely dependent on manufacturing. Despite so many years of progress, Germany has not been able to create a substantial service sector. Also, the tax systems in Germany are not favourable for new companies to set up shop there. Hence, until the manufacturing sector rises again, it is likely that the German economy will continue to remain subdued.

Effects on the Eurozone

  • France and Germany were known to be the main economic drivers of the Eurozone. The yellow vests protests in France has brought global attention to their economic problems. As the economy of Germany also fumbles, the European Union has revised it’s growth rates. The economy expects to grow at about 1% which close to 50% of the 2% average growth that the region has been recording in the past.
  • Germany and other Eurozone countries have taken up a large number of migrants from the Syrian crisis. As such the costs of rehabilitating these refugees and providing them with jobs and a decent standard of living are also weighing down on the German economy. The failure to rehabilitate these refugees will lead to crime and other adverse circumstances.
  • German banks such as Deutsche Bank and Commerzbank have been providing financing to all major projects and debt issues in the Eurozone. Many critics claim that this funding to the Eurozone will end up causing the downfall of these institutions themselves. It will be interesting to see how Eurozone is able to generate enough credit in the absence of these institutions.

The bottom line is that Germany has been a pivotal force which has helped keep the Eurozone strung together. For some reason, if the Germany economy were to collapse, the domino effects will be felt all over Europe.

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