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Germany needs a new growth model by Sander Tordoir and Shahin Vallée, 30 June 2023 Berlin should fundamentally reset its growth strategy, rather than clinging to a failing model of industrial export corporatism. During the past decade, Germany’s export-driven economic model underpinned its strength on the European and international stage. The country accumulated a large external surplus and used its deep pockets to cement its status a leading development aid donor, amplify its voice in the Bretton Woods institutions and, albeit hesitantly, backstop the eurozone and its bailout funds. Europe’s largest economy has also proven to be more adaptable than previously thought and weathered the pandemic and the Russian gas cut-off better than widely anticipated. But these shocks should not hide the fact that the German economic engine is facing structural headwinds, that are steadily weakening the country as geopolitical tensions mount. The exports that powered growth in the 2010s, propelled by Asian demand for German cars, machinery, and chemicals, ran out of steam in 2018, amidst former US President Trump’s trade wars, growing Chinese production and ‘Dieselgate’, with car-makers abruptly divesting from diesel vehicles after they had tampered with European Union emissions tests. Today, the German economy is roughly the size it was in 2019, as is its industrial output. Over that period, France added more than twice as many jobs as Germany, albeit many under apprenticeship schemes. The US economy, meanwhile, grew by 5 per cent and has returned to its pre-pandemic expansion path. Moreover, German growth is expected to lag behind the eurozone average until 2025, putting it closer to Brexit Britain than its peers. Despite this, German policy-making does not seem set on long-term growth. Some in the governing traffic-light coalition of of Social Democrats (SPD), Greens, and pro-business Free Democrats (FDP) want to pursue a new form of industrial policy that uses lavish subsidies both to boost green tech and to limit the effects of rising industrial energy prices. Others clamour for higher interest rates and budget cuts. But the chokeholds on German growth stem from a deeper interplay between international dynamics and a domestic policy which are unfit for this decade. Germany needs to embrace a new growth strategy to avoid a further drift down the economic league table. For decades, Germany’s economic strategy was either agnostic to geopolitics or pursued ideas like ‘Wandel durch Handel’, reducing political tensions through trade. Trade deficits prompted German support for CER INSIGHT: GERMANY NEEDS A NEW GROWTH MODEL 30 June 2023
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