Holger Schmieding: “Germany is the big disappointment of the year”

interview

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Mr Schmieding, last autumn you predicted a recovery in the German economy for the summer of 2024. There is little evidence of this now. What was the reason?
The German economy is actually the biggest disappointment of the year, especially in comparison with other western industrialized countries. One reason for this is that global trade is not getting going – I had expected a slight resumption here. Instead, China’s weakness is more pronounced than expected: the country is doing less for domestic demand and is aggressively trying to gain market share abroad by selling its surplus production at cheap prices on the global market. In addition, we continue to have a high level of political uncertainty, particularly in energy policy – this is contributing to companies being reluctant to invest.

But energy prices have now returned to normal levels, haven’t they?
Yes, energy prices have calmed down, consumers are seeing prices fall slightly compared to last year. Overall, consumers’ income situation is at least as good as expected, and real incomes are rising. But overall economic concerns are greater than expected, which means consumers’ propensity to spend is lower than expected. If the news is not good, consumers also spend less of their money. And then there is another factor that I underestimated a year ago.

Namely?
The shock over the rapid rise in energy prices and the uncertainty over the heating law are deeper than expected. In other words, they still shape behavior, even though the issues have actually been dealt with to a large extent and the heating law, for example, never came into force. But the shock, anger and uncertainty remain.

What about Germany’s structural problems, what role do they play in the current situation?
We do indeed have significant structural problems. But the counter question is: who doesn’t? Compared to other countries, we cannot say that we have fallen behind dramatically. A small part of the structural problems is simply a reflection of our success to date. We have one of the best labor markets in the western world, a high employment rate and employment that is continuing to rise. And unfortunately, this is also leading to a shortage of skilled workers; our labor market is empty. This brings with it completely new problems, for example, there is a shortage of workers in the public sector. This means that the processing time for applications is longer and this itself becomes an obstacle to growth for companies.

There are many complaints about the economic policies of the traffic light government. Can you find anything positive?
The fact that the Supply Chain Protection Act is being reduced to the European minimum level is good news. The Skilled Immigration Act is not entirely straightforward, but it is a step in the right direction. And the government’s latest growth initiative has also set some positive things in motion. But it will take time for this to take effect. You only notice structural changes after a few years. If the order from China stops coming, you notice it immediately. This government has set the right course in many areas, but it has not communicated this well.

How could this be changed?
I wish some people would shut up a little more often; if we heard less about how decisions are made in the political process and more about what the content of a decision is. In the debate, the argument on the way to a result takes up more space than the result itself. And then the results are not presented well enough; there is a lack of a good communicator.

Would it take some kind of new agenda or jolt moment to wake the country up?
The situation is not comparable to the time before the Agenda, when there was mass unemployment. There are a number of structural problems, from over-regulation to a shortage of workers. And there are many small adjustments to solve these, not one big switch that can be turned. The government is now turning many adjustments, but because of the debt brake, it cannot do what other countries can do – such as simply putting more money into public services or lowering corporate taxes.

However, you will not find a political majority in this country for a reform of the debt brake.
It will happen in a year.

Really?
You can quote me on that. I would bet a lot that a CDU-led government – whether Green or SPD – will first modernize the debt brake. It will not abolish it, but will create more scope for investment, as the vast majority of economists are demanding.

So why doesn’t this happen sooner? Time is of the essence.
The CDU cannot do well today because otherwise the FDP would be peddling the issue. And the FDP cannot move because otherwise it would lose one or two percentage points of its voters to the CDU – those people who are really interested in the debt brake and who base their voting decision on it. They are the only ones who matter in this interplay between the CDU and the FDP. But that is why none of these parties can back down from their demands at the moment. But that will all change after the next federal election.