Does Germany’s economy need more than a cup of coffee?

Publications 4 February, 2024 17:23

"I'm afraid that we will actually miss out on the future, because we're taking too little risks."

Verena Pausder is a successful German entrepreneur who is clear about where she thinks the economy is going wrong.

This week, it was confirmed that Europe's biggest economy shrank by 0.3% last year.

Whilst the country avoided recession - thanks to a statistical quirk - most economists think Germany will be in that position when the numbers for the first part of this year are published.

Germany's growth is being held back by the twin shocks of the energy crisis, caused by the war in Ukraine, and higher interest rates.

There are also long-term structural issues such as ageing infrastructure, a labour shortage and the cost of tackling climate change.

At January's World Economic Forum in Davos, Germany's finance minister Christian Lindner denied these problems made Germany the "sick man" of Europe.

"After very successful periods since 2012 and these years of crisis, Germany is a tired man after a short night, and the low growth expectations are probably a wake up call," he said.

"And now, we have a good cup of coffee, which means structural reforms, and then we will be continuing to succeed economically."

For Mrs Pausder, who is chair of the German Start-up Association and founder of the kids app developer Fox & Sheep a "change in mindset" is what's needed.

"I think we're really good at kind of listing all the negative stuff and what we're not good at. And I think what we're forgetting is what we actually get done."

She points out that despite the downturn there were still 2,489 start-ups founded last year and the country is making good progress in the switch to green energy.

Younger generations are more willing to take risks, she says. But as things stand, Germany's pension funds - which are worth more than $700bn - "are not allowed to invest into asset classes like venture capital and private equity".

"We're used to these big brands of the past, and we want to do everything to have them in the future. And sometimes we put too much energy into conserving what we have [rather] then to investing in the new things."

Those big brands have traditionally sold huge amounts of cars, machinery and pharmaceuticals abroad, driving economic growth and influencing government policy.

However, foreign demand "has been declining for many, many months", says Dr Klaus Deutsch, the chief economist at the German Federation of Industries (BDI).

Exports to non-EU countries were down 9.2% in December compared to the same time a year earlier.