The sick man of Europe
The sick man of Europe
2024 has been a year dominated by world politics, with elections taking place this year in countries that are home to almost half of the world’s population - more recently in the UK and US. However, while the world has been watching events unfold in Washington, Germany has been quietly going into political meltdown.
Auf Wiedersehen, Pet
In Germany’s federal electoral system, a single party or parliamentary group rarely wins an absolute majority of seats in the Bundestag (German parliament), and thus coalition governments, rather than single-party governments, are usually the expected outcome of a German election. The current coalition, which has been in power since 2021, have struggled to see eye to eye on any policy and have seemingly staggered from crisis to crisis.
Germany is expected to hold a snap election on 23rd February 2025 following the collapse of the current governing coalition. Last week, following weeks of internal tensions on how to stimulate Germany’s ailing economy, German Chancellor Olaf Scholz of the Social Democrats dismissed the Finance Minister and coalition partner, Christian Lindner of the Free Democrats. The proposed February election date will undergo a series of steps prior to being confirmed, but this has been reported as largely being a formality. The next step is for Scholz to call for a confidence vote on the current government on 16th December. If, as expected, he loses, the election date will be formally proposed to President Frank-Walter Steinmeier. Scholz will then have 21 days to dissolve the Bundestag.
There is hope that once the vote of no confidence takes place it will bring more certainty to an economy that has narrowly avoided a recession. There are already calls for the new government to suspend Germany’s debt brake, allowing more fiscal leeway in the 2025 budget and more government borrowing to take place as a result. The debt brake was introduced in 2009 by the Merkel cabinet as a constitutional rule that limits the federal government’s budget deficit (to 0.35% of Gross Domestic Product) and the amount of debt it can issue. The debt brake was suspended as a justified response to the national emergency caused by the Covid pandemic in 2020 but was reintroduced earlier this year.
The ‘Sick Man of Europe’
The UK was labelled ‘the sick man of Europe’ in 1970 by foreign press and commentators due to industrial strife and poor economic performance as compared with other European countries. This phrase may now be applicable to Germany, which despite being Europe’s most powerful economy has more recently become a drag on European growth. The saying goes that, “when Germany sneezes, Europe catches a cold.” Germany has experienced a period of stagnation in the post-Covid years, with no real growth (as measured by Gross Domestic Product – GDP) from Q4 2019 to Q3 2024. Surprisingly, the wider European bloc has managed to maintain positive output growth of nearly 1% over the same period, particularly due to the robust performance of southern European economies.
Real GDP (annualised, %)
Source: Artorius, Bloomberg
As we know, British people are quick to lament UK train operators but recent dissatisfaction with Germany’s famous Deutsche Bahn would provide Brits with stiff competition. As someone who visited Germany over the summer, I was looking forward to experiencing the legendary punctuality of German trains, but my weeklong journey was a lesson in patience. In an unprecedented move, Swiss transport authorities banned Deutsche Bahn's unreliable 'high-speed' trains from their country last year. Whilst we are certainly not in a position to criticise anyone else in this space, for Germans this is no trivial matter, symbolising the pressures facing their economy and indicating a wider malaise across the country.
A country which specialises in industry has understandably faced struggles in the face of high interest rates and high energy prices. This has only been exacerbated by Russia’s invasion into Ukraine (due to their overreliance on cheap Russian energy), a global manufacturing downturn and Chinese dominance in the sales of electric vehicles (EVs). If Donald Trump’s policies on tariffs are to be believed, this will only make matters worse for an economy reliant on the production and export of motor vehicles. Cars are Germany’s top export, and the US is its biggest export market. Not only has China started to displace Germany globally in this space but this has also reduced the amount of EVs China imports from Germany (currently ranking as Germany's fourth largest export market). Many western politicians argue that the playing field in this industry is not entirely level, hence the eagerness to introduce the pending European (and US) tariffs for Chinese EV imports. German motor vehicle production has failed to recover to pre-pandemic levels, with only 4 million vehicles having rolled off production lines in 2023. Before the pandemic this figure averaged 5.5 million; production volumes have been running well below this figure for six successive years.
Passenger motor vehicles produced in Germany
Source: Artorius, Bloomberg
Nevertheless, there are other factors at play in Germany’s recent decline, specifically the level of productivity growth, which has been sluggish, and, broader structural questions regarding their manufacturing and export-driven economic model.
Investors will be keeping a close eye on affairs in Germany over the coming months and years to see whether a new government can help restore its economy and become the beacon of Europe it once was. As for German commuters, Deutsche Bahn have announced plans to upgrade their aging infrastructure. Less patient travellers may not be holding their breath to see if services improve as a result, but we are keeping an open mind about the outlook for the stagnant European economic locomotive.
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In other news
Markets have reacted positively to Trump’s appointment to the White House as investors have flocked to US stocks. It has very much been ‘America first’ in terms of outperformance versus other markets since the US election, and this is a story investors have been familiar with this year. On average, the S&P500 closes at an all-time high 18 times each year, but this has happened 50 times so far in 2024.
The inflation figure in the US came in at 2.6% earlier this week which matched expectations. Markets are now firmly pricing in a 25-basis point cut at the next month’s Federal Reserve meeting. Meanwhile, the yield on 10-year Treasury bonds in the US have pushed up to 4.5%, potentially putting pressure on equities if they were to rise even further, which could herald the end of the post-Trump election euphoria.
Yuval Peshchanitsky
Portfolio Analyst
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