Germany's Economy Leading Europe Sounds 'Warning'... Rising EU Crisis Concerns

Concerns Over Slowdown in Germany’s Growth Engine Economy
Downward Pressure on European Economy... Will EU Cohesion Weaken?

[Image source=Yonhap News]

[Asia Economy Reporter Kim Hyunjung] As concerns grow over a significant slowdown in Germany’s economy, which has been leading the European economy, downward pressure on the Eurozone economy is intensifying. If the economic crisis deepens, it is expected to lead to political instability, including a weakening of the European Union (EU)’s cohesion.

According to the Organisation for Economic Co-operation and Development (OECD) and others on the 17th, Germany’s economic slowdown stands out among major countries worldwide this year. Last month, the OECD revised Germany’s economic growth forecast down by 2.2 percentage points from 4.1% to 1.9%. This is the largest downward adjustment among the G7 major countries.

Contrary to initial expectations of a robust recovery, Germany’s economic recovery after the COVID-19 pandemic is lagging behind other European countries.

In particular, Germany’s trade balance turned to a deficit for the first time in over 30 years since 1991. In May, exports decreased by 0.5% compared to the previous month, while imports increased by 2.7%, resulting in a trade deficit of 1 billion euros. This trade balance significantly worsened compared to the previous month (3.1 billion euros surplus) and the same month last year (13.4 billion euros surplus).

Within Germany, voices are emerging warning that the German economy is facing its most severe crisis since reunification and that the crisis could be prolonged.

Above all, the economic sanctions resulting from the invasion of Ukraine have made it difficult to receive natural gas supplies from Russia, which is considered the biggest negative factor. Doubts have been raised about the restart of Nord Stream 1, and concerns are growing that if related supplies do not increase, Germany could face a gas shortage within this year. Germany has been implementing a gas emergency plan following Russia’s invasion of Ukraine and the ensuing war, and at the end of June, it upgraded the alert level from early warning (Level 1) to emergency warning (Level 2).

If a gas supply shortage materializes and a critical alert (Level 3) is issued, it is expected that companies using gas as fuel or production material will be significantly impacted by the implementation of energy rationing. Some companies are reportedly considering relocating factories to other countries in preparation for energy shortages.

Germany has so far overcome economic crises through exports, but due to global economic slowdown and recession, ongoing supply chain disruptions, and other factors, export sluggishness is expected to continue. In particular, policy tightening in the United States and Europe raises concerns about a decline in external demand due to the global economic growth slowdown.

Given Germany’s increasing dependence on trade with China, renewed lockdown measures and economic slowdown in China are expected to exert downward pressure on the German economy.

Considering these factors, the likelihood of a slowdown in Germany’s economy, which is the growth engine of the Eurozone economy, appears very high, and in such a case, downward pressure on the entire European economy is expected to intensify. Germany accounts for about 29% of the Eurozone economy. Taking into account the poor economic conditions in other parts of Europe due to the resurgence of COVID-19 and the prolonged war, the situation could become even more serious.

This worsening economic outlook is also expected to act as a political risk that weakens EU cohesion. Within Germany, opposition to supporting Southern European countries is growing, which could make it difficult to manage the risk of fragmentation arising during the European Central Bank’s (ECB) monetary tightening process.

This situation is already intensifying in Italy. Italian Prime Minister Mario Draghi announced his intention to resign after the largest party, the Five Star Movement (M5S), boycotted the Senate confidence vote linked to a 26 billion euro livelihood support bill. The Five Star Movement, led by former Prime Minister Giuseppe Conte, has clashed with Prime Minister Draghi over not only livelihood support measures amid the energy crisis and rising prices but also military aid to Ukraine.

Since Germany plans to reduce public spending from next year under the ‘debt brake’ regulation, it is unlikely to welcome fiscal support for Southern European countries. Additionally, as Eurosceptic parties gain strength across Europe, coordination among EU member states on major issues such as refugee and Ukraine policies is expected to face difficulties.

With increasing refugees due to the Ukraine war and food shortages in the Middle East and North Africa, the absence of a cooperative strategy could trigger divisions among member states. Furthermore, as the Ukraine war prolongs amid worsening economic forecasts, fatigue is accumulating, potentially expanding conflicts among member states over approaches to the war.

This content was produced with the assistance of AI translation services.