Explanation: The next German government faces three major economic challenges

BERLIN, Oct. 5 (Reuters) – Chancellor Angela Merkel has led Germany through many crises over the past 16 years, but she has also left a mixed legacy and failed to address some deep structural issues of the largest economy in Europe.

Despite a “golden decade” of uninterrupted growth and budget surpluses, most economists agree that Germany has neglected its public infrastructure and has invested too little in digitization.

The Ifo Institute predicts that the economy will grow by 5.1% in 2022, the highest rate since the economic boom of the early 1990s after the reunification of Germany.

The exceptionally strong growth outlook is mainly due to the recovery and catch-up effects of the COVID-19 pandemic. But beneath the shiny surface, things seem less bright.

If Germany is to avoid falling further behind in the coming years, the next coalition government must address these three challenges:

DIGITIZATION

Under Merkel’s leadership, Germany has fallen further behind in terms of digitization. This is the conclusion of a poll by the European Center for Digital Competitiveness based in Berlin published in September, shortly before the elections.

Germany ranked 18th out of the group of 20 major industrialized and emerging countries (G20), with only Japan and India doing worse.

The government’s goal of providing fast Internet access via a national network is far from being achieved. There are still too few fiber optic cables, especially in rural areas.

Germany is also lagging behind in the expansion of 5G mobile communications, slowing small and medium businesses in some areas.

Finally, the country lacks computer specialists. According to the Bitkom industry association, 86,000 IT expert positions are currently vacant. Seven in ten companies complain about a shortage of IT specialists, and 60% expect the situation to worsen in the coming years, Bitkom said.

CHIP SHORTAGE

The powerful German auto industry is struggling to ramp up production in the wake of the coronavirus crisis due to a lack of semiconductors and other components.

While automakers and suppliers rely almost exclusively on chips from just a few manufacturers in Asia and the United States, supply chain disruptions have revealed an Achilles heel in Deutschland AG’s business model.

While Germany has prospered through globalization, the global network of supply chains that energized its economy is now proving to be a critical weakness. Read more

A record 77.4% of industrial companies reported difficulties in procuring intermediaries and raw materials in September, according to a survey by the Ifo institute. Among automakers, that figure has climbed to an all-time high of 97%.

Shortages of microchips and other industrial components are hampering economic recovery this year, forcing executives and policymakers to rethink supply lines and try to reduce reliance on a handful of suppliers Asian and American.

As global semiconductor production capacities are fully utilized, a significant short-term expansion in production is not expected and experts predict that the shortages will last until next year.

In alliance with the executive of the European Union, Germany and France want to pour billions of euros into state aid schemes to support the construction of local chip factories and the development of semi- new generation drivers.

AGING SOCIETY

Germany is aging after decades of relatively low birth rates and uneven immigration.

In the face of rapidly aging society and a shrinking workforce, Merkel has largely ignored calls for more action to reform the public pension system and relax immigration rules.

Under existing rules put in place by Merkel’s first coalition government in 2006, the age at which Germans can receive a full state pension without reduction is gradually increased from 65 to 67 until 2031.

A panel of government economic advisers has suggested raising the age threshold further to 68 by 2042. But this has been rejected by outgoing Finance Minister Olaf Scholz who is in pole position to succeed Merkel at the helm. chancellor after the narrow electoral victory of her center-left. social democrats.

According to the Institute for the World Economy (IfW), the peak of German employment is expected to be reached in 2023 with nearly 46 million people in employment. After that, it is expected that more people will leave the labor market than new workers will enter it.

This means that Germany will lose around 130,000 people of working age each year from 2026.

The shrinking workforce is expected to reduce the possible increase in economic output with normal capacity utilization to less than 0.9% by the end of 2026 – well below the long-term average of 1, 4%.

Experts say this problem could be alleviated by higher immigration, better childcare services to increase parental participation in the labor market, and more flexible working time models to keep older people working too. as long as possible.

Reporting by Michael Nienaber, editing by Andrew Heavens

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