Germany’s ongoing perma-crisis has weighed on its entire economy and, because of its sheer size, on the entire European region.
Its current state is a culmination of many problems—from red tape impeding business to lackluster demand recovery stunting the growth of its key industries.
However, according to Alfred Kammer, the head of IMF Europe, there might be one nonnegotiable answer to the above.
“Without a functioning infrastructure, there can be no productive economy,” Kammer told the German newspaper Sueddeutsche Zeitung on Monday.
He said that Germany needed structural reforms and more investment in public infrastructure to shake off a recession. A decline in the working population and bureaucracy adds to the litany of problems.
The German economy—Europe’s largest—is set to shrink by 0.2% in 2024 for the second year in a row. Its economic minister, Robert Habeck, echoed Kammer’s concerns earlier this month, highlighting that many of the country’s problems were caused by internal structures rather than cyclical factors.
“A lot has been left behind here over the past decades,” he said.
Germany’s baggage
Germany muscled its way through the pandemic and energy crisis following Russia’s invasion of Ukraine. Still, it has been losing its grip on trade and manufacturing for a few years. Take the country’s exports to its biggest trading partner, China—those figures have declined sharply.
Despite building its reputation as a European champion through its industrial prowess through much of the 21st century, Germany’s challenges within its turf have been mounting too. Years of red tape, underinvestment in modernizing infrastructure, and climbing costs have left the country to play catch-up with other advanced economies.
“The German economy has simply missed the train to innovate and modernize. For too long, it’s been a combination of being too arrogant, too naive, too complacent—they just thought there would be no challengers to its own strong corporate world,” Carsten Brzeski, global head of macro for ING Research, told Fortune earlier this month.
Germany’s crown jewels, such as Volkswagen, have been struggling to pick themselves up amid a harsh macroeconomic environment and struggling demand. This has only added to the negative sentiment surrounding the European superpower, as seen in Intel’s postponement of plans to invest in Germany.
The U.S.-Europe growth divide
When asked about the divergence in growth of companies based in Europe versus America, Kammer noted that the biggest difference came down to scale and regulations.
He said that the U.S. had a huge market for goods and services within the country, which reduced unit costs. However, achieving a similar scale in Europe invariably requires crossing borders, which incurs more costs.
“The EU internal market does exist, but in fact it is littered with regulatory hurdles and other barriers,” Kammer said. “Young companies in Europe also have the problem that they often cannot access the capital they need for their growth.”
According to IMF’s Kammer, Germany’s economic condition and prospects for recovery deter companies from investing because they want to “know what is going to happen in the next 10 to 15 years.”
Even if the picture seems dire now, if structural changes are made and investment-friendly policies are in place, German companies have proved time and time again that they can adapt, Kammer said.
