Joachim Nagel: Germany - generally healthy, but facing challenges
Keynote speech by Dr Joachim Nagel, President of the Deutsche Bundesbank, at the
Capital City Reception, Berlin, 17 October 2023.
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1 Germany: the "sick man" of Europe?
Ladies and gentlemen,
The Bundesbank's Capital City Reception is an event where you would normally expect
to spend a carefree evening and hear the Bundesbank President tell you something
about inflation and monetary policy. That is as this evening should be. However, looking
at the situation in the Middle East, I find it difficult to start with "business as usual".
Ten days ago, terrorists killed hundreds of people in Israel with the utmost brutality.
More than 260 visitors died in the Re'im music festival massacre alone. There's hardly
anyone in Israel who isn't mourning the death of friends or relatives, hoping that injured
people will recover, anxiously awaiting the fate of loved ones taken hostage. I join them
in their mourning, hopes and anxiousness. And I wish to pledge my solidarity here and
now with the people of Israel. For ten days now, the world has been a different one.
Violence has reached a new level. My thoughts are with all those who are suffering
through no fault of their own from the outbreak of violence.
Ladies and gentlemen, almost exactly a year ago, at the Bundesbank's last Capital City
Reception, the inflation rate stood at more than 10%. Since then, inflation has fallen
back significantly, thanks in part to the Eurosystem's forceful response. The monetary
policy measures are yielding results. However, inflation remains high. Along with
uncertainty. On the Governing Council of the ECB, we discuss and assess
developments in economic activity and the inflation outlook. The decisions we take
there are data-dependent. But that's all I wish to say about the current monetary policy
stance.
You see, today's topic is a different one: Germany's prospects as a business location.
Anyone who has been following the news in recent months won't have missed the
stories about the return of Germany as the "sick man". If things did not change soon,
they said, Germany faced the risk of "deindustrialisation".
This discussion mainly gained traction on the back of the weak growth figures since the
last quarter of 2022. Forecasts by all manner of institutions suggest that Germany is the
only major industrialised nation whose economy is expected to contract in 2023. Our
experts see this as the outcome of two developments in particular: the at times very
high energy prices caused by the Russian war against Ukraine and a currently weak
global economy.
The bout of weakness in the German economy is not, then, primarily structural, as is
being suggested by the debate on potential deindustrialisation. This, in turn, is
consistent with most forecasts for Germany for 2024, which are already predicting a
recovery in economic activity. Therefore, I cannot agree with the "sick man" diagnosis.
2 Challenges to and opportunities for the German economy
However, Germany and its firms face major challenges - of that, there is no doubt. We
discussed this in an article in the September issue of the Bundesbank's Monthly Report.
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I would like to briefly address two of the key challenges.
For one thing, there is the decarbonisation of the economy. Climate change is
advancing rapidly and affecting all of humanity. For another, the high electricity and gas
prices are continuing to show us in no uncertain terms how heavily we still rely on fossil
fuels. Transitioning away from oil, gas and coal and expanding renewable energy will
therefore not only be good for the climate, but will also make us more independent and
may potentially lead to lower electricity prices again in Germany over the long term.
However, another thing is clear as well: the era of at times very low energy costs is over
for now. That's something that all consumers of electricity - be they big or small - will
have to get used to. Some parts of industry, claiming that they are at an acute
competitive disadvantage to their foreign rivals, are calling for a rapid artificial reduction
in the price of electricity for some firms. In my view, however, this will only delay the
inevitable structural change. Transitioning towards net zero means comprehensively
restructuring our economy: prominent examples include energy generation, networks,
new storage capabilities, heating technology and transport. All of these will require
extensive investment: in new equipment, but also in research and development, in
order to use energy efficiently.
Policymakers can play a supportive role in this regard: Reliable and consistent climate
policymaking will create planning certainty on the path to carbon neutrality by 2045. At
the same time, government approval processes and judicial review procedures need to
be sped up. At the European level, Germany should campaign for further progress to be
made towards the capital markets union because the upcoming investments will require
funding. And good access to market financing is an important piece of this mosaic.
In addition to decarbonisation, demographic change is posing major challenges to our
economy and society. It will accelerate considerably in the coming years. This is
because the "baby boomer" generation is heading towards retirement, which will mean
fewer workers. And that will further exacerbate the already acute shortage of skilled
labour.
Policymakers would do well to at least mitigate this development. To this end, they have
to toggle every available lever: by facilitating skilled immigration, expanding the
provision of childcare, and by linking the retirement age beyond the age of 67 to life
expectancy.
The challenges just mentioned fundamentally concern our society as a whole. However,
industry is the focus of the current debate on Germany as a business location. This is
because it has a great weight - by international standards and also in the public
perception. Concerns about Germany as an industrial location therefore more easily
make the headlines than is the case for other sectors.
Looking at how German industry has responded to the latest challenges, I am generally
optimistic. Thanks to a sound funding and earnings situation, it has been able to cope
well with the energy shock for the time being. Significant energy savings also helped in
this regard. Firms were supported by a general government that had agency and was
an important pillar in the recent crises. Value added in industry as a whole maintained a
rather stable trajectory.
However, pressure to adapt is significantly higher in some sectors of industry than in
others. Energy-intensive sectors such as the chemical industry, in particular, are
suffering under the increased energy prices. At the same time, however, Germany has
firms that are capable of transformation. The strong German " Mittelstand " is one area
that is contributing to this adaptability. This market segment is home to "hidden
champions" that boast innovative capacity and rank among the global market leaders in
their sectors.
I am firmly convinced that German industry is also well equipped to rise to the
challenges that still lie ahead. In my opinion, "Made in Germany" will continue to be a
coveted and successful trademark.
3 Germany: healthy, but facing challenges
In closing, let me briefly revisit the image of the "sick man". Being diagnosed with a
disease - rightly or not - can trigger two opposite reactions. One is to give in to your
presumptive fate: Why bother fighting if everything is going down the drain anyway?
The other is to pull yourself together and ask: How can I get into the right kind of shape
to face future challenges? There is certainly no doubt that action is preferable to
resignation.
Even if I do not share the diagnosis of being the "sick man" of Europe, it is a wake-up
call. And it is launching a societal debate - including the one that's happening right here
and right now. German industry and our society can adapt to a changing environment.
This is something they have proven time and again. The staking out of clear and
reliable political framework conditions can be supportive of this. I am sure that the
current debate will help make our country stronger and fitter for the future.
In my opinion, Germany is healthy. But it faces challenges.
Thank you.
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See Deutsche Bundesbank (2023), Germany as a business location: selected aspects
of current dependencies and medium-term challenges, Monthly Report, September, pp.
15-35.