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Germany is the “tired man” of Europe in need of “a strong cup of coffee”, the country’s finance minister said on Friday, arguing the recent economic downturn was a useful wake-up call to enable the reforms needed for recovery.
Christian Lindner told the World Economic Forum in Davos that “Germany is not the sick man” of Europe, as some have argued after its economy contracted 0.3 per cent last year and analysts warned it was likely to continue stagnating this year.
Lindner said the country needed to improve its productivity through structural reforms to strengthen the supply side of its economy, such as by improving the availability of labour, energy and digital technology.
“After a very successful period since 2012 and these years of crises, Germany is a tired man after a short night,” he said, adding: “Low growth expectations are probably a wake-up call and now we have a good cup of coffee, which means structural reforms and then we will be continuing to succeed economically.”
The German government, a coalition of Social Democrats, Greens and liberals, has pushed through a number of reforms to reduce bureaucracy, speed up the rollout of renewable energy and boost digitisation. On Friday, the Bundestag voted through new rules on citizenship, which it is hoped will encourage skilled immigration.
Economists at Deutsche Bank this week forecast Germany’s economy would decline again in the first three months of this year from the previous quarter, “followed by lacklustre positive quarterly growth rates from the second quarter onwards”. But they forecast Europe’s largest economy would still suffer an annual contraction of 0.2 per cent this year, compared to growth of 0.2 per cent in the eurozone overall.
The German finance minister, who this week was booed by a crowd of farmers protesting over cuts to agricultural fuel subsidies, also rejected calls from several other speakers on the same Davos panel for governments to raise taxes to fund the transition to green energy.
Raising taxes, he told the panel that included Ngozi Okonjo-Iweala, head of the World Trade Organization, “would cause serious problems for me domestically”.
Instead of raising carbon taxes, Lindner proposed a global carbon trading system that allows high polluters to pay money to fund green projects elsewhere rather than cutting their carbon emissions.
“We should ask the OECD to work on a common framework for a global carbon market as they did successfully on global minimum taxation,” he said, suggesting investing in renewable energy in Africa would have a greater impact than cutting the emissions of German steelmakers.
Germany’s constitutional debt brake, which limits the amount of new borrowing it can do, came back into force this year after being suspended when the pandemic hit in 2020. But the government was recently forced to cut €17bn of planned spending after a constitutional court ruled against off-balance sheet funds designed to circumvent the debt brake.
Lindner has been forced to seek savings from many parts of the government, including cuts to farming subsidies. “We had to solve our debt and deficit issues, which made me the loneliest minister in cabinet, but we succeeded,” he said.
He also pushed back against calls for Europe to introduce more subsidies to match those offered in the US, such as the Inflation Reduction Act, which is tempting some European companies to shift production to America.
“I am concerned that some policymakers in the EU tend to follow the US to subsidise almost everything — but we cannot afford a subsidy race,” he said.
Additional reporting by Guy Chazan in Berlin