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Challenges for the German motor of Europe

Angela Merkel retired gracefully from the German Parliament and Chancellery just in time. A few months later her policies were being torn up under the pressure of events.

| 4 min read

Angela Merkel’s carefully crafted rapprochement with Russia, her own version of Ostpolitik, lies in tatters following Russia’s invasion of Ukraine. Her policy of keeping defence spending low and declining a strong military role for Germany in the defence of the European Union (EU) and NATO is being revised by her socialist successor.

Mrs Merkel’s dependence on relatively cheap Russian gas has become an embarrassment and a major problem, with one Nord Stream pipe in use helping pay for Putin’s war and the other standing empty. Her decision to close all German nuclear power looks difficult as Germany enters energy shortages, though it remains government policy. Her insouciance to the impact of energy costs and the electrification of transport on the all-important German motor industry is creating structural problems at the heart of the once very successful German industrial machine.

In the fourth quarter of 2021, German GDP fell a little. Germany’s early success or luck with Covid spread was reversed by a more serious wave of the disease leading to interruptions to social and economic life. This year the government advisers have just slashed their forecast of growth from 4.6% for 2022 to 1.8%. The first quarter is proving difficult, with the confidence and activity indicators looking weak. The most recent confidence index, the ZEW, came in at a minus 41 for April, back to the levels when Covid-19 first broke out. Because expectations of future growth and turnover are so depressed, the survey also looked forward to a fall in inflation.

Auto market in flux

In the all-important German auto market, sales fell 10.1% in 2021 compared to Covid-damaged 2020, with just 2.6 million new vehicles finding owners compared to 3.6 million in 2019, the last year before the pandemic. In the first three months of 2022, there was a further fall of 4.6%. Industry and general commentators usually blame supply shortages of crucial components, particularly microprocessors. Whilst this may indeed be part of the reason, it is also possible the whole industry in Germany – and elsewhere in the advanced world – is losing sales from the transition to all-electric models.

A lot of buyers have been put off range anxiety, a shortage of charge points, the relatively high cost of the vehicles.

It looks as if the top-down demands that we change the drive system of our vehicles is better at putting people off buying the diesel and petrol technologies governments wish to ban than it is at persuading people to buy the new electric technology governments prefer. A lot of buyers have been put off range anxiety, a shortage of charge points, the relatively high cost of the vehicles, and an absence of enough experience of how well they perform and how long they last. Fleet buyers that are offered tax incentives and worried about their carbon footprint are easier to woo. Only those countries such as Norway, which have offered large subsidies or tax cuts, have made more progress in selling large numbers of electric cars.

The fact that German GDP fell in the last quarter of 2021 and is now making slow progress with growth is helping make the European Central Bank (ECB) far more cautious than the Fed in taking tough monetary action to curb inflation.

Perhaps more importantly, the ECB has no wish to drive mortgages and credit card rates up just before the Le Pen/Macron election as they are very keen Le Pen does not win. They are also concerned about the state of debts in Greece and Italy, where they wish to avoid a rerun of the Euro crises of a decade ago, when the zone sought to impose discipline on Greek and Cypriot finances by withholding support. Greece is likely to need more help to get through. The ECB has relented and now buys in Geek debt to keep the Greek longer-term interest rates closer to the very low Euro averages.

New European governments

Assuming Macron wins as current polls imply, the French will remain engaged with the EU and will be wanting to strengthen the common foreign and security policy. Were Le Pen to win, then the EU would need to respond to her wishes to increase French self-determination and reduce the costs of the EU to France.

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Challenges for the German motor of Europe

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