Explainer: Germany’s next government faces three big economic challenges

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BERLIN (Businesshala) – Chancellor Angela Merkel has propelled Germany through a number of crises over the past 16 years, but she has also left behind a mixed legacy and failed to tackle some deep structural problems in Europe’s biggest economy. has been

FILE PHOTO: Workers wear protective masks at a Volkswagen assembly line in Wolfsburg, Germany, April 27, 2020. Sven Pfortner/Pool via Businesshala

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

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The Ifo Institute estimates the economy will grow by 5.1% in 2022, the strongest rate since the economic boom in the early 1990s following Germany’s reunification.

The unusually strong growth outlook is primarily due to the effects of the COVID-19 pandemic recovering and catching on. But under a shiny surface things look less bright.

If Germany wants to avoid further lag in the next few years, the upcoming coalition government will have to deal with these three challenges:

digitization

Germany has lagged behind in terms of digitization under Merkel’s watch. That was the finding of a poll published in September, shortly before the election, by the Berlin-based European Center for Digital Competitiveness.

Germany ranks 18th in the Group of 20 Major Industrialized and Emerging Countries (G20), only worse for Japan and India.

The government’s goal of offering fast internet through a nationwide network is far from over. There are still very few fiber optic cables, especially in rural areas.

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

Lastly, there is a shortage of IT experts in the country. According to industry association Bitcom, there are currently 86,000 vacancies for IT specialists. Bitcom said seven out of ten companies complain about a lack of IT specialists, and 60 percent expect the situation to worsen in the coming years.

lack of chip

Germany’s powerful car industry is struggling to ramp up production following the coronavirus crisis due to shortages in semiconductors and other components.

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

While Germany booms on the heels of globalization, the worldwide web of supply chains that have turbo-charged its economy is now proving to be a significant weakness.

A survey by the Ifo Institute showed that a record 77.4% of industrial companies in September reported difficulties in procuring intermediates and raw materials. Among car companies, this figure reached an unprecedented 97%.

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

As global semiconductor production capacity is fully tapped, a significant short-term expansion of production is not on the cards and experts predict the shortfall will last well into next year.

In alliance with the EU executive, Germany and France are looking to pour billions of euros into state aid schemes to support the construction of local chip factories and the development of next-generation semiconductors.

old age society

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

Faced with a rapidly aging society and a shrinking workforce, Merkel has largely ignored calls for further steps to reform the public pension system and make immigration rules more flexible.

Under current rules created by Merkel’s first coalition government in 2006, the age at which Germans can receive a full state pension without deduction is gradually increasing from 65 to 67 by 2031.

A panel of economic advisors to the government has suggested raising the age limit to 68 by 2042. But it has been rejected by outgoing Finance Minister Olaf Scholz, who is in pole position to succeed Merkel as chancellor after his centre-left’s narrow electoral victory. Social Democrats.

According to the Institute for the World Economy (IFW), about 46 million people are expected to work in 2023 at the peak of German employment. After that, more people are projected to leave the labor market than new workers are entering.

This means Germany will lose about 130,000 working-age people every year from 2026 onwards.

The shrinking workforce is projected to reduce potential growth in economic output to less than 0.9 percent with normal capacity utilization at the end of 2026 – well below the long-term average of 1.4 percent.

Experts say this problem can be mitigated with higher immigration, better childcare services to increase parental job market participation, and more flexible working time models so that older people can work as long as possible. Can go

Reporting by Michael Nienaber, Editing by Andrew Heavens

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