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Will the ‘sick man of Europe’ label stick to Germany this time around?

Germany is confronting economic challenges, marking almost two years of stagnant growth, infrastructural deficiencies, and disruptions from strikes and protests. The resurfacing of the “sick man of Europe” label, however, may be an exaggeration, as the nation’s economy is more in a state of flatlining than imminent collapse. Chancellor Olaf Scholz’s coalition is grappling with crises, particularly a €60 billion budget gap triggered by a court decision redirecting pandemic funds towards achieving carbon neutrality. Structural issues, including an overreliance on exports, a significant share of the economy in manufacturing, and a slow response to the demand for electric vehicles, are posing fundamental challenges.

Peter Bofinger, a Würzburg University economics professor, suggests a reevaluation of Germany’s business model, emphasizing that the country needs to embrace public debt as a growth catalyst. This strategy entails increased investment in domestic demand and the integration of new technologies. In contrast, Holger Schmieding, an economist at Berenberg Bank, remains optimistic, attributing Germany’s temporary economic struggles to China’s diminished role in global growth and the shift away from Russian energy dependence.

However, Timo Wollmershäuser, head of forecasting at the Ifo Institute, highlights Germany’s decreasing competitiveness due to higher energy costs, sustained high tax burdens, bureaucratic hurdles, slow digitalization progress, and a shortage of skilled workers. As Germany faces challenges similar to other eurozone economies, such as higher interest rates and the Ukrainian war, addressing these structural issues becomes paramount for a sustainable recovery.

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