Speaker 1: In January, Bloomberg editor in chief John Micklethwaite interviewed Germany's
Speaker 1: Chancellor Olaf Schultz. Despite soaring energy prices caused by Russia's
Speaker 1: invasion of Ukraine, which have shaken Germany's economy, Schultz said
Speaker 1: the country would not fall into recession.
Speaker 2: Will Germany now avoid a recession in twenty twenty.
Speaker 3: Three, Yes, I'm absolutely convinced that this will not happen.
Speaker 3: That we are going into recession, and we showed that
Speaker 3: we were, that we are able to react to a
Speaker 3: very difficult situation.
Speaker 1: That turned out not to be the case.
Speaker 4: The Eurozone's largest economy, Germany falls into recession as the
Speaker 4: cost of living crisis bites.
Speaker 2: Europe's powerhouse has slipped into recession. Could Germany's economic slowed
Speaker 2: down drag down the whole continent. Germany unexpectedly goes into
Speaker 2: recession after a surprise fall in first called a GDP.
Speaker 1: Germany has been the economic engine of Europe for decades,
Speaker 1: but Bloomberg's Jana Rando and William Wilks and Frankfurt report
Speaker 1: that as the country now works to climb back from
Speaker 1: the winter recession, there are signs that's economy isn't as
Speaker 1: resilient as it once was, and that Germany may be
Speaker 1: losing its innovative edge.
Speaker 4: Poverty is increasing, people struggle to pay their bills, They're
Speaker 4: quite unhappy with the government.
Speaker 1: That could mean trouble not just for Germany, but the
Speaker 1: rest of Europe and beyond.
Speaker 2: To have politics increasingly fractured by this kind of frustrating
Speaker 2: and stumbling economy would be perhaps disastrous for a continent
Speaker 2: which is looking and needs Germany to step of its
Speaker 2: kind of role in the security space.
Speaker 1: I'm west Kosova today on the big take Germany tries
Speaker 1: to restart that engine.
Speaker 4: Germany, as Europe's biggest economy, has a special place in Europe,
Speaker 4: and if that biggest economy is struggling, then of course
Speaker 4: everybody around it gets worried. Germany is very open, it's
Speaker 4: an expert led economy. It's very relevant in the political
Speaker 4: context as well. You know, when you say the US
Speaker 4: is struggling and Europe then catches a cold, you can
Speaker 4: say the same thing about Germany. Germany is struggling, and
Speaker 4: everybody else will feel the consequences of that as well.
Speaker 4: And of course the problems Germany faces are manyfold. We
Speaker 4: can talk about the economy just cyclically being you know,
Speaker 4: or coming out of a winter recession, really feeling a
Speaker 4: hit to its manufacturing base, which is very important. We
Speaker 4: can talk about a lot of structural challenges for the
Speaker 4: German economy. We can talk about supply chain problems, we
Speaker 4: can talk about demographics, we can talk about the energy transition,
Speaker 4: climate change, high inflation, like all those things hit the
Speaker 4: country and the economy in a very special way. And
Speaker 4: then of course we can talk about politics as well.
Speaker 4: We're seeing populist gaining ground, the kind of party that
Speaker 4: nobody thought was going to be that powerful, you know,
Speaker 4: of right wing populist party now tying in second place
Speaker 4: with the Social Democrats, which obviously all of Schultz Chancellor
Speaker 4: is a member of. So a lot of things happening
Speaker 4: in Germany at the moment, a lot of things that
Speaker 4: are not nice, are not conducive to just stable economic
Speaker 4: growth that we would like to see.
Speaker 1: So will as Janna says, there's a lot in there
Speaker 1: to talk about. Maybe we can start by just painting
Speaker 1: a picture of the German economy right now.
Speaker 2: The German economy, after kind of ten years of doing
Speaker 2: pretty well, is now struggling to adjust to this new
Speaker 2: reality of higher energy prices that's been unleashed by the
Speaker 2: war in Ukraine, which now makes it it going to
Speaker 2: be the slowest growing of the G seven big economies
Speaker 2: in twenty twenty three, and other economists expect Germany to
Speaker 2: grow much more slowly than some of its peers over
Speaker 2: the coming years. And beyond that, energy intensive industries like steel, chemicals,
Speaker 2: glass making, all these things are going to manufactured products
Speaker 2: kind of higher up the value chain. And those energy
Speaker 2: intensive industries, which tend to be defined as sort of
Speaker 2: an operation where energy costs of a quarter of the
Speaker 2: input costs, they're really feeling the pinch and squeeze from
Speaker 2: these higher energy prices. And we're seeing in the chemical sector.
Speaker 2: Germany has this huge chemical sectors they'd only to the
Speaker 2: US and China and proportionally much bigger than those two countries.
Speaker 2: There's just been immense kind of plants shut downs, lots
Speaker 2: of companies are turning down output because there's no money
Speaker 2: to be made in these gas intensive kind of chemical processes, and.
Speaker 1: That itself is now being called into question too. Is
Speaker 1: that right?
Speaker 4: Well, in a way, I mean yes, you're right. The
Speaker 4: German economy is kind of. I like to think of
Speaker 4: it more as a stabilizing force than a growth driver.
Speaker 4: So yes, that is still very much the case. Things
Speaker 4: move slowly in Germany for many different reasons. Be it
Speaker 4: risk aversion, be it just you know, meticulous planning, be
Speaker 4: it bureaucracy when it comes to economic swings, the labor
Speaker 4: retention plans that we have in place, so the automatic
Speaker 4: stabilizers is what we call them, the unemployment insurance and
Speaker 4: also the short time work benefits that keep people in jobs,
Speaker 4: so that all has a stabilizing effect, and that in
Speaker 4: a way will probably remain the case. What's going to
Speaker 4: be very difficult going forward is to kind of reinvent
Speaker 4: an economy that rests on very stable or has rested
Speaker 4: on very stable foundations, and those foundations are being shaken
Speaker 4: at the moment.
Speaker 1: How has this economic slow down and the prospect of
Speaker 1: Germany kind of losing its historical momentum affecting people in Germany.
Speaker 1: How is it affecting just the day to day lives
Speaker 1: of Germans.
Speaker 4: There is a lot of uncertainty about the way forward.
Speaker 4: We are facing a cost of living crisis. Like much
Speaker 4: of the rest of the world, poverty is increasing people
Speaker 4: struggle to pay their bills. They're quite unhappy with the government.
Speaker 4: There is concern over job security, despite unemployment being at
Speaker 4: a record low or close to a record low, just
Speaker 4: because people wonder will my job still exist once the
Speaker 4: economy turns. A lot of people are wondering with the
Speaker 4: energy transition, how am I going to heat my house
Speaker 4: in the future. A lot of things right now that
Speaker 4: you know, worry people, and a lot of uncertainty really
Speaker 4: in many forms, which you know, all of us businesses
Speaker 4: politicians will have to find answers.
Speaker 1: For will How does what Yanna is describing at home
Speaker 1: in Germany impacting the rest of Europe.
Speaker 2: There are direct kind of economic impacts from a lot
Speaker 2: of supply chains begin and end in Germany, and your
Speaker 2: see a rip will go through there. Even more seriously
Speaker 2: is the impact that are kind of Germany that's distracted
Speaker 2: by economic difficulties for a decade or so, what impact
Speaker 2: that we'll have on its leadership within Europe in the
Speaker 2: economic space, I think, in the political space, and also
Speaker 2: of increasing importance also in the security space. You know,
Speaker 2: a Germany that is forced by its own economic frustrations
Speaker 2: and a frustrated populace to kind of turn inward and
Speaker 2: focus on problems within Germany, and to have politics increasingly
Speaker 2: fractured by this kind of frustrating and stumbling economy would
Speaker 2: be perhaps disastrous for a continent which is looking and
Speaker 2: needs Germany to a step up it kind of role
Speaker 2: in the security space. Germany is for decades underspent on
Speaker 2: defense and as a roll too obvious now there's threats
Speaker 2: to European security on its eastern flank, and you know,
Speaker 2: the United States is covering a lot of European defense weakness,
Speaker 2: but who knows what will happen in the next US election.
Speaker 2: And it's also the same if Europe faces another economic
Speaker 2: crisis like it has several times over the past decade,
Speaker 2: it has relied in the past on Germany taking a
Speaker 2: grown up and magnanimous and patient and also kind of
Speaker 2: opening its wallet and paying for things. Eventually, a Germany
Speaker 2: that's distracted by its own domestic troubles and frustrations might
Speaker 2: be less willing to do that, which could have vast
Speaker 2: implications for the rest of the conton and also the
Speaker 2: single currency. Far from having Shardenfreud, I think a lot
Speaker 2: of other European capitals will be looking on nervously and
Speaker 2: seeing that, you know, not wanting Germany to fall into
Speaker 2: an reverted last decade will.
Speaker 1: At the beginning of twenty three, Germany's Chancellor, all of
Speaker 1: Shoals told Bloomberg that he's sure the country would avoid
Speaker 1: a recession this year. If you fast forward to now
Speaker 1: and the situation is pretty different, how much of what
Speaker 1: is happening to the nation's economy can be attributed to
Speaker 1: the actions of Shoals in his government.
Speaker 2: Well, in some ways what's going on now isn't entirely
Speaker 2: his fault or even arguably at all his fault. You
Speaker 2: might look at some of the structural problems that Germany
Speaker 2: has found itself with, with kind of poor it investment
Speaker 2: and overreliance on Russian energy. Those were problems that came
Speaker 2: up during past governments.
Speaker 4: Yeah, I fully agree there. The reliance on Russian energy
Speaker 4: goes back a very long time. So the first pipeline,
Speaker 4: for example, for gas from Siberia was built in the
Speaker 4: nineteen seventies. Northstream won the pipelin started in the late
Speaker 4: nineteen nineties. So that just shows you how far or
Speaker 4: how long those problems have been and that dependency has
Speaker 4: been in the making. What actually came as a surprise
Speaker 4: to me, is how quickly Germany under Schaltz was actually
Speaker 4: able to win itself off Russian gas. So that is
Speaker 4: something that with all this criticism we tend to forget.
Speaker 4: There was concern after the invasion and the decision to
Speaker 4: do without, that the lights would go off in Germany,
Speaker 4: that factories would have to shut down, that we would
Speaker 4: have to ration electricity.
Speaker 5: We begin here in Germany, where the government has announced
Speaker 5: it is activating an early warning plan in preparation for
Speaker 5: possible shortages and gas deliver raies from Russia.
Speaker 4: None of that happened, partially because of energy savings, but
Speaker 4: also partially because the government was able to work around
Speaker 4: the problem. We have three ships for liquefied natural gas,
Speaker 4: you know, in front of the German shoreline at the moment,
Speaker 4: and more on their way. So that just shows you
Speaker 4: that there is a determination. It shows you that, you know,
Speaker 4: comma crisis, things will fall into place in Germany. And
Speaker 4: it's always kind of been like that, which is not
Speaker 4: to say that you know, there are problems and there's
Speaker 4: a lot to do for the government, and certainly it's
Speaker 4: fair to say that looking at it from where I said,
Speaker 4: and where will SIT's probably as well that there are
Speaker 4: lots of problems. The coalition has lots of homework to
Speaker 4: do to make sure that it actually can pull in
Speaker 4: the right direction and pull in the right direction together.
Speaker 2: What's perhaps different than really fascinating about the current moment
Speaker 2: is Germany faces this accumulation of a series of problems.
Speaker 2: Perhaps it hasn't faced for a long time. Under Angela Merkel,
Speaker 2: the previous chancellor. Her government faced a lot of challenges,
Speaker 2: including the refugee crisis and the Eurozone crisis, but there
Speaker 2: was a bit of space in between them. Now Germany
Speaker 2: faces competitiveness challenges from Chinese carmakers.
Speaker 5: Following years of state investment. China is leading way in
Speaker 5: electric mobility, with domestic brands outpacing competitors including German bay
Speaker 5: moths like Volksfang and BMW.
Speaker 2: Germany faces an energy crisis steming from Russia's war with Ukraine.
Speaker 2: Germany faces the competitive challenges of the US Inflation Reduction
Speaker 2: Act and the fact that that's drawing investment into the
Speaker 2: US and away from Europe. Germany also faces this worsening
Speaker 2: geostrategic geopolitical situation of rising tension between China and the West.
Speaker 2: And it's this accumulation of problems which is really kind
Speaker 2: of unique about this moment, and it's going to be
Speaker 2: very difficult for the German government to deal with all
Speaker 2: of these things at once. And we haven't even gotten
Speaker 2: to talking about the demographic challenges. While all this is happening,
Speaker 2: Germany is looking at a future of a drastically graying
Speaker 2: and shrinking workforce, which will further challenge its competitiveness.
Speaker 1: After the break, Why has Germany lost its edge in tech?
Speaker 1: Will you and Janna have needed this pretty stark picture
Speaker 1: of the challenges that Germany is facing. Maybe now we
Speaker 1: can talk really about some more specifics. What are some
Speaker 1: of the big problems that German companies, German manufacturers, the
Speaker 1: drivers of the economy are facing right now.
Speaker 2: I think one big one is that they're struggling to
Speaker 2: keep up on innovation and it's getting harder to innovate.
Speaker 2: So Germany for years has done there and German companies
Speaker 2: have done very well from making kind of incremental changes
Speaker 2: to existing technologies and an example being kind of continuous
Speaker 2: improvement of the combustion engine. But now what kind of
Speaker 2: the world product markets are demanding is shift much more
Speaker 2: to digital technologies and other things. And because of that,
Speaker 2: there are signs that Germany's kind of innovation power is weakening.
Speaker 2: It doesn't have any universities in the top twenty five
Speaker 2: in the world rankings. It's really low down the league
Speaker 2: tables for investment in digital technologies. So you're seeing that Germany,
Speaker 2: as technologies are changing and we're going down more digital
Speaker 2: and electrified routes, that Germany's ability to kind of make
Speaker 2: those incremental improvements in long standing technologies is becoming less
Speaker 2: and less relevant. And that's a real challenge for Germany.
Speaker 2: And also you can see it in the startup space.
Speaker 2: The number of startups in Germany is also declining. And
Speaker 2: again it comes back to this thing that you've got
Speaker 2: a kind of culture that's more risk averse than elsewhere,
Speaker 2: that quite likes, you know, making incremental changes. And how
Speaker 2: do you get back on top when your kind of
Speaker 2: innovation culture is kind of conservative and your approach to
Speaker 2: risk is very conservative. How do you get back on
Speaker 2: top of the pile when with those approaches, it's going
Speaker 2: to really challenge Germany.
Speaker 4: That you mentioned risk a version, but even if you
Speaker 4: were somebody who had an idea. Just getting funding for
Speaker 4: it is incredibly difficult. So there's one statistic that shocked
Speaker 4: me venture capital investment. It was under twelve billion last
Speaker 4: year compared with far more than two hundred billion in
Speaker 4: the US. That is obviously telling you a lot of
Speaker 4: stories about how likely it is to see a big
Speaker 4: startup that could you know, eventually work on the global level.
Speaker 4: Very very difficult here in Germany.
Speaker 1: Janna, you raised that important point about venture capital. A
Speaker 1: lot of that money tends to go into the technology industries,
Speaker 1: and you're writing the story that Germany has started to
Speaker 1: lose its edge in technology. Why is that and what
Speaker 1: are some examples of that.
Speaker 4: A lot of what we have in Germany in terms
Speaker 4: of technology is quite old fashioned. So there is SAP
Speaker 4: for example, you know, a software company that goes back
Speaker 4: to the nineteen seventies. Essentially when you talk about infrastructure,
Speaker 4: you know digital infrastructure. There is a big joke that's
Speaker 4: making up the runs in Europe, of course, where everybody
Speaker 4: is traveling on trains and you know, people ask, you know,
Speaker 4: how do you know your train has passed the border
Speaker 4: to Germany? Well, the Wi Fi connection breaks down and
Speaker 4: your phone doesn't have any coverage anymore. It's very sad.
Speaker 4: It's funny, you know, but it's actually true. You can
Speaker 4: really tell, you know, you're driving on the autobah, which
Speaker 4: is another symbol of you know, economic strength of Germany.
Speaker 4: If you were to make try and make a phone
Speaker 4: call as a passenger, oftentimes you're out of luck because
Speaker 4: you're in you know, in a blackout zone where there's
Speaker 4: absolutely no coverage to have. That is emblematic for the
Speaker 4: challenges we face. You want to talk about broadband technology.
Speaker 4: For example, the share of fiber connections in Germany right
Speaker 4: now is eight percent, and you compare that to the
Speaker 4: places like Korea or Japan or even Spain where it
Speaker 4: is a eighty percent, so more than ten times that level.
Speaker 4: That also shows you something about the state of technology
Speaker 4: in Germany. Of course, you know people are trying to
Speaker 4: fix it, but it's a very very slow moving process.
Speaker 2: German car makers have been very aspirational brands for consumers.
Speaker 2: People have certain and a certain wealth category would have
Speaker 2: bought Volkswagens and Oples and then aspired to own BMW's
Speaker 2: and Mercedes later on in life. But now looking forward,
Speaker 2: people are looking at German cars and thinking hang on
Speaker 2: that doesn't have any of the tech of the Tesla
Speaker 2: or any of the kind of range performance of some
Speaker 2: of the Chinese electric cars, So those brands don't have
Speaker 2: this cutting edge lead that they had anymore. What's going
Speaker 2: on in cars is kind of symbolic of the challenges
Speaker 2: that bordered German economy faces. You know, markets are changing,
Speaker 2: other countries are catching up. They're hungry competitors, and can
Speaker 2: Germany and German companies be nimble enough and can they
Speaker 2: kind of reinvent their thinking enough to re establish a
Speaker 2: kind of lead in these technology areas. And I think
Speaker 2: that question is open, and it's one that's worrying a
Speaker 2: lot of executives at Volkswagen and Mercedes and BMW. They're
Speaker 2: kind of wondering can they do it? How do we
Speaker 2: compete with tech firms on you know, in car software.
Speaker 2: And there's billions of yours being spent on it, but
Speaker 2: it's not guaranteed that that money could end up not
Speaker 2: returning them to the pinnacle, and then we might just
Speaker 2: see a slow, over many decades decline in the importance
Speaker 2: and relevance of German carmakers in global markets.
Speaker 1: When we come back, what does all this economic turmoil
Speaker 1: mean for all off Shultz, Well, obviously we're talking about
Speaker 1: some pretty serious headwinds that Germany is face seeing, and
Speaker 1: one that you've both talked about is Germany's need for
Speaker 1: energy transition. So how do they solve this problem? What
Speaker 1: needs to happen?
Speaker 2: In short, they need to just get lots and lots
Speaker 2: of renewable energy online, which is going to involve overhauling
Speaker 2: Germany's kind of a good labyrinthine planning system. And they
Speaker 2: also need to come up with partnerships to kind of
Speaker 2: import some energy from abroad. Again, like a hydrogen which
Speaker 2: kind of when you burn it, it burns hot and clean,
Speaker 2: so it could be used as an industrial fuel in Germany,
Speaker 2: but it's quite expensive to produce if you don't have
Speaker 2: masses of abundant renewable energy, which Germany's not ever likely
Speaker 2: to have, so they'll need to agree deals to kind
Speaker 2: of import it from other countries. But basically they need
Speaker 2: to unblock kind of bureaucratic roadblocks and really get things
Speaker 2: moving in the energy space. But it's very, very hard,
Speaker 2: and I think realistically what will happen is there will
Speaker 2: be an acceleration in the construction of kind of renewable
Speaker 2: energy infrastructure. But at the same time, I think Germany's
Speaker 2: energy situation means that there will be continue to be
Speaker 2: a kind of steady the industrialization in Germany.
Speaker 4: Yeah, interesting that you mentioned bureaucracy, because that is really
Speaker 4: something that pulds back the country. A lot of applications
Speaker 4: for all kinds of construction projects are still done on paper.
Speaker 2: It's also an issue for startup. You would have to
Speaker 2: be a masochist to want to set up a startup
Speaker 2: with Germany with the numbers of kind of bureaucratic hurdles
Speaker 2: you have to cross to get business started. I mean,
Speaker 2: the government talks about simplifying it, but it's another reason
Speaker 2: why German with great ideas might look at things and think, actually,
Speaker 2: I'll go and work for one of the established big
Speaker 2: companies because starting my own business is just more more
Speaker 2: trouble than it's worth, which is not something you see
Speaker 2: in somewhere like the US, where you know, the rewards
Speaker 2: are so much clearer and you have people like Elon
Speaker 2: Musk and like Mark z of Ckbergl. You know, they
Speaker 2: see the opportunity for returns and it's not so difficult.
Speaker 1: There, Jana. In order for Germany to move ahead in
Speaker 1: the way that you've been describing, it'll take a lot
Speaker 1: of political will. What do you think we can expect
Speaker 1: to happen during all off Schulz's term. Does he have
Speaker 1: the political support to do what needs to be done?
Speaker 4: I think his challenge is one where he can technically
Speaker 4: build on the support of every lawmaker in the country,
Speaker 4: right because ultimately it's in everybody's interest to make sure
Speaker 4: the transition works and turns into success and keeps the
Speaker 4: German economic engine running. So in that sense, the arguments
Speaker 4: that he will have to face are not so much
Speaker 4: about the target, but it's more about the road of
Speaker 4: travel and which detours to take and which projects to
Speaker 4: tackle first. So that's in a way a different set
Speaker 4: of challenges than a leader would have to face in
Speaker 4: other circumstances. But of course it's not an easy task.
Speaker 4: He's leading a three way coalition of social Democrats, the
Speaker 4: Green Party and then the fiscally quite conservative Liberals, and
Speaker 4: you could argue that those are not exactly the three
Speaker 4: of them natural coalition partners. And it just already shows
Speaker 4: you how the political landscape in Germany is getting more diverse.
Speaker 4: There's talk about a new party being founded on the
Speaker 4: left side potentially this year. The discourse is going to
Speaker 4: get very, very complicated, and everybody is going to have
Speaker 4: ideas about the best way forward, and I think his
Speaker 4: biggest challenge will be to field all those ideas, to
Speaker 4: feel those challenges and putting them into some sort of
Speaker 4: an order that the majority of people will be able
Speaker 4: to support and will be able to say this is
Speaker 4: something that's manageable for us, because, let's face it, it's one
Speaker 4: thing to recognize the challenges ahead, and it's a completely
Speaker 4: different thing to then find strategies to get us there.
Speaker 4: Because everything that's going to be needed in Germany is
Speaker 4: going to be expensive. Somebody is going to have to
Speaker 4: pay for those investments, be it the government through public spending,
Speaker 4: be it companies, be it consumers. And designing laws and
Speaker 4: goals in a way that it's affordable to those people
Speaker 4: and to the public sector and the private sector is
Speaker 4: going to be a tremendous challenge.
Speaker 1: Janna Will, thanks so much for talking with me today.
Speaker 4: Thanks Wes, very nice to be here, Thanks having.
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