Not only because of Russian gas, the German economy is facing difficulties for reasons everyone knows.

According to DW, economists and industry associations agree that 2023 will be a stagnant year for the German economy - the "locomotive" of Europe.

Germany's budget issues are getting 'hotter' and the country's economy is struggling. (Source: AP)

"The reality is we are stagnant"

“The reality is that we are stagnating,” Moritz Kraemer, chief economist at Landesbank Baden-Württemberg, stressed in an interview.

DW emphasized: "The reasons why Germany is in trouble seem to be known to everyone."

Specifically, consumers are hesitant to spend due to inflation and rising prices. In addition, the sluggish global economy is putting stress on exporters - a sector that used to be the engine of the economy.

Unstable energy prices are also causing many international corporations to put investment plans on hold. These businesses are even building new facilities abroad, such as the US or China.

In addition, the ambitious green transition of Europe's largest economy, promoted by German economy and climate minister Robert Habeck, is costing a lot of money.

Not only that, Germany's energy-intensive industry is suffering a huge shock for various reasons.

First , the European "locomotive" has lost its cheap natural gas supply from Russia due to the impact of the Russia-Ukraine conflict. The skyrocketing gas prices have led to rising inflation and economic recession.

Second , the impact of higher interest rates to tackle high inflation has put additional pressure on households and businesses, while Germany's manufacturing-heavy economy has struggled with weaker global trade volumes.

Third , the increasing dependence on China in the current geopolitical context has greatly affected the German economy.

According to data from Germany, imported goods from China account for 12.8% of the country's total imported goods.

Big hole in the budget

In mid-November 2023, the German Constitutional Court rejected the government's plan to reallocate 60 billion euros (about 65 billion USD) in backlogs from the Covid-19 fund to use for climate goals and economic modernization. The decision came as the German government was rushing to prepare for the 2024 fiscal program, which has upset the spending plan.

Germany's budget issue has become "hot" after the Constitutional Court's ruling. This ruling affects other extra-budgetary funds that the European "locomotive" has applied for many years to finance the "debt brake" policy to limit the public budget deficit to exceed 0.35% of GDP. Germany's "debt brake" policy has been applied since 2009, under former Chancellor Angela Merkel.

When the Covid-19 pandemic broke out, this policy was waived for the period 2020-2022 to increase emergency public spending to deal with the crisis. In 2023, this policy was applied again and was the reason why the German Constitutional Court did not accept the change of the purpose of using the aforementioned 60 billion Euros.

The government's plans rely heavily on this money in the coming years and the court's decision has created a huge hole in the budget.

After three years of heavy spending to combat the pandemic and the fallout from the conflict in Ukraine, the German government is implementing widespread budget cuts. German Finance Minister Christian Lindner has declared his determination to reduce debt at any cost, stressing that by 2024, interest payments alone will cost the government 37 billion euros.

The interest payment has put the German government in a difficult situation, because the draft budget law for 2024 submitted to the National Assembly for approval is only 445 billion Euros - 30 billion Euros less than this year's budget.

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By 2024, interest payments alone will cost the German government 37 billion euros. (Source: DPA)

Financial "tightening"

With a tight budget, the German government will likely have to look for ways to save money.

At the end of November 2023, after several rounds of tough negotiations, the government agreed on a supplementary budget for 2023 and suspended the "debt brake" for that year in order to find a deal to cover the 60 billion euro budget deficit.

The budget for 2024 has been significantly cut. Some fear that planned spending cuts, fewer subsidies and higher energy prices could slow the economy and even cause inflation.

The Constitutional Court's ruling also puts Robert Habeck's industrial and climate policy projects in jeopardy. The German Ministry of Economics and Climate estimates that economic growth will fall by up to half a percentage point.

According to ING chief economist Carsten Brzeski, there are two new risk factors for the German economy following the Constitutional Court ruling: fiscal austerity and political instability.

Currently, the German government still assumes that the country's GDP will increase by 1.3% for 2024. But almost all reputable economic researchers predict that Germany's GDP growth will be below 1% this year.

Crisis on all sides?

OECD economist Isabell Koske sees the 2022 energy crisis hitting Germany harder than other countries because industry plays a bigger role in the country. At the same time, dependence on Russian gas has hurt Europe's largest economy more over the past two years.

"High inflation reduces household purchasing power, which in turn affects consumption. The government budget crisis also makes companies and consumers nervous," added Isabell Koske.

It is important to resolve the budget crisis as quickly as possible to give businesses and households planning for the future peace of mind and confidence. A solution should include cutting spending and increasing revenue.

Expert Stefan Schneider from Deutsche Bank also believes that the German economy will decline by 2024.

"Germany has bet on Russian gas as a cheap source of energy for industry, on the Chinese economic miracle as a driver of exports, and on Pax Americana in the transfer of national security. On all three issues, Germany has come to the end of the road," said Moritz Schularick, president of the Kiel Institute for the World Economy.

The article in the Handelsblatt economic magazine also affirmed that the country's economy continues to face bleak prospects in 2024.

The magazine cited a survey by the German Economic Institute (IW) showing that the majority of businesses expressed pessimism. Specifically, 30 out of 47 economic associations surveyed said that their current situation was worse than a year ago, including key, labor-intensive industries such as machine manufacturing, mechanics, electricity, construction and retail.

“The biggest headwinds for 2024 include a weak global economy, geopolitical uncertainty and rising interest rates,” the IW survey assessed.

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