The stumbling German economy is a danger to the rest of Europe

The news from Germany is bleak and getting bleaker. A survey of the main industry associations this week showed that expectations are gloomier than for almost 20 years. Growth is much lower than predicted; unemployment, already high, is expected to rise. Good reason, in short, for Germans to get depressed (again).

Internal links

Economic crisis forces Germany close to breaking euro rules

The news from Germany is bleak and getting bleaker. A survey of the main industry associations this week showed that expectations are gloomier than for almost 20 years. Growth is much lower than predicted; unemployment, already high, is expected to rise. Good reason, in short, for Germans to get depressed (again).

Part of the problem are the uncertainties created by 11 September. Even before the Manhattan catastrophe, however, it was clear that economic growth would be much lower than last year's 3 per cent. Many of the problems lie with the country's economic inflexibility. The Social Democrat Chancellor, Gerhard Schröder, introduced a number of important tax reforms last year that improved things somewhat. Even now, however, Germany's economy is hardly lithe. Its absurdly generous system of pensions and welfare benefits (stays at health spas come courtesy of the state) is clearly unsustainable. The pension timebomb could cause a particularly serious explosion in Germany, where one in five of the population will be over 65 in just a few years.

Germany's leaders have long acknowledged that radical reforms are needed; but they have been too frightened to introduce the changes that are essential if Germany is to remain Europe's leading economy.

And it is still the leading economy – a point that is easily forgotten amid the hand-wringing and sometimes ill-disguised schadenfreude. Germany alone produces a quarter of the gross domestic product of the entire European Union – much more than any other country.

If Germany comes to be seen as the economically sick man of Europe, that bodes ill for the EU itself. It matters, too, for the proposed enlargement of the union to include countries such as Poland, the Czech Republic and Hungary – an expansion that can only be successful if the most powerful country in the region remains stable and prosperous. Germany has been an important motor in the creation of the euro. If Germany's own economy now stumbles, the dangers for the rest of Europe are clear.

Already, 9 per cent are out of work; in the former communist east, the figure is twice as high. Mr Schröder promised a slight cut in the number of unemployed by the time of elections next year. But even his modest predictions now look unfulfillable. In the meantime, the government has repeatedly had to scale back its predictions of growth. The country is weighed down, too, by its crippling debt burden. Germany, which was tough in its demands that countries such as Italy should get their economies under tighter control, in order to become eligible for joining the euro, is now in danger of breaking the rules that it helped to draw up, thus potentially upsetting the European applecart. One intended benefit of the euro was avoiding the instability that caused such problems in the past; it would be a sad irony if Germany, the self-proclaimed linchpin of stability, helped to undermine the structures that have been put in place.

It should still be remembered that the collapse of the German economy has regularly been predicted, by Germans and foreigners alike – only for doomsayers to be confounded. Germany frequently seems incapable of reform – and then, at the 11th hour, introduces changes that allow it to adapt and to survive in a more competitive world. Germany is not, as Germans themselves admit, a country of natural entrepreneurs; it is, however, a country where precision is prized. German thoroughness may be a cliché; but it is also real. This thoroughness has in past years enabled the lumbering giant to make essential changes – late, but just in time. For Europe's sake – not just for the country at the economic, political and geographic heart of the continent – we must hope that this will not be the occasion when things do, finally, fall apart.