The German Election.

A week from today.

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1. The Economist:

Germany is the hole at the heart of Europe. It accounts for a quarter of the European Union’s output but it has been in recession for the past two years—and this year risks being the third. The perception that irregular migration is out of control has led to a surge in support for the xenophobic right, fragmenting German politics and causing paralysis in government and inaction in the EU. Its business model relied on manufacturing exports, especially to China, cheap gas from Russia and security provided by America. But that lies in ruins. The election on February 23rd is the most significant in Europe for years. There is a likely winner; but what happens next is both hard to discern and critically important.

That winner-in-waiting is Friedrich Merz, the 69-year-old leader of the Christian Democratic Union (CDU). Together with its Bavarian sister party, the CDU is predicted to win some 30% of the vote, far more than any party but not nearly enough for a majority. Coalition-forming will take months, and it is not clear whether Mr Merz will go for an alliance with the Social Democrats or the Greens. He may even need a second partner, which would be bad news: the unwieldy three-party coalition led by today’s chancellor, Olaf Scholz, condemned Germany to three years of drift and, when it collapsed, an early election.

But the biggest mystery surrounds Mr Merz himself. As his detractors gleefully point out, he has never been a minister, and indeed has never run anything larger than the CDU’s parliamentary caucus. His career in business was of the advisory and convening sort. Assuming he gets the top job, how will he transform a broken Germany? And since Europe functions best when it has strong Franco-German leadership, how will Mr Merz lead Europe when his French counterpart, Emmanuel Macron, is a busted flush? (Source: economist.com)

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2. The Wall Street Journal (20 December 2024):

Volkswagen said it had agreed to a deal with its union to reduce its workforce by more than 35,000 and cut billions of dollars a year in costs, while averting immediate factory closures in Germany.

Under the agreement announced Friday, VW said it would gradually reduce staffing levels “in a socially responsible way,” through early retirement and other measures. Workers will also forgo pay increases and lose certain bonuses. In exchange, the company agreed to not make any forced job cuts until 2030 and to keep all its German factories open.

The cost-cutting plan comes as VW and other European carmakers contend with a tough economic environment, high domestic costs, abrupt shifts in demand for electric vehicles and increasing competition from lower-cost Chinese EV makers. (Source: wsj.com)

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3. The Economist:

At the annual press conference of the Federation of German Industries (BDI) late last month, Peter Leibinger, its new leader, said that the mood in business circles is “as bad as I have ever seen it”. Many bosses doubt that their biggest handicaps—red tape, high taxes and costly social-security contributions—will improve much following the election, after which Friedrich Merz, leader of the opposition Christian Democratic Union (CDU) party, is expected to become chancellor. Bosses are confident that whatever coalition emerges will be friendlier towards them than the one forged by Olaf Scholz, Germany’s current chancellor. But few believe that reforms will be fast or deep enough.

Germany’s manufacturing base is shuddering. Industrial output has fallen by about a tenth over the past two years. Giants such as Volkswagen, the world’s biggest carmaker by sales, are scaling back production in the country. Matthias Lapp, chief executive of Lapp, a family-owned maker of cables based near Stuttgart, describes Germany as “our problem child”. On February 3rd his company reported sales of €1.8bn for its most recent financial year, down by 5.3% from the year before. Sales in Germany fell by 15%; in Asia, America and the Middle East business is humming. (Source: economist.com)

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4. Eurointelligence (27 January 2025):

On Saturday, Friedrich Merz had something interesting to say about the economy. Unfortunately, he also made sure that nobody is discussing this. He said the German economic model was irretrievably broken. We have been saying that for a while, but Merz is the first German politician who understands that Germany's current problems are not only of a different scale, but also of a different kind. He described the German economic model as importing cheap intermediate goods and then refining them with the help of cheap Russian gas. It was an economic model that relied critically on a particular geopolitical constellation, and on oligopolitistic dominance of technologies Germany has specialized in.

Merz also retold an anecdote from Davos, where the CEO of Microsoft told him Germany was too obsessed with data protection, and not enough with data usage and data security. The fact that Germany, and other European countries, are failing to exploit their data is one of the deep causes behind this current, historically unusual, economic slump. The entirety of European data legislation, very much at Germany's behest, is focused on protecting the consumer. This also constitutes a legal principle applied by the European courts. Europeans are protecting individuals from abuse of their data by companies. Whereas the Americans are protecting the companies from outside hackers, but maintain a much lighter data protection regime. The Europeans thought they can force their general data protection regime onto the rest of the world. The reality is that it is becoming unsustainable for Europe itself. Implemented in 2018, it was the beginning of a long series of anti-tech laws that is leaving Europe stuck in the digital dark ages.