Eurozone nightmare as Germany's business model is now broken in 'big problem' for EU

Germany has gone from being the powerhouse of the European Union to the sick man of Europe, a UK-based economist has warned.

And Julian Jessop believes that while Berlin’s woes are nothing for Britain to crow about, Prime Minister Rishi Sunak should take comfort in the fact that the domestic economy is in significantly better shape. This is partly a result of the decision more than two decades ago not to join the Eurozone.

Mr Jessop, Economics Fellow at the Institute for Economic Affairs (IEA), was commenting on figures published on Monday by the German government’s Federal Statistical Office (DESTATIS), suggesting GDP fell by 0.3 percent in 2023 compared with the previous year.

Even after adjustments for “calendar effects”, the decline in economic performance amounted to 0.1 percent, the report indicated. He told Express.co.uk: “We’re obviously in a lot better position and we’re still in a mess.

“But things are worse in Germany. Of course, this isn’t good news for the UK – Germany is Europe’s biggest single economy and still a major trading partner so we shouldn’t take any pleasure in this.

“But it is significant that Germany is struggling so much.” Asked to explain the reasons for the economic decline of the European Union’s most populous nation, Mr Jessop, said Germany’s economic model is broken.

He said: “They’ve been relying for years on cheap energy, mainly imported from Russia, to make things to sell to countries like China. So they’ve been hit simultaneously by the energy crisis and also a slowdown in global trade and weakness in the Chinese economy.

“It’s not a huge surprise that they struggled last year. What’s worrying though, that there has been no real sign of recovery this year either.”

It seemed probable that the country’s economy would shrink again this year, Mr Jessop predicted.

He continued: “So that’s two years of a full-year recession in Germany, which is a big problem for the whole of the region, to see this previous engine of growth struggling in a way that it is now.”

As for the question of whether the UK’s economy was more resilient, Mr Jessop said: “It is, for sure, because we’ve got a different business model.

“Germany is dominated by particular types of manufacturing, which have really struggled over the last few years, cars being the most obvious one.

“We’ve got a more diversified economy, more services based and we’re not particularly dependent on any one foreign market like China.

“So yes we’ve got a more resilient economy because it’s more diversified and we are less dependent on one or two things that have worked very well for Germany over the last 10 years or so but no longer.”

While Mr Jessop downplayed the significance of Brexit when it came to Britain’s economic performance in comparison with other European countries including Germany, he did suggest the decision not to sign up for monetary union was a factor.

He explained: “It has allowed us to be a bit more flexible on fiscal policy. The Germans have very strict fiscal rules, which means that they’re going to have to cut spending a lot or rather not spend as much as they would otherwise have done.

“Because we’re outside the euro we don’t have to follow all the special rules that the EU imposes on budgets, we can set our own rules.

“Because we outside the EU, and in particular because we’re outside the euro area, we’ve got a lot more flexibility when it comes to taxation and spending.”

Olaf Scholz is currently struggling in the face of widespread tractor protests by farmers angry at planned diesel subsidy cuts. Mr Jessop said: Germany is clearly the sick man of Europe, nobody in their right mind would think otherwise, because they’ve got a broken business model.”

He explained: “It has allowed us to be a bit more flexible on fiscal policy. The Germans have very strict fiscal rules, which means that they’re going to have to cut spending a lot or rather not spend as much as they would otherwise have done.”

Speaking to reporters at the launch of the report yesterday, DESTATIS President Ruth Brand said: “Overall economic development faltered in Germany in 2023 in an environment that continues to be marked by multiple crises.

“Despite recent price declines, prices remained high at all stages in the economic process and put a damper on economic growth.”

She added: “Unfavourable financing conditions due to rising interest rates and weaker domestic and foreign demand also took their toll.

“Therefore, the German economy did not continue its recovery from the sharp economic slump experienced in the pandemic year of 2020.”