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European Union’s Economic Powerhouse Remains in “Difficult Waters” After 2023 Recession

Updated: Mar 31

Anna Matthei

From: Euractiv

From the COVID-19 pandemic to the Russian invasion of Ukraine, the European Union (EU) along with the rest of the global economy has faced great economic, public health, and political crises. Though the effects of the pandemic are waning, things are far from pristine for the Europeans. Home of the headquarters of the EU, Germany has been the economic powerhouse of the continent. But can this economic powerhouse maintain their longstanding economic growth without any power?

Opposed to the expected growth of 1.2 percent for 2024, Steffen Hebestreit – spokesperson for the German government – states that German output is to grow by a mere 0.2 percent this year. Several factors come into play when assessing how German growth has fallen in ranks compared to the rest of the developed world’s economies. Part of the story lies within the effects of the Russian invasion. Germany’s industrial sector was bustling until it came time to face its reliance on Russian fuel, particularly imported gas. This, in combination with the rising interest rates to combat inflation, along with shipping disruptions in the Red Sea, have created the “perfect storm” – as Economy Minister Robert Habeck reports.

Luckily, Germany is shifting their gas imports away from Russia towards other countries such as Norway, and an increase in liquified natural gas imports from the United States. Though one might hope this is part of the initiative to defund Russia’s invasion, this shift was mainly forced as Russia weaponized Germany’s reliance on their gas. The decline in fuel resources has cut back the output for the industrial sector by 2% and overall exports by 1.8%, causing lags in innovation and rise in unemployment. In combination with the previous challenges, this has significantly eroded the purchasing power of German citizens.

Though this spells trouble for Germany, these increased relations between other democracies such as the United States and Norway can prove beneficial in the long run. In addition, this could push Germany to rely more on renewable energy and subsize innovations in this sector. Marcel Fratzscher, President of the German Institute for Economic Research (DIW), believes that change is possible, but not under the current economic structures in Germany. This means cutting back on investments from energy-demanding sectors and looking onwards to the industries of the future.

The Social Democratic Party (SPD), Green Party, and Free Democratic Party (FDP) are currently at odds on how to strengthen their economy. Their 2009 constitutional amendment to limit deficit spending, originally meant to protect the German government from excessive debt, has now limited the ability of the German government to help its slowing industries including agriculture and technology. The German government is still not in agreement on how to change their current economic state. The FDP believes that taxes on corporations should be restricted. However, the Greens believe that the government should share its funds, thus reaching or surpassing their debt limits put in place in 2009. 

Germany is the EU’s largest economy and the world’s third largest exporter. The United States and Germany also have strong ties in foreign direct investment (FDI). While the US has invested about $148 billion in FDIs in Germany, they have invested $522 billion FDI in the US. This decline in Germany’s economy is sure to affect the United States. In order to strengthen our bilateral relations, especially after the Trump administration, it is vital to support the German economy so that its growth can resume before the estimated year 2028: if nothing is to be done. This is also particularly important in light of the Russian invasion of Ukraine, as the United States is now dividing its attention south of Europe to the Middle East.


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