Germany’s Five Shocks

Over the last decade, Germany has been the slowest growing economy in the European Union, and Europe has been the slowest growing continent in the world. From 1995 to 2005, Germany will have grown by only 14.6%, while the old EU on average will have grown by 24%, the US by 39.9%, and the world economy by 45.6%. Why has Germany performed so badly?

One theory, endorsed by the head of Germany’s ruling Social Democratic Party, Franz Müntefering, is that Germany is already where the others still want to be. Slow German growth, he maintains, is a sign of natural convergence.

But this theory is not convincing. Germany has recently been overtaken in terms of per capita income by several EU countries, including Ireland, the UK, the Netherlands, and France, and is still growing more slowly than all of them.

Another, more plausible theory is that over the past fifteen years there have been various external challenges or shocks that have hit the country simultaneously. Rigid as it was, with an extensive welfare system and an over-regulated labor market, Germany was unable to react to these shocks and ran into trouble. This theory recalls that of the British historian Arnold Toynbee, according to which empires collapse because they are unable to react to external challenges.