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Michel the German GDPGDPTSMCIWHYour browser does not support the element., a national personification such as America’s Uncle Sam or Britain’s John Bull, is a sleepy fellow with a nightcap. He is a bit conservative and not all that keen on disruption. Michel is, in other words, a suitable representative for the modern German economy, whichhas grown by a meagre 0.1% over the past five years and is, according to forecasts, now entering yet another year of stagnation. When voters head to the polls on February 23rd, the miserable state of the economy will be at the front of many minds.Germany has been in a similar situation before. “In the early 2000s, the complaints were similar...We missed that underneath the surface many things were changing,” says Jens Ulbrich, chief economist at the Bundesbank, Germany’s central bank. Back then, just as today, China had entered new markets, unsettling European industry, and technological advances had to be incorporated into manufacturing. Now the challenges are even more daunting. America, once the protector of a rules-based global economy, threatens to up-end it. And China, formerly an enthusiastic purchaser of German equipment, mostly makes its own. But could there once again be signs of change underneath the surface?Begin with the subject about which Germans are most morose: their sputtering car industry. The sector lost some 10,000 jobs in the year to June, as firms struggled to transition from petrol-powered to electric vehicles amid growing Chinese competition. Now the industry’s best hope lies in a combination of restructuring and investment from abroad: Tesla, Elon Musk’s electric-vehicle firm, has opened a factory 50km (30 miles) outside Berlin, with plans to expand; Chinese competitors are reportedly considering purchasing Volkswagen factories if they close down.This is more damage limitation than barnstorming recovery. Creative destruction will have to play a part, too. In the 1970s, when Germany’s world-beating camera-makers were destroyed by Japanese rivals, surviving firms refocused on other types of optical equipment. Today they make up a growing sector, which added 2,000 jobs in the year to June, supplying the semiconductor and space industries. Some companies in the automotive supply chain may now be able to focus on, say, Germany’s growing aerospace-and-defence sector, which is benefiting as European countries beef up their armed forces, or medical technology, where Germany has long had strengths. Both industries are adding jobs (see chart).The green transition could be another source of growth. Charging infrastructure, hydrogen electrolysers, industrial electrification, smart power grids—Germany has advantages in all, according to a study by Boston Consulting Group and the German Economic Institute. Even in artificial intelligence, where the country has so far lagged behind, it could play a bigger role as firms incorporate the tech into their processes, says Christian Rammer of the Leibniz Centre for European Economic Research. Germany’s , made up of mid-sized companies with niche expertise, is renowned for its relations with clients and knowledge of their data and needs, which helped during the internet revolution. Manufacturing and machine-building firms are likely to add more services to their portfolios, to assist customers with the new tech. Such industry-linked services added 35,000 jobs in the year to June. The sector should continue to grow.Moreover, new companies seem to be emerging to meet the global economy’s changing needs. Last year more than 2,700 startups were established in Germany, some 11% more than in 2023. In a recent survey, young small and middling firms, particularly in research-intensive manufacturing and digital services, expected revenues to grow. Investors are showing guarded optimism as well. From 2015 to 2019 venture capitalists invested less than $5bn (or roughly 0.14% of ) a year in Germany. Since then, that has risen to an annual average of $11bn (or 0.2% of ).A reorientation of the German economy along these lines, led by new, innovative firms, would mean some wrenching shifts. Industrial areas are likely to lose out, particularly ones home to businesses that have struggled to reduce emissions. Tirschenreuth in Bavaria, which is host to paper producers, and Upper Sauerland near Dortmund, host to the timber industry, will face difficulties. Meanwhile urban areas, where talent and ideas tend to gather, should benefit. Jens Südekum of Düsseldorf University notes that when large firms create new tech units they tend to do so near cities in order to attract elite engineers. That helps explain why Tesla opened its factory outside Berlin.Although such a reorientation would cause political discomfort, it would not necessarily exacerbate existing divides. Saxony, in Germany’s poorer east, is likely to prosper, for instance. In part owing to the East German government’s industrial policy in the 1980s, which sought to build semiconductor expertise so as to reduce dependence on the capitalist West, the region has become Europe’s largest maker of microelectronics, with over 80,000 locals employed by the industry. In August construction began on a new semiconductor fab in Dresden, part of a project led by , a cutting-edge Taiwanese chipmaker, which represents the largest investment in Saxony since 1990. At the same time, Germany’s windy north-east is benefiting from rising demand for renewable energy. Indeed, analysis by Steffen Müller of , a research institute, finds that Germany’s east is now losing fewer jobs to business insolvencies than the rich south.Creative destruction is rarely comfortable, but it is required in Germany. A state that is more trusting of markets, as well as the new industries they create, and less keen to dole out subsidies for the old, would help the process along. Ministers would also be wise to lift spending, so as to provide a boost to demand. Perhaps the election will deliver a government willing to rouse Michel from his slumber.
