Brexit is, we’re told, a disaster that shaved a hefty slice off UK economic growth. But there does seem to be a very large proverbial elephant standing in the way of this thesis. Our EU neighbours don’t seem to have been doing any better than an admittedly sluggish – if now recovering – Britain. While the UK economy grew by 0.7 per cent in the first quarter of this year followed by 0.5 per cent in the second quarter, the French economy managed only 0.3 per cent and 0.2 per cent.
It is Germany that continues to surprise most on the downside. The economy shrank again in the second quarter, by 0.1 per cent. The German economy has now contracted in four of the last seven quarters, only avoiding the technical definition of a recession by virtue of the fact that so far it has not seen two consecutive quarters of contraction.
Nor are things looking too bright for the foreseeable future. The German government has just downgraded its expectations. Previous forecasts for 0.3 per cent growth over the course of this year have now been downgraded to zero. Germany has, of course, been struck particularly hard by the Ukraine war, thanks to its reliance on Russian gas. Angela Merkel’s government made a fatal miscalculation of continuing this dependence even after Putin had already helped himself to Crimea in 2014 – the deal for the Nord Stream 2 pipeline, unbelievable though it seems now, was made after that invasion.
Yet the German economy has been in trouble since before Putin’s second Ukraine invasion and predates Covid, too. Output from the mighty car industry peaked in 2015; the number of cars produced is now only two-thirds of what was manufactured then. Last week, Volkswagen announced what would once have been unthinkable: it is proposing to close down factories in Germany. Wider German industrial production turned negative in 2018; apart from the rebound from the deep chasm of Covid, it has enjoyed few months of growth since. Germany has been going through the same process of deindustrialisation that other western European countries have already gone through as production is transferred to lower-cost environments – only in Germany’s case it has been delayed by a decade or two. That doesn’t make it any less painful, however. In fact, it seems to be happening at a more rapid pace than it did in Britain, spurred on by Germany’s 2045 net-zero target. In 2022, another German industrial giant, BASF, announced that it no longer made sense to invest in Europe – and that it would instead build a £10 billion plant in China, citing energy costs as a reason.
German industry still has a long, long way to fall. Manufacturing currently accounts for 26.6 per cent of the German economy, nearly three times Britain’s 9.3 per cent. It still employs 7.5 million workers. As Britain showed in the 1980s, when factories close, they take down whole communities with them. That is likely to give the far-right, which is already winning regional elections, a large boost.
The decline of the German industrial economy is likely to be Europe’s big story over the next decade. Not that that will stop frustrated UK Remainers bleating that Brexit is the fount of all evil.
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