Germany was the only one among the seven largest economies in the world to finish the year 2023 in a recession, with a GDP decline of 0.3 percent and a budget deficit of 60 billion euros. The loss of purchasing power due to high inflation and tightening financing conditions burdens both consumption and investments. The inflation rate is 5.9 percent on a year-on-year basis, and food prices, in particular, have risen significantly.
The results of the Hans-Bekler Foundation study have shown that a decline in living standards is being felt in Germany. A significant portion of the population does not earn enough to afford the accustomed way of life, and the number of those who cannot afford clothing, food, heating, etc., is increasing.
After much deliberation, the government has adopted a budget of 476.8 billion euros for the year 2024. The crisis was triggered by the Constitutional Court’s decision to prohibit the use of funds originally intended for COVID-19 recovery to stabilize energy prices, amounting to 60 billion euros. The court ruled that Chancellor Olaf Scholz’s coalition had acted in violation of the so-called debt brake, leading to a cascade of problems since then. Due to the deficit, austerity measures have been imposed, sparking strikes among various social groups. The poor state of the country is being exploited by the right-wing Alternative for Germany (AfD), whose popularity continues to rise, posing a threat to the democracy painstakingly built after World War II.
Germany has operated on a basis of tolerance for decades and is known for its high trust in its social state. Citizens have been burdened for years by cumbersome bureaucracy and high taxes, but that was not enough to incite rebellion. It wasn’t even the pandemic or the energy crisis.
The tipping point came with announcements that subsidies for machinery and diesel fuel would be cut for farmers. Following this, farmers took to the streets in large numbers in protest.
Aleksandar Vučić recently stated in Davos that “when Germany coughs, we get pneumonia,” emphasizing that Germany’s economic downturn has created a problem for Serbia. He added that if it weren’t for this decline, the projected GDP growth for Serbia in 2024 would have been 4.5 percent instead of 3.5 percent. If Vučić is correct, Germany’s growth contributes at least one percent annually to Serbia. Germany is Serbia’s largest foreign trade partner, accounting for 13.7 percent, while China is the second.
According to the Development Agency’s data, Serbia has attracted more than 42 billion euros in foreign investments since 2007, with a significant portion coming from German investments. Almost every city in Serbia has some German factories operating: Priboj, Preljina, Kruševac, Pančevo, Subotica, and more. Among the most important investors are Štada, which acquired Hemofarm in Vršac; Henkel, the owner of Merima in Kruševac; and Continental, which has settled in Vojvodina. German companies employ more than 80,000 Serbian workers.
What is concerning is that most of these factories operate as parts manufacturers and suppliers for the German automotive industry, and the numbers show a significant decline in car production. In November, Germany experienced a year-on-year industrial decline of 4.9 percent, directly impacting the demand for our exports. A recovery is hard to expect this year. Forecasts indicate that Germany will face stagnation, with optimistic scenarios suggesting a growth of only 0.7 percent. This is not sufficient for Serbia.
However, Germany’s presence in Serbia is not only through investments. Numerous German institutions participate in reform processes. Their consulting services and financial contributions are also significant for Serbia. Germany is interested in ecological projects in our country, such as climate preservation and sustainable economy, the development of renewable energy sources, and the decarbonization of the energy sector. Democracy and civil society are also important to Germany.
Germany and Serbia had an upward trajectory in their relations until Angela Merkel stepped down from the position of Chancellor. Since then, new challenges have arisen for us. The shift in policy towards Serbia is particularly a consequence of the involvement of the Greens in Scholz’s government, which includes the Minister of Foreign Affairs, Annalena Baerbock. In March 2022, during her visit to Belgrade, she called on Serbia to align its foreign policy with the EU, a stance that German officials particularly criticize, and Berlin is also dissatisfied with Belgrade’s policy towards Kosovo and Metohija (KiM).
In Davos, Vučić met with Wolfgang Schäuble, the Minister for Special Affairs and a close confidant of Olaf Scholz, rather than with the Foreign Minister Baerbock, who was also present at the forum. This also reflects the state of relations between the two countries. During his visit to Serbia in mid-2022, Scholz himself called on Belgrade to join sanctions against Russia. Two more recent events further strained Germany-Serbia relations: the accusation by Serbian Minister of Police Bratislav Gašić in parliament that Germany was hiding the killer of Oliver Ivanović, and revelations about possible electoral fraud in Serbia. Regarding the latter, the German Bundestag was particularly critical, with all three ruling parties stating that developments in Serbia were heading in the wrong direction and calling on the European Commission to reassess its relationship with Belgrade.
The economic and political news from Germany is not encouraging. Due to geopolitical instability arising from two major wars and the challenges in Red Sea transport, Berlin will continue to shorten supply chains for its industry, presenting an opportunity for Serbia. However, the economic contraction in Germany is not favorable for our real sector. Another, even greater concern is the political sparks between the two countries, which threaten to escalate into a fire. The worst thing that could happen to us is if Germany tightens the financial faucet or decides to withdraw investments, halting the arrival of new ones. According to data obtained by NIN from the Business Registers Agency (APR), there are currently 1,017 companies operating in Serbia whose founders or owners hold shares from German companies.
Furthermore, the European Commission has outlined a growth plan for the Western Balkans worth six billion euros until 2027, and Serbia is counting on a significant portion of that funding. Germany, in particular, has substantial resources in that fund.
To better understand the situation in the largest European economy, it is necessary to delve into the past. Experts believe that the complex guilt stemming from World War II still troubles the Germans today, despite successfully building a democracy of which they can be proud. Germans are grateful to the United States for deciding, as the victor after the war, to revitalize and industrialize their country. In doing so, Germany heavily relied on the U.S. as a security shield and invested minimally in its military. Now, this approach may need to change.
The situation will become further complicated if Donald Trump wins the November elections in the United States. He will insist on allocating two percent of the budget for the military, and a new economic isolation of the U.S. would not be beneficial for the rest of the world, including major partners like Germany.
The fundamental question today is whether the economic decline in Germany occurred as a result of the financial troubles in the United States or if it was a mistake of the country’s long-standing economic policy. Germany has relied on strengthening its export-oriented industry and inexpensive imports of raw materials from Russia and China, rather than focusing on domestic investments, encouraging innovation, startups, IT, and research-technological development. Today, Germany faces issues such as slow internet, sluggish digitization, a lack of qualified workforce, and excessive bureaucracy. The country has not invested significantly in infrastructure, leading to outdated railways. Considering that major European corridors pass through Germany, the absence of a clear vision for investments in transportation and logistics becomes puzzling.
Another significant mistake is the insistence on constant austerity. German governments have rarely been willing to finance growth through loans and borrowing, often differing with the French, who advocated for substantial investment cycles. The root cause of this frugal behavior is believed to be the trauma from the time of the Weimar Republic, which experienced hyperinflation in 1923. However, constant austerity in the economy has consequences. Germany still maintains a strong social state, but the quality of its services becomes questionable due to the austerity measures it now needs to implement. The local philosophy of profit-making relied on cheap labor and other favorable inputs, such as the cost of energy. This system worked well until workers started costing more, and the country faced a shortage of Russian gas.
Today, Germany relies on importing expensive liquefied gas from the United States and renewable energy sources dependent on nature—water, wind, and sun.
Due to the high cost of energy, products have become expensive and non-competitive. There are increasingly frequent reports of bankruptcies and the relocation of industrial facilities to other countries. Germany is also not benefiting from the U.S. law that offers substantial incentives to electric vehicle manufacturers, while Berlin is phasing them out, making it non-competitive in that sector as well.
Additionally, Germany is currently reassessing its relationship with China, which is complicated and intertwined with various interests, especially those of the automotive and pharmaceutical industries. The country is facing increasing pressure from the United States to further reduce ties with Beijing, a move that could accelerate Germany’s path into an economic abyss. Another significant social burden for the state is the migrants from the Middle and Far East, as well as around 1.2 million Ukrainian refugees—about a third of the total number of refugees entering the European Union.
In Germany today, farmers and train drivers are on strike, and other social groups are also gearing up for protests. Farmers are demonstrating against austerity policies. Initially, it was planned to immediately eliminate tax breaks for diesel and tax exemptions for agricultural vehicles, which would have provided the government with nearly a billion euros. However, due to protests from farmers, this decision was scaled back, and now the plan is to gradually phase out the diesel discount over the next three years.
German analysts suggest that protests should not be interpreted unilaterally, and they mainly involve large industrialized farmers protecting the interests of the agricultural industry. They aim to maintain the current state and privileges, preserve subsidies, and resist a shift towards the proclaimed goal of environmentally friendly agricultural production.
Nenad Krajcer, a journalist from Berlin, shares insights with NIN on the extent to which economic and political changes have affected the population. According to him, the city where he lives and works was considered one of the cheaper ones, but today it is almost on par with Munich, Cologne, Frankfurt…
“The worst was in 2022 when energy prices drastically increased. That was the biggest blow to household budgets. It later pulled up food prices and everything else. Now the situation has stabilized, but people still exhibit a sense of fear. This is particularly noticeable in shopping; you can buy much less for 50 euros than you could before the pandemic,” says Krajcer.
He emphasizes that another blow to household budgets has been the rents, which have doubled in the last 10 years, with the most significant increase occurring after the pandemic.
“People were moving to Berlin because rents were very low. Today, they are almost as high as in the most expensive cities in Germany, around 20 euros per square meter. This affects subtenants the most. However, according to the law here, the landlord has precisely regulated limits on how much they can increase the rent for the tenant, so the biggest problem is for those who are just arriving or want to move to another apartment. In that case, they must pay according to the current tariff, which is very high. In addition to prices, the issue is also the shortage of properties, especially in large cities,” explains the interviewee from NIN.
According to Nenad Krajcer, it is impossible not to notice significantly higher prices for hospitality services. He agrees that people still go to restaurants, but based on his own experience and the experiences of friends and acquaintances, he adds that they do so less frequently, not only due to the increase in prices but also because of a decline in quality.
On the other hand, Krajcer emphasizes that not everything is as bleak as it is portrayed, and in line with the rise in prices, which are a bit atypical for Germany today, salaries have also increased. He points out that there have been various forms of assistance to mitigate the impact of inflation on household budgets, so in his estimation, it is more of a subjective feeling that everything is much more expensive today.
“Germans love to complain. They are big panickers, and some obvious examples show that not everything is so bleak. When you try to book a hotel, a plane ticket, a package… most are filled, and these are mainly retirees, not wealthy individuals. This shows that it’s not as bad as it seems, that many things can still be afforded, just a bit more challenging, and probably the hardest for families with children,” concludes the interviewee from NIN.
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