Teutonic plague: is Germany the sick man of Europe?

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Of $45 for three month plan equivalent to $15 per month. Required new customer offer for first three months only. Speed slow. 135 gigabytes of network busy taxes and fees extra. See mint mobile.com. Hello and welcome to the Intelligence from the Economist. In Lagos, I'm Ora Ogumbi.

And in London, I'm Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world.

People really love their big cars. The loud, flashy trucks and SUVs have become a status symbol of sorts. Of car manufacturers love them too, especially for their healthy profit margins. But their attempt to replicate this business with electric vehicles comes at a cost.

And the language with the most native speakers is by a long way, Mandarin. And for a long while, it was a wildly popular choice for learners outside China. We ask why, amid a wider drop in language interest, so few are choosing it today.

First up though, In the 2000 and tens, Germany was thriving. An employment miracle, or as the Germans say, a job funder, reached full flower on the back of a boom in demand from emerging markets, Germany's economy grew by more than its European rivals, Britain and France, while its debt to GDP ratio fell below 60%. Angela Merkel, chancellor throughout these glory years, was lauded for uniquely grown up leadership and commentators published books with titles such as why the Germans Do It Best Better. Germany's footballers even won the World Cup. But the 2020s are shaping up to be very different, and not just because the national football team is faltering. The country's problems are Deep rooted, painfully knotty and show no signs of being fixed.

Germany's economy has gone from leader to laggard.

Christian Odendall is our European Economics editor.

Germans are unhappy with their government and the far right alternativa for Deutschland party is polling at 20%. Its vaulted economic model and state look increasingly unable to provide growth and public services. Once it was Europe's motor and now the wheels may be coming off.

Okay, so tell us just how bad is the situation in Germany?

So the IMF predicts Germany will be the only economy in the G7 to contract this year. And this is partly because the country is uncomfortably exposed to some unique circumstances such as the war in Europe or the slowdown in China. Interest rates have shot up here too, hurting German construction and business investments. We know that gas is still relatively expensive. Consumers are struggling. Their real wages have only just started to grow again after having fallen back to levels last seen in 2015. But I think less widely appreciated is that Germany's long term prospects are also not great. It is exposed to a triple whammy. Industry looks painfully vulnerable to the new geopolitical rivalry between China and America. Its journey to net zero emissions will be particularly difficult and its workforce is unusually elderly. And to make matters worse, the German state looks ill prepared for these challenges.

Okay, well this sounds rather ominous. Let's start by looking at the geopolitical picture. What makes the German economy so exposed?

So both America and Europe want to re engineer their supply chains to reduce reliance on non western suppliers, particularly China. And this will provide some benefit for Germany as firms try to reshore production. Billions of euros have been committed to investment by intel in Germany or by tsmc, the Taiwanese chip maker. But these investments also come at a great expense for the German taxpayer because there is a subsidy race going on globally. And so billions of euros in subsidies have been thrown at these chip companies. Then we have Germany's very export oriented, globally integrated economy. And whenever trade links are reduced or technologically transfers are not working as they did then that will always affect a more open and trade heavy economy like Germany's a lot more. And we've looked at sort of the exposure to autocracies and Germany and the Netherlands combined have some of the highest share relative to their GDP in terms of trade with autocracies. And then there is the other thing that China increasingly tries to replace western companies and western imports with products of its own. And one of these things is cars. And you know, Germany is famous for its car industry, but the German car industry risks being left behind. By the switch to electric vehicles. At the same time as China, that has invested a lot in building its own electric vehicle capacities, is starting to export these vehicles to the west, to the world, but even to Germany.

And what about the journey to net zero? Why is Germany going to find that so particularly difficult?

So there's some good news. The German economy is one of the most energy efficient in Europe. But the problem is that, of course, the big industrial base, including some very energy intensive businesses like chemicals and steel production and so forth, means that there is a lot of decarbonization in the industry that still needs to happen. And the original plan was to replace nuclear and coal with gas and renewable energy. But we know that these plants are now a mess because cheap gas is no longer available. At the same time, Germany has to decarbonize its industry. And how to fix that is one of the major debates in Germany at the moment. And some chemical companies have already restructured their businesses or even closed down some plants. The German government is mulling a bigger response by subsidizing energy for these businesses for the time that not enough renewable capacity has been built yet. You know, building up a renewable system, building up the grid and so forth. But this will take time.

And what about Germany's demographic issues, that unusually elderly workforce you spoke of?

So even during last year's energy crisis, Germany's much lauded Mittelstand, the smallish firms that make up a big chunk of its economy, cited a paucity of suitable workers as their main concern. And it is estimated that without immigration and without any other adjustment, the labor market will lose 7 million of its 45 million workers by 2035. So that means for German businesses in total, one of the major concerns is how do we fill the jobs when our skilled workers retire? And once that problem was solved by importing workers from Eastern Europe, because high western and German wages brought them to the West. But the economies in the east of Europe are either booming themselves or have a similar demographic problem, which means they are also lacking skilled workers. And Germany itself has not yet reinvented itself as a sort of Canada of Europe, which is open and nimble to attract global talent. And so this is one of the major challenges. How Germany can reinvent itself as a country for immigration that is open to immigration, that is open to talent and attractive for talent globally.

And why is the German government so ill prepared to deal with this triple threat?

So one of the things that connects all these three challenges is that they require nimble and digitally savvy and highly capable state to help the economy adjust. The problem is that Germany's state and bureaucracy is none of these things right? So take digitalization as an example. A law introduced in 2017 decreed that by 2022, almost 600 services should be digitalized. Germany only managed about 130 of them. And this is just the front end facing the public. The whole back end is still largely paper based. That's as an example. There are many other examples like it. And so what you're hearing from businesses across the country, all from schools or universities or research centers and so forth, is that slow moving bureaucracy in Germany is making it very hard to adapt to a rapidly changing world.

So, Christian, tell us what needs to be done.

I think we are at this point now once more, where Germany needs fairly deep reforms. For example, a complete revamp of how the state and bureaucracy operates and to reinvent itself as a country for immigrants. A country that invests a lot in the green transition quickly. And this is what Germany needs to do. But there's not that much realization for the need for change. And while some of the investments and easing of planning procedures and so forth that is needed for the green transition is happening, I think there is a lot more potential for much more sweeping reforms to make sure that Germany can adapt to these three major challenges facing its economy.

Christian, thank you so much for coming on the show.

Thank you for having me. Ora.

It will leave everything you thought possible in a cloud of dust. The quiet revolution begins with the nearly silent all electric propulsion system that offers 1,000 horsepower.

The battery that powers the electric version of GM's Hummer weighs as much as a Honda Civic.

Every aspect of the Hummer EV has been designed to look and act unlike anything out there. Hummer EV.

The new electric Chevy Silverado weighs 3,800 kilograms. But it's not just the legacy car companies going big in electric. Tesla is expected to finally start production this year on its new cybertruck. Remember the one that I said in an earlier episode, looks like it belongs on Mars?

Where is that cybertruck?

Is that around here?

That's somewhere around here.

Bring on the cybertruck.

It's a vehicle that the CEO Elon Musk has likened to a futuristic armored personnel carrier. As these vehicles get bigger and bigger, they get heavier, in part because they need huge batteries to drive them a safe range without running out of juice. Of all the electric vehicles or EVs sold last year, more than half were SUVs. So how green are these cars really?

So the strange phenomenon in the EV market is that cars are getting bigger, and carmakers want that.

Henry Tricks writes the Schumpeter column for the Economist.

Carmakers are pushing bigger, more luxurious vehicles partly because the profit margins on small EVs are very low. Whereas the bigger. The more luxurious the car, the fatter the potential profits. But they're also following consumer demand. For decades, people have wanted bigger vehicles, particularly SUVs, and this trend has now just morphed into the EV segment as well. But it's not really sustainable, either economically or environmentally.

Okay, but how much does their size matter? I mean, isn't it just better that there are more electric vehicles on the road?

Yes, at the moment, it is much better that there are just electric vehicles on the road. And over the course of its lifetime, even a monster electric vehicle has fewer emissions than your average petrol engine. So at the start of its life, an electric vehicle actually has a bigger carbon footprint than a petrol engine, if you take into account the materials that go into batteries, the metals that go into the car, and the manufacturer of the electric vehicles themselves. But the big difference comes when you hit the road. The electric vehicle has no tailpipe emissions, whereas the internal combustion engine chugs out petrol and diesel fumes and carbon dioxide from the exhaust pipe. And these make the emissions of a conventional car much higher over the course of 20 years or so than an EV. And this is true even in places where the electricity to charge an EV is, is generated by coal or other fossil fuels, which is the case in some US States and in parts of Europe and China.

And that's one factor that electric vehicles opponents actually point to, that the degree of their eco friendliness ultimately depends on the electricity source for charging it. Right?

Yeah. I mean, that point is made a lot. And yet a car that's charged using fossil fuel electricity may still emit fewer emissions than a petrol engine. Obviously, the green greener the energy source, the better. And we are moving in that direction. Utilities are shifting towards renewables, and there are greener grids. The trouble is that the bigger the battery, the more time it needs to charge, which puts more strain on the grid. And we're used to thinking about the electrification of transport. But that's not the only source of demand for clean power as we move into a more decarbonized future. So you have to use that clean energy economically, at least until we build much bigger grids. And the bigger the car, the more strain on the grid. There's also evidence that these battery sizes are growing faster than people expected, which is a reflection of. Of the growth in the demand for those big EVs. But that trend could ultimately have a negative impact on both the EV market and the environment.

And Henry, why is that?

Well, let's just first of all look at the environment. We know that mining for the components of a battery, you know, puts a toll on the environment. And there is also likely to be a scarcity of these minerals in coming years. I mean, we are still at the foothills of the EV rev solution right now. And already the batteries are one of the most expensive components of an electric car. And the risk is that they will become prohibitively expensive if there is more and more demand for those minerals. But to decarbonize the energy system, what you need is the sort of electric vehicles that are affordable to the mass market. And the fact that so many big gigantic batteries are being built for luxury vehicles, I think that is squeezing the lower end of the market.

Okay, but for those who are after that wow factor, is there anything that governments can do to change their minds and encourage them to go a little smaller perhaps?

Sure.

I mean, so first and foremost, governments can incentivise smaller EV purchases by building out more charging infrastructure so that actually you don't have to have a vehicle with a 450 mile range. They could also force car makers to label the energy and the material efficiency of the cars, just like, you know, you see on electric appliances, for example. And it's interesting because the car makers themselves now realize that this EV obesity epidemic may not be sustainable even as they continue to produce these big burly vehicles.

But Henry, you said yourself that larger EVs are more profitable. Why wouldn't they want to go big if that's where the money is?

Yeah, good point. Well, I guess there are two things to think about here. One is competition from China and the other is regulation. So Chinese drivers are demanding bigger cars, but battery efficiency is considered really important there. So even as their cars are getting bigger at home, they are exporting the smaller, lighter models because that's where they see the bigger, biggest gap in the market. And you see that European car makers are beginning to see the threat of competition from China and are moving fast down market as a result. But let's face it, not everyone is going to make their decision on which EV to buy based on whether or not they're good for the planet. Many people will simply like an EV because it's fun, fast and cheap to drive. But for those of us worried about the climate, we should be aware that our choices are important here. If we want the rest of the world to have the opportunity to drive in a carbon neutral way as well. It may require us to drive smaller EVs and to leave those monster trucks on the lot.

Well, Henry, I should probably learn to drive first before I decide which car I'm going to buy. Thank you so much for coming on the show.

Great to be here. Thank you, Orey.

Not so long ago, the language to be learning worldwide was Mandarin. China's influence in business and on the world stage was rising fast, and the argument went, so were the future benefits of speaking its main language. But now all that interest seems to have faded among foreign students.

The number of people studying Mandarin at university has been declining for a decade.

Rosie Blore writes about China for the Economist.

And let's not forget, you know, we've had massive growth in China during that time, huge rise in importance of China. And yet, even though language in general isn't valued across particularly much of the English speaking world, Mandarin has been even more in decline than other languages.

And do we know why that is?

So there are lots of reasons. As with anything where you get 18 year olds, each one would give you a different one for why they chose to study or not to study Mandarin. But there have been particular surveys that looked at why people did study it, and there was one in 2016 that showed that people particularly studied Chinese to improve their employment prospects. For a while, it certainly seemed like having any knowledge of Mandarin or any knowledge of China gave job seekers an edge. But that's really changed, and that's partly because you've had a steady stream of bilingual Chinese graduates who can now fill most employment gaps. And it's also because the proficiency that a lot of Western students achieved was just not as good as Chinese students. So in China, the national curriculum means that you start learning Chinese by age 8. That's actually quite late for a lot of Chinese. Many of them study it before, whereas for Western graduates, if you only start learning at 16 or 18, then you know you're going to struggle.

So the explanation here is just simply the supply and demand has come to a different balance.

So that's one of the reasons, but another big one is about kind of what people think about China. There have been growing geopolitical tensions and China's political reputation has taken a big knock. So a lot of Mandarin teachers mentioned the Beijing Olympics in 2008 as spurring real excitement amongst students. People were excited about this changing, exciting, glossy country. But that shine faded, you know, under Xi Jinping. Not immediately, but pretty soon it became obvious that things were sort of taking a chill. And then there were these big international high profile news events, Hong Kong demonstrations, growing awareness that the Uyghurs in Xinjiang in western China were being locked up and repressed. And so in most high income countries you've seen negative views about China or rise and they now stand at or near historic highs. And as well as that, some people worry that there's growing anti Western China sentiment within China. So they worry about what they will encounter when they get there. But to me, one of the interesting things is actually kind of when we started to see the dip. So you got a decline in the number of American students going to study in China from 2011. In most countries, the peak in university learning was reached in 2013.

So wait a minute, why the drop off then visible before all of these geopolitical tensions became so.

So that's partly about a perception about China as not a very nice place to live. So if you think back to that time, it was very rare to see any image of Beijing that wasn't of its smog, that wasn't kind of gloomy. And I think air pollution put a lot of people off. We certainly saw a lot of expats left China at the time. A lot of rich Chinese tried to emigrate. And so this kind of airpocalypse was just one of those things where if one of the very images you see of a country is basically the fact that you can't see when you get there, who wants to go.

And so now that the dip is that much clearer, what effect do you think that has on China itself?

I mean, in some ways the linguistic reach of a country is the ultimate expression of its soft power. So one really interesting thing looking at the stats is Korea, you know, thriving pop culture. Bts, we're watching Squid game. People want to learn the language. Korea is not going to be where your career is. It just seems kind of cool. So China's soft power is really weak abroad, partly because its entertainment industry really is serving the interests of the Communist Party before the people. And then of course, if people are not visiting China to live there, to work there, to travel there, it's hard to see that it's an amazing, beautiful country with incredible people, which of course it is.

And what about the flip side though? What cost does it incur for people outside China who are not getting exposed to the language?

Lots of people would say who cares in the age of Google Translate? But definitely governments are worried. Mandarin is deemed critical by the American government for national and economic Security, the CIA, the Department of Defense, the State Department, they're all desperately trying to recruit Mandarin graduates. Britain is super short on China expertise and language skills. So I think if current trends continue, you're just going to get a worse and worse situation. We've already got people talking about a new Cold War, mutual distrust, mutual misunderstanding, and all of that seems to me to make conflict more likely, not less likely.

Thanks very much for your time, Rosie.

Thank you.

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