Locomotive of EU economy struggling

Germany's gross domestic product fell 0.2 percent in the fourth quarter of 2022 from the previous quarter, lower than market expectations. That followed a growth of 0.5 percent in the third quarter and 0.1 percent in the second, and was the first contraction since the first quarter of 2021.

The energy and electricity prices in Germany have been brought under control and consumer confidence has risen for four months in a row as well. But the economy still shrank in the fourth quarter mainly because of the weakening of consumption amid high inflation.

The consumer price index in Germany rose 8.6 percent year-on-year in December. Behind this statistics are changes in the lifestyles of many German families. Struggling with high inflation, many people in Germany had to change their lifestyle last year. For example, nearly one in six skipped a meal to save money, and 40 percent cut out expensive ingredients or skipped desserts to save money.

Although Germany has the biggest fight against rising energy prices and inflation in the EU-the federal government wrote€200 billion ($217.4 billion) in cheques to German businesses and households — the support proved to be too late. The gas price cap, for example, only came into effect on Jan 1, and households and small businesses won't benefit from the cap until March. An average monthly rental subsidy of€190 for low- and middle-income families was not effective until this year.

Even if the economic indicators of Germany do not suggest a technical recession, other indicators suggest stagnation is all but inevitable. Affected by soaring energy prices, a large number of German manufacturing companies have cut production, relocated their production or even closed down in 2022. Shrinking capacity pushed German exports into deficit last May for the first time in more than 30 years. In addition, there is a serious labor shortage — about 2 million posts are awaiting workers — in German manufacturing. Last year, a wave of strikes in some industries further weakened manufacturing capacity of the country.

It can be said that energy problems and labor problems have evolved into structural problems for the German economy. Similar problems exist to varying degrees in other major EU economies. The fact that EU countries overcame the energy crisis last year does not mean that these structural problems will automatically disappear.

Economic problems always spill over into geopolitics. Thanks to a temporary respite in energy security and a mild winter, some European countries are increasingly taking a more aggressive and oblique approach to the Ukraine crisis. The question is whether, and for how long, this strategy will help fix the economy.