Germany's Unexpected Economic Crisis

Economics Explained
3 Mar 202413:21

Summary

TLDRThe video script delves into Germany's industrial prowess and its potential decline as a manufacturing powerhouse. It explores the factors contributing to Germany's comparative advantage, such as skilled labor, advanced technology, and reputation for high-quality engineering. However, challenges like an aging workforce, energy crisis, and competition from countries like China are putting pressure on German industry. The script examines the implications of this shift, suggesting that Germany could transition to service roles, leveraging its brand reputation while offshoring production. While presenting risks and changes, this transition could position Germany for continued economic success in a globalized economy.

Takeaways

  • πŸ‡©πŸ‡ͺ Germany's economic prowess is driven by high-end manufacturing, holding the position as the world's third largest economy and the most influential within the EU.
  • 🏭 Despite a small share in total manufacturing output and exports, German cars symbolize the country's engineering excellence, with a broader leadership in engineered goods like aircraft and medical devices.
  • πŸ“‰ A combination of internal and external challenges threatens Germany's industrial dominance, prompting discussions on the future of its economy.
  • πŸ’Ό The strike actions across Europe, fueled by inflation, highlight the importance of investing and saving strategies to combat currency value loss.
  • 🌍 The global shift towards comparative advantage has countries like China and Singapore focusing on their economic strengths, influencing global trade dynamics.
  • πŸ› οΈ Germany's comparative advantage in manufacturing high-end industrial goods is attributed to its skilled workforce, technological expertise, and reputation for quality.
  • πŸ”‹ Recent challenges, including energy crises and an aging workforce, pressure German manufacturing and its global competitiveness.
  • 🌏 The rise of manufacturing capabilities in countries like China poses a challenge to Germany's industrial sector, with more BMWs now produced in China than in Germany.
  • πŸ“ˆ German manufacturing's decline could potentially leverage Germany's strong brand reputation, shifting towards a model where manufacturing is outsourced but still benefits from the 'Made in Germany' premium.
  • πŸ”„ A shift from local manufacturing to service-oriented roles could align with global economic trends, yet poses risks and challenges for the German workforce and economic model.

Q & A

  • What factors have contributed to Germany's industrial dominance in the past?

    -Germany's comparative advantage in producing high-end manufactured goods stems from its highly skilled workforce, particularly in engineering and manufacturing disciplines, its geographic position within Europe, and access to cheap energy sources like natural gas from Russia and Norway.

  • Why are economists predicting the decline of Germany's industrial dominance?

    -Several factors are contributing to this prediction, including an aging skilled workforce, difficulties in attracting skilled migrants, high training standards and bureaucracy, and competition from countries like China that are catching up in advanced manufacturing capabilities.

  • How is the energy crisis impacting German manufacturing?

    -The energy crisis has hit German businesses particularly hard because the country is heavily dependent on cheap fossil fuels to power its energy-intensive factories. Higher energy costs are having a bigger impact on German manufacturing than higher labor costs ever did.

  • What is Germany's comparative advantage in the manufacturing sector?

    -Germany's comparative advantage lies in its global reputation for producing high-quality, premium manufactured goods, which allows German companies to charge higher prices compared to competitors from other countries.

  • How could the decline in domestic manufacturing potentially benefit Germany?

    -Germany could leverage its reputation for producing high-quality goods without the disadvantages of actually manufacturing them domestically. German companies could offshore production to other countries while still benefiting from the premium pricing associated with the German brand.

  • What are the potential risks of shifting away from domestic manufacturing?

    -The risks include potential disruptions to Germany's harmonious labor relations and egalitarian economic system, as well as the possibility of losing its reputation for quality if international operations fail to maintain standards. There is also the risk of job losses if the shift does not directly lead to better jobs for German workers.

  • How does Germany's manufacturing sector compare to other advanced economies?

    -Germany has about 50% more of its people working in industrial jobs compared to other advanced economies with large domestic automakers and high-end manufacturers.

  • Why have German companies historically chosen to manufacture domestically?

    -For the last three decades, Germany has decided to do more manufacturing in-house rather than offshoring operations, which was a logical step for its advanced economy at the time.

  • How does automation and mechanization impact labor costs in German manufacturing?

    -German car factories use a lot of automated machines and tools, allowing a few highly skilled workers to produce many times more cars per worker than with basic hand tools. At this scale, paying higher wages to German workers is competitive because the advantage comes from having the machines and experience, rather than relying on low-cost labor.

  • What challenges is Germany facing in maintaining its skilled workforce?

    -Germany is struggling with an aging skilled workforce, where many workers are leaving the workforce earlier due to generous retirement benefits. Additionally, the country has had difficulties attracting skilled migrants due to language barriers and bureaucratic training certifications that can take years to obtain.

Outlines

00:00

πŸ‡©πŸ‡ͺ Germany's Innovative Industrial Prowess

This paragraph discusses Germany's reputation as a leading manufacturing powerhouse, producing high-end engineered goods across various industries. It highlights Germany's rise to become the third-largest economy globally, surpassing Japan, and its dominance within the European Union. The paragraph emphasizes Germany's ability to manufacture a wide array of products, from cars to nuclear centrifuges, owing to its skilled workforce and advanced engineering capabilities.

05:02

🏭 Factors Contributing to Germany's Industrial Advantage

The paragraph explores the factors that have contributed to Germany's comparative advantage in manufacturing. It discusses Germany's highly skilled and well-paid workforce, access to cheap energy sources, and its strong global reputation for quality engineering. The paragraph also examines the role of automation and advanced machinery in offsetting high labor costs. Additionally, it touches on China's growing manufacturing capabilities, which are beginning to rival those of Germany, and the potential impact on Germany's industrial dominance.

10:05

🌍 Shifting Dynamics and Future Prospects for German Industry

This paragraph explores the potential shift away from domestic manufacturing in Germany and its implications. It discusses the aging workforce, challenges in attracting skilled migrants, and the catch-up by other countries like China in advanced manufacturing. The paragraph suggests that Germany could leverage its reputation for quality goods by offshoring production while retaining the premium pricing associated with German-made products. However, it also highlights potential risks, such as worker protests, disruption to Germany's egalitarian economic system, and the potential loss of reputation if quality standards are not maintained in international operations.

Mindmap

Keywords

πŸ’‘Comparative Advantage

Comparative advantage refers to a country's ability to produce a good or service at a lower opportunity cost relative to other countries. The video explains how different countries specialize in areas where they have a comparative advantage, such as China in low-cost manufacturing and Singapore in financial services, due to factors like population, geography, and political systems. Germany's comparative advantage lies in producing high-end manufactured goods, thanks to its skilled workforce and engineering prowess.

πŸ’‘Reputation

Reputation refers to the public perception or reputation associated with a country or its products. The video highlights how Germany's reputation for high-quality engineering and manufacturing plays a crucial role in its comparative advantage. Consumers are willing to pay a premium for German-made goods due to the perceived high quality, even if the products are not necessarily made in Germany. Maintaining this reputation is crucial for German companies as they shift operations overseas.

πŸ’‘Offshoring

Offshoring refers to the process of relocating a company's operations or production facilities to a foreign country. The video suggests that German companies may need to offshore their manufacturing operations to other countries due to various challenges, such as an aging workforce, labor shortages, and rising energy costs. This could allow them to leverage Germany's reputation for quality while benefiting from lower production costs abroad.

πŸ’‘Energy Crisis

The energy crisis refers to the recent challenges faced by Germany in securing affordable and reliable energy sources, particularly natural gas. The video mentions how higher energy costs have had a significant impact on German manufacturing, as the country has historically relied on cheap natural gas from Russia and Norway to power its energy-intensive factories. This crisis has contributed to the pressure on Germany's industrial dominance.

πŸ’‘Labor Shortage

Labor shortage refers to the lack of available skilled workers to fill job vacancies in a particular industry or region. The video highlights Germany's struggle to attract skilled migrants and fill over 750,000 job vacancies in its core industries, despite its generous retirement benefits. This shortage of manpower has been a contributing factor to the potential decline of Germany's industrial dominance.

πŸ’‘Automation

Automation refers to the use of machines, robots, and computer-controlled equipment to perform tasks traditionally done by human workers. The video explains how German factories have relied heavily on advanced automation and machinery, enabling them to remain competitive despite higher labor costs. However, it also suggests that there are limits to how much productivity can be gained through automation alone.

πŸ’‘Value-adding Services

Value-adding services refer to activities or roles that contribute to the creation of additional value or revenue for a company or economy. The video suggests that as Germany shifts away from domestic manufacturing, its workforce could potentially transition into more productive and value-adding service roles, such as training foreign teams or managing international operations. This could potentially make the country even wealthier, but also carries risks if the transition is not managed properly.

πŸ’‘Unions

Unions are organized groups of workers that negotiate with employers over wages, working conditions, and other benefits. The video mentions that Germany has historically had very powerful unions that have represented workers' rights and contributed to the country's harmonious relations between workers and companies. However, this balance could be disrupted if German companies offshore a significant portion of their operations and no longer rely as heavily on domestic workers.

πŸ’‘Economic System

An economic system refers to the structure and mechanisms that govern the production, distribution, and consumption of goods and services within a country or region. The video suggests that Germany's highly egalitarian economic system, which protects workers' rights and manages the economy to benefit labor, could be undermined if the shift away from domestic manufacturing continues. This could represent a significant change to the way business has traditionally been conducted in the country.

πŸ’‘Global Trade

Global trade refers to the exchange of goods, services, and capital across international borders. The video discusses how countries have become more integrated into global trade networks, specializing in areas where they have a comparative advantage and trading with other nations to obtain goods and services they cannot produce as efficiently. Germany's position in global trade has been shaped by its ability to produce high-end manufactured goods for export, but this dominance may be challenged by various internal and external factors.

Highlights

Germany has recently become the third largest economy in the world behind China and the USA after overtaking a stagnant Japan.

Germany has become a world leader in a vast array of different engineered goods from aircraft and medical devices to centrifuges used in nuclear energy.

A long list of internal and external challenges have put significant pressure on German industry to the point where a lot of economists and commentators are predicting that the country could lose its industrial dominance entirely.

Germany has a highly skilled workforce, especially in engineering and manufacturing disciplines, a decent geographic position within Europe and has over the past few decades had access to very cheap energy.

German industry relies heavily on either highly advanced machines and tools to assist with production, or they are producing something so valuable the difference between paying someone $2 an hour to make it versus $50 an hour effectively makes no difference to the end price.

An even clearer example of Germany's comparative advantage would be products made by a company like Siemens, who produce things like nuclear centrifuges where the labor costs are barely a rounding error.

The energy crisis hit a lot of German businesses particularly hard because the country is still so dependent on cheap fossil fuels to power factories that use an incredible amount of energy.

Germany's incredibly talented and highly skilled workforce is aging, and thanks to generous retirement benefits, people are leaving the workforce earlier than they might need to.

Germany is desperately short on manpower, with over 750,000 job vacancies in some of the country's core industries going unfilled.

Today Chinese manufacturing is genuinely rivaling the stuff coming out of Germany, with more BMWs produced in China than in Germany.

German companies can charge a premium over companies from other countries for their manufactured goods because consumers perceive German-made goods as a high-quality alternative, regardless of where the goods are actually made.

Germany scaling back on its manufacturing is in many ways kind of overdue, as Germany has about 50% more of its people working in industrial jobs compared to other advanced economies.

The shift away from domestic manufacturing is not so much a failure of Germany's industries as it is taking the next logical step for their advanced economy.

If German companies don't maintain their standards while setting up international operations, they will very quickly lose the large group of consumers who are willing to pay a premium for a good that is at least theoretically German.

Workers across Germany are already protesting government changes to energy subsidies and tax rules, a symptom of the shift in the way that business has been done in the country.

Transcripts

00:00

Germany is as famous today for its incredible engineering prowess as it is for big jugs of

00:04

beer, sausages and checkered history. Germany has recently become the third largest economy

00:09

in the world behind China and the USA after overtaking a stagnant Japan.

00:12

It's also clearly the most powerful and influential economy within the European Union

00:16

and a large driver of that economic success has been the country's ability to produce

00:20

extremely high-end manufactured goods. Of course there are the country's cars,

00:24

but that only makes up a surprisingly small share of the country's total manufacturing output and

00:28

an even smaller share of its exports. Germany really does live up to its reputation because

00:32

it has become a world leader in a vast array of different engineered goods from aircraft

00:36

and medical devices to centrifuges used in nuclear energy. Basically if there's something

00:40

that really needs to be made right there's probably a German factory making it, or at least

00:45

there was. A long list of internal and external challenges have put significant pressure on German

00:50

industry to the point where a lot of economists and commentators are predicting that the country

00:54

could lose its industrial dominance entirely. That is a big claim that would represent a

00:58

significant shift in national, regional and frankly global trade. But even if it does come true it may

01:05

not be as bad as it sounds for the world's third largest economy and to find out why we must as

01:09

always answer a few important questions. So why are economists predicting the end of Germany's

01:14

industrial dominance? Why is this happening now? And finally why could this actually be a good

01:20

thing for Germany?

01:22

While workers are on strike across much of Europe it's easy to sympathise with their

01:25

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01:29

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today. As the world has opened up to more global cooperation where goods and services are traded

02:30

more freely between countries across the world, there's been a general shift towards countries

02:34

doing what they do best. A country like China has an enormous and relatively industrially capable

02:39

population, a decent global position for trade, and a political system that has been very

02:43

accommodating of rapid expansion so it has become a global center of low-cost manufacturing.

02:48

Singapore has a tiny landmass and a relatively small population, but it has developed a very

02:52

robust political system and it's right in the middle of the world's busiest trade route so

02:56

it has become a highly competitive business and refueling destination.

02:59

These economic features lead to something called comparative advantage. No matter how hard

03:04

Singapore tries it just doesn't have enough landmass or manpower to compete with the industrial might

03:08

of China. Likewise, without radical changes in the way the country operates, no international

03:13

businesses will move their operations to China because it represents significant political risk.

03:18

So this means that China has a comparative advantage in producing basic manufactured goods

03:22

and Singapore has a comparative advantage in producing financial services and operating as

03:26

a glorified servo for the world. So long as these countries remain more or less cooperative with

03:31

one another these strengths and weaknesses are fine because Singapore can buy cheap consumer

03:35

goods from China and Chinese shipping companies can use Singapore as a gas stop or a place to

03:39

manage international finances. On an individual level in our own economies we have grown wealthier

03:45

by specializing in roles that we do really well and letting other people do the same and then just

03:49

trading with one another. Most people don't know how to do surgery on themselves but that's okay

03:54

because they can pay doctors to do it with the money they've made from their own specialized job.

03:58

Free trade and taking advantage of comparative advantage lets entire national economies

04:02

effectively do the same thing, which theoretically should be great. Highly specialized roles in

04:07

modern economies are one of the biggest reasons that the world is so wealthy today,

04:11

but there can be issues at a national scale. On a personal level within economies, especially

04:17

advanced and politically stable economies, there are authorities and institutions in place to

04:21

settle disagreements. On a global level there really isn't the same thing. There are mediators

04:26

like the world trade organization and the UN, but if a country decides to cut another country

04:30

off from trade then short of declaring war on them there really isn't much that can be done.

04:34

This whole issue with holding a valuable place in global trade while not being overly reliant

04:38

on it is especially important in Germany because of its unique advantages.

04:43

Germany has a highly skilled workforce, especially in engineering and manufacturing disciplines,

04:48

a decent geographic position within Europe and has over the past few decades had access to very

04:53

cheap energy. This gave it a strong comparative advantage in producing high-end industrial goods.

04:58

Normally when people think of gaining an economic advantage in manufacturing,

05:01

they think first to lower the cost of the labor force so factories have to pay their

05:05

workers less so they can make things cheaper overall. This is why places like China produce

05:09

so much of the world's stuff, but as wages in China have increased, global manufacturers are

05:14

looking for cheaper alternatives in countries like India. Now Germany is home to some of the

05:18

highest-paid workers in the world, so on the surface it doesn't make sense how it remains

05:23

competitive with cheaper global centers. But depending on the type of manufacturing,

05:27

labor costs are not as important as one might expect.

05:30

Most German industry relies heavily on either highly advanced machines and tools to assist

05:35

with production, or they are producing something so valuable the difference between paying someone

05:39

$2 an hour to make it versus $50 an hour effectively makes no difference to the end price.

05:44

German car factories use a lot of automated machines, with just a few highly skilled

05:48

workers using those machines to make 100 times as many cars per worker as they could with basic

05:52

hand tools. At that scale, paying highly skilled German workers more has been competitive because

05:57

the advantage came from having the machines and the experience to use them, rather than having

06:01

the workers that would work for the lowest possible price. If this is compared to the

06:05

type of products that countries like China typically produce, they tend to be put together

06:08

with more basic tools and a lot of hands-on assembly. There are of course German cars that

06:13

are also made by hand, but they tend to be extremely valuable, where the end consumer

06:17

is willing to pay a premium to have a car that was hand-built in Germany.

06:20

And that right there has actually been one of the biggest factors contributing to Germany's

06:24

comparative advantage in manufacturing, and that's its global reputation.

06:28

An even clearer example of this would be products made by a company like Siemens,

06:32

ok yes, terrible name to put in a youtube video, but still one of the country's largest manufacturers.

06:36

They produce things like nuclear centrifuges and everything that goes along with them.

06:40

These machines cost hundreds of millions of dollars to produce and install,

06:44

and it's the type of thing where not only would the reputation of German engineering go a long way,

06:48

it would be the kind of thing that only Germany and a handful of other countries

06:51

around the world would be allowed to produce without causing geopolitical tensions.

06:55

The labor costs of machines like this are barely a rounding error,

06:58

so the high cost of German workers isn't really a problem.

07:02

Other input costs, especially energy are more important for the highly mechanized

07:06

industry taking place in Germany. Now in the past this has actually been

07:09

one of the country's biggest strengths. Since the mid-1990s it has been able to

07:13

pump very cheap natural gas directly from Russia and Norway, which have some of the

07:16

largest reserves of this energy source in the world. Now clearly there have been troubles with

07:20

this in the last two years, and higher energy costs are having a bigger impact on German

07:24

manufacturing than higher wages ever really could. And that's only the first thing pushing

07:28

the shift away from Germany. The energy crisis hit a lot of German

07:32

businesses particularly hard because the country is still so dependent on cheap fossil fuels

07:37

to power factories that use an incredible amount of energy.

07:40

But German manufacturing has been in decline well before that already,

07:43

and this trend too can be explained by carefully exploring what contributed to

07:46

the country's comparative advantage to begin with.

07:49

It's incredibly talented and highly skilled workforce is aging, and thanks to generous

07:53

retirement benefits that are a key feature of the country's economic system, people are

07:56

leaving the workforce earlier than they might need to.

07:59

Of course on an individual level this is fantastic, people shouldn't sacrifice the

08:03

quality of their life for the sake of economic metrics, but businesses within Germany are

08:07

struggling with this. Now normally advanced economies can compensate for this by bringing

08:11

in skilled migrants from countries with lower standards of living, but Germany has struggled

08:14

with this too. Skilled workers just aren't as drawn to Germany as they are to places

08:19

like Australia, Canada, the UK and especially the USA.

08:22

Now part of this is just the language, English is a far more widely spoken first and second

08:27

language than German is, but there are other factors as well.

08:30

The high training standards that have contributed to Germany's strong manufacturing reputation

08:34

means that even workers that want to move into low-skilled roles often have to sort

08:37

through bureaucratic training certifications that can take years before they start working.

08:42

Whatever the root cause the results are the same, Germany is desperately short on manpower

08:46

with over 750,000 job vacancies in some of the country's core industries going unfilled.

08:52

Gaining a comparative advantage for the quality of its manufacturing has also meant that it

08:56

was only a matter of time until other countries caught up.

08:58

Today Chinese manufacturing is not nearly as far behind German manufacturing as it once

09:03

was. China is building cars, batteries, aircraft and advanced machinery that is

09:07

genuinely rivaling the stuff coming out of Germany.

09:10

Of course China still produces a lot of garbage products which is why it still has a bad reputation

09:14

for producing subpar goods, but it has demonstrated that it can genuinely compete in the advanced

09:19

manufacturing space as well.

09:21

Today there are more BMWs produced in China than there are produced in Germany,

09:25

and despite that metric perhaps being a bit of a national embarrassment,

09:28

it ironically enough highlights how one of Germany's greatest opportunities

09:32

is being hidden behind this seemingly bad news.

09:35

German companies can charge a premium over companies from other countries for their

09:38

manufactured goods because consumers perceive German-made goods as a high-quality alternative.

09:43

Whether that's true, well just ask anyone that's tried to maintain a Volkswagen.

09:47

But the reality doesn't matter, what also doesn't matter is where the goods are actually made.

09:52

People just see a German company and assume the goods were made in Germany.

09:56

If the predictions of German industrial decline are correct then what the country could do

10:00

is leverage its advantage of having a fantastic reputation for producing goods that are worth

10:04

paying a premium for, without any of the disadvantages of actually having to produce

10:08

them in Germany. Germany scaling back on its manufacturing is in many ways kind of overdue.

10:14

Compared to other advanced economies, even those that have their own large domestic

10:17

automakers and high-end manufacturers, Germany has about 50% more of its people

10:21

working in industrial jobs. These jobs can be made more productive by giving people working

10:25

them more advanced tools and technology to leverage how much work they are doing,

10:29

but there is an eventual limit.

10:31

A worker building a car by hand might take a month to put one unit together,

10:35

whereas a small team overseeing large industrial presses and robotic assembly arms could produce

10:39

a thousand a day, and since they produce more there is more room to pay them more,

10:43

which is why salaries in advanced economies are higher.

10:46

But eventually it becomes better for these workers to just move into service roles,

10:50

where instead of overseeing the manufacturing themselves, they spend their time setting up

10:54

infrastructure and training teams in other countries to do it for them.

10:57

The USA is the largest economy in the world today, in large part because it is home to

11:01

companies that do most of their operations overseas, but still bring in the wealth generated

11:06

from these activities back on shore. Germany has for the last three decades decided to do

11:10

stuff more in-house, but this shift away from domestic manufacturing is not so much a failure

11:15

of its industries as it is taking the next logical step for their advanced economy.

11:20

But that doesn't mean that there won't be major problems.

11:23

If this shift away from local manufacturing does continue,

11:26

it would represent a major shift in a major economy,

11:28

and any change that big is going to have consequences.

11:32

Workers across Germany are already protesting government changes to energy subsidies and

11:36

tax rules, and while this is mostly directed towards agriculture and transport for now,

11:40

it's a symptom of the shift in the way that business has been done in the country.

11:44

Germany has historically had very harmonious relations between workers and companies,

11:48

but that's because German workers are represented well by very powerful unions

11:52

and the economy itself is managed in such a way to protect workers rights.

11:55

This works while German companies need German workers, but if they can offshore a bulk of

12:00

their operations then it could undermine the highly egalitarian economic system that

12:03

modern Germany has been built on.

12:05

Even from the perspective of a purely cold-hearted macroeconomist,

12:08

only concerned with headline economic figures,

12:10

the shift away from domestic industry still could present risks.

12:14

Theoretically, the workforce could move into more productive and value-adding service roles

12:18

that make the country even wealthier.

12:20

But the move from a role where a worker is directly installing engines into a car,

12:23

to something like a role where they're training a foreign team to install an engine,

12:26

takes a different set of skills.

12:28

There's also no guarantee that this shift would directly lead to better jobs for Germans,

12:32

instead of just less jobs for Germans.

12:34

Installing engines may not be as valuable as training a new team to install engines,

12:38

but it does provide something to do so long as there are cars to be made.

12:42

Once a foreign team has been trained on how to do a German's job,

12:44

they don't really need the German worker anymore.

12:47

Beyond that, the reputation of a country is a lot like the reputation of a company,

12:51

individual, or anything really.

12:53

If German companies don't maintain their standards while setting up international operations,

12:57

they will very quickly lose the large group of consumers

13:00

who are willing to pay a premium for a good that is at least, theoretically, German.

13:04

Now, we did a comprehensive overview of all of the features of the German economy a few months ago,

13:09

so we wanted to just focus on the issue of shrinking industry in this video,

13:12

without repeating too much.

13:13

But if you haven't watched that more general overview,

13:16

you should be able to click to it on your screen now.

13:18

Thanks for watching mate, bye.