How the economies of Germany and France are adapting to new conditions

The consequences of the Russian military operation in Ukraine and the general weakness of the global economy continue to affect European countries, but they are adapting to common problems in different ways. Germany is the slowest to adapt to the changed situation, as official statistics show. Industrial production in this country is still falling, including due to the loss of some orders from China. The second largest economy in Europe, France, whose growth is largely supported by the service sector, copes with challenges faster and more confidently. The multidirectional dynamics of the two countries is explained not only by different starting conditions, but also by different speeds in making decisions important to support the economy.

Statistics on how European countries ended 2023 and began 2024 show that they are adapting to the consequences of the Russian military operation in Ukraine in different ways. Against the backdrop of a weak global economy, the general framework for developed countries is set by high interest rates, the fight against inflation and a slowdown in business activity.

Germany is the slowest to adapt to changed economic conditions – the index of the current economic situation (ZEW), published yesterday, dropped in February to its minimum since June 2020. The indicator was minus 81.7 points after minus 77.3 points in January (index values ​​above zero indicate optimism, below – pessimism). Although analysts had expected a less significant decline – to minus 79 points – the final value was not surprising. Data published by the country’s statistical office (Destatis) continues to point to the weakness of the German economy.

In Germany, as one of the largest consumers of gas, the consequences of the military operation were most noticeably reflected: for example, it was the Federal Republic of Germany that experienced a reduction in industrial production, which was a consequence of the refusal of part of Russian supplies. According to Eurostat, in November (more recent statistics are not yet available), German industrial production decreased year-on-year by 4.9%.

The economic growth of Germany was previously largely supported by export orders. In 2022–2023, they were noticeably affected by the general slowdown of the global economy (and world trade, in particular). In an interesting way, Germany’s trade relations with one of its largest partners, China, were transformed. Exports to China, which had been declining since 2020 due to Covid restrictions and a slow economic recovery, did not recover in 2023, including due to the fact that some of the goods previously imported by Beijing were replaced by products of its own production, which can now compete with the German one on the world market. In December 2023, exports of goods from Germany to China amounted to €7.2 billion, which is 12.7% less than in December 2022. At the same time, Germany’s dependence on Chinese supplies remains – in particular, in the purchase of components necessary in connection with the restructuring of the automotive industry to meet the requirements of EU climate policy.

France, which remains noticeably more attractive for foreign direct investment, adapted to the changing rules of the game faster than Germany. Part of the country’s economic stability is due to its reliance on the services sector (including tourism), which expanded in 2023. The French economy was seriously supported by the assistance mechanisms that the country’s authorities launched in 2022 – thanks to subsidies, the country managed to go through a period of rapid growth in energy prices with fewer losses than Germany. In Germany, a prompt response is hampered, among other things, by ideological differences between the parties in the ruling coalition, and the coordination process is often delayed. The process of adaptation of the two countries to challenges is also distinguished by the difference in the components of the energy balance. The development of the nuclear industry helped France reduce its dependence on gas to a minimum; in Germany, we recall that last year the last three nuclear power plants were disconnected from the network.

Kristina Borovikova