The Sunday Times, 
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As several hundred of the great and good of the German car industry held their annual get-together last week in Nürtingen, a small town outside Stuttgart, there was little to lighten the mood.
The past few months have not been kind to the companies behind Mercedes-Benz, BMW, Volkswagen and Porsche. Still paying the price for their role in the Dieselgate emissions scandal that has hung like a noxious cloud over the industry for four years, the car-makers now face a global trade war alongside the uncertainties of Brexit.
Looming above everything is the transition from a century-long reliance on petrol and diesel power to electric traction, which has so far been led not from their traditional strongholds of Munich or Wolfsburg, but by Silicon Valley upstart Tesla and from the Far East.
“What is going on at the moment is brutal for us,” Peter Schwarzenbauer, a member of BMW’s board, told bosses at Nürtingen. “We have always faced headwinds but in the past there was also the possibility of compensating for them.”
“We can’t be under any illusions,” agreed Jürgen Stackmann, head of sales for Volkswagen. “The next years are going to be tough.”
It is not just the car-makers — which, together with suppliers, employ about 830,000 people across Germany — facing such headwinds. The mood across swathes of industry in Europe’s biggest economy is increasingly grim as indicator after indicator points to a country teetering on the edge of recession.
Underlying it is a more fundamental question: is the export-driven model that has fuelled Germany’s astonishing economic success over the past decades nearing the end of the road?
The latest batch of official statistics, although contradictory, gave little cause for cheer. Optimism provoked on Tuesday by an unexpectedly upbeat 0.3% rise in German industrial production in August proved short-lived.
Two days later came the news that exports in the same month had dropped by 1.8% (on a seasonally adjusted basis), steeper than expected and the sharpest decline since April. Industrial orders were down in August, too, largely on weaker domestic demand.
We have to wait for the release of September’s gross domestic product figures to know whether the German economy has formally entered negative territory for the first time in six years, but the outlook is not good. “We will [probably] have a contraction in GDP in the third quarter, and thus a recession,” Uwe Burkert, economist at LBBW bank, told Reuters.
The immediate cause of Germany’s malaise lies in the worsening global economy, sparked in large part by Donald Trump’s trade war against China, which is now spreading to Europe.
If Beijing carries out its threat to reimpose 25% tariffs on American cars, Mercedes-Benz, which builds the 4x4s it sells to China in Alabama, and BMW, which exports its models from a plant in South Carolina, will be among the hardest hit. German exporters face further pain as a result of this month’s World Trade Organisation ruling allowing America to impose tariffs on EU goods — also up to 25% — in retaliation for subsidies paid by European governments to Airbus that it has deemed illegal.
Then there is Brexit. German exports to the UK plunged by €3.5bn (£3.1bn) in the first half of this year. Britain, which as recently as 2016 was the country’s fifth-biggest trading partner, has dropped to 13th place, behind Poland, according to Holger Bingmann, president of the BGA, a trade federation.
A hard Brexit would have “catastrophic consequences for German foreign trade”, he warned last week.
The longer-term impact of Britain’s departure could be even more damaging: like other EU countries, Germany fears competition from a buccaneering, lightly regulated “Singapore on Thames”.
It has so far been left largely to the European Central Bank (ECB) to attempt to break up the storm clouds that have been gathering not only over the German economy but, by extension, over much of the eurozone. Its president, Mario Draghi, in one of his last acts before stepping down at the end of this month, cut interest rates from -0.4% to -0.5% and announced a resumption of quantitative easing (QE), vowing to buy €20bn of bonds a month until inflation climbs back up to the 2% target.
The move has been much criticised — including, it emerged last week, by experts on the ECB’s own monetary policy committee, who wrote a letter to Draghi and other members of the bank’s governing council days before their decision last month, warning them against resuming bond purchases.
With interest rates already so far into negative territory, critics fear a further loosening of monetary policy could provide little or no boost to the eurozone economy. The onus, they argue, is instead on countries with strong public finances — namely Germany and Holland — to give their countries a fiscal boost by taxing less or spending more.
Germany, on track to run a budget surplus for the sixth year running — a rarity among the world’s largest economies — certainly has the scope to open the sluices. It is not just outsiders — such as French President Emmanuel Macron, who ruffled feathers in April by asking whether the German economic model had “perhaps run its course” — who are urging it to do so.
Such sentiments are also heard these days within Angela Merkel’s ruling Christian Democrats. A paper published last month by the Union of the Middle, a centrist group within the party, called on the government to spend more, especially on infrastructure — much of which, from broadband provision to roads and bridges, is in surprisingly poor shape.
The response from Chancellor Merkel so far has been a resounding “nein”. Pursuit of the schwarze null (black zero) — a balanced budget — is an article of faith among the German Establishment since a “debt brake” imposing a strict limit on borrowing by both the federal government and those of its 16 states was added to the constitution in 2009, in the wake of the financial crisis.
Surprisingly, perhaps, one of the firmest advocates of fiscal orthodoxy is the finance minister, Olaf Scholz, who is from the Social Democrats, the junior partner in Merkel’s coalition.
The German economy has weathered past crises and may be able to get over this one too, especially if Trump scales back his trade war and — as began to appear more likely this weekend — a Brexit deal is done.
Yet the slowdown has also raised broader concerns about the longer-term viability of an economic model that has become heavily dependent on exporting cars and other manufactured goods to China and America.
Almost two-thirds of Germany’s Dax 30 index is made up of “old economy” industries such as machine tools, chemicals, cars and finance, compared with just 40% in the US, noted Jörg Zeuner, chief economist of Union Investment. He added: “Germany feels the impact of weakening world trade more than others — and has turned into the economic tail-light of the eurozone.”
The country’s car-makers, slow to climb on the electric bandwagon, are playing catch-up. Last month’s Frankfurt motor show saw Volkswagen launch its first purpose-built electric car, the ID.3, which it says will ultimately be as important as the Beetle or Golf. Mercedes dazzled with a sleek, battery-powered concept version of its flagship S-class.
Yet, while the internal combustion engine showcases Germany’s traditional engineering skills, the heart — and as much as half the cost — of an electric car is its battery, a sector dominated by the Chinese and other Far Eastern suppliers.
Recent years have seen a scramble to establish joint ventures between German and Asian firms, while China’s CATL, the world’s leading maker of car batteries, is about to start work on a €1.8bn plant in Arnstadt, east Germany, from which it will supply BMW and Volvo, among others.
Peter Altmaier, the economic affairs minister, and Bruno Le Maire, his French counterpart, are also pushing for European companies to go it alone, hoping to see billions of euros — some of it public money — ploughed into an Airbus-style consortium to make batteries.
However successful Germany’s move from petrol and diesel proves, margins on electric cars are lower than on traditional ones, obliging manufacturers to keep making gas guzzlers for now.
The relative simplicity of electric motors means they also require far fewer workers — a point highlighted by BMW’s Schwarzenbauer, who wondered aloud at Nürtingen about the thousands of engineers at his company who are specialists in internal combustion engines.
“We can’t simply brush away the fact that we have many workers who are really worried about what is going to happen to them,” he said.
Those headwinds do not look like easing any time soon.