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Germany’s warning of five difficult years could be a headache for the euro

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Sometimes politicians say quiet things out loud.

It happened over the weekend with German Economy Minister Robert Habeck warning that Germany faces a difficult five years due to deindustrialisation due to high energy prices.

Germany is already in recession and centered on industrial companies, which are withering and reducing their production.

“We have a major transformation period ahead of us until 2030,” during which Germany will shift from a traditional industrial base dependent on fossil fuels to green energies like hydrogen, Habeck said.

He called for more energy subsidies.

The problem for this is budgetary. Eurozone countries are linked to deficits below 3% of GDP and Germany was the main policeman of this policy in the 2010s, drawing the wrath of the Spaniards, Italians and Greeks, among others . Today, these economies are doing relatively well and Germany is struggling.

The deficit rules are currently on hold due to covid and this will likely continue until 2024 but at some point they have to end. How much the peripheral countries want to push at this point will determine what comes next for Germany and the Eurozone economy. Germany’s political situation is also difficult, with deficit hawks still wielding enormous influence in a fragmented system.

Habeck put it bluntly:

“The question is: are we borrowing money or do we no longer have an industry?

Either option is negative for the Euro, just at different maturities. I suspect subsidies will flow in, which should also help boost safe havens like gold.

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