Small Businesses Sound Alarm Over Weakening German Economy

Thousands of the small and midsize companies that form the backbone of the German economy warned this week that the country was losing its edge, as the country’s central bank signaled the threat of a recession would loom over Germany in the first three months of 2024.

“Every day, Germany is losing its ability to remain internationally competitive,” read an open letter to the government signed by 18 associations representing the businesses, in industries ranging from technology to trucking to taxi companies.

The aim of the letter was to urge lawmakers to overcome partisan fighting that is blocking passage of a law intended to provide tax credits for investments that speed the transition to a green economy. But the sweeping statement ticked off a list of concerns facing businesses, including high energy prices, labor shortages, slow efforts to digitize the bureaucracy and high taxes. “The economic downturn is homemade,” it said.

Those strains are reflected in a report released on Monday by Germany’s central bank, the Bundesbank, which said that the country’s economy, Europe’s largest, was poised to shrink in the first three months of the year. After a contraction of 0.3 percent in the final months of 2023, a second consecutive decline would land the country in a technical recession.

The Bundesbank cited a weak export market, price-conscious consumers who remain cautious about spending and a lack of investment by companies spooked by higher borrowing costs.

The country’s minister for the economy, Robert Habeck, called the state of the economy “dramatically bad” last week. On Wednesday, he will present the government’s economic report for 2024, which includes projections of just 0.2 percent annual growth, scaled back from the 1.3 percent expansion forecast issued last year.

Mr. Habeck’s ministry has drafted legislation, inspired by the U.S. Inflation Reduction Act, to provide billions in tax credits to companies that invest in green energy. The idea is to attract many German firms that have shifted their investments to the United States.

Corporate taxes in Germany are among the highest in Europe, at more than 29 percent, compared with about 25 percent in neighboring France and the Netherlands. .

The lower house of Parliament passed the law in November, but members of the conservative opposition parties are blocking its final passage through the upper house. They point out that application of the proposed law will fall to the states, which lack sufficient resources. They are also demanding that planned cuts for subsidies to agricultural diesel fuel — a proposal that sent farmers into the streets in nationwide protests last month — should be dropped in exchange for their support.

The public appeal from the business associations is an unusual campaign for groups that usually remain in the background. It reflects the frustration felt by many of the small and midsize firms — known as the Mittelstand — over the government’s willingness to spend billions to attract large firms such as the chipmaker Intel or the battery producer Northvolt, said Jens Südekum, a professor of economics at the Heinrich Heine University in Düsseldorf.

“That’s why this law is so important — it is an instrument for everybody,” Mr. Südekum said. “For small and midsize enterprises, this is really essential.”