Europe’s largest economy, Germany, is on a path of decline that might soon become irreversible.
Germany is approaching a critical point. Business leaders are aware, and citizens can feel it, yet politicians cannot give solutions.
It has placed Europe’s largest economy on a path of decline that might soon become irreversible. After 5 years of stagnation, Germany’s economy is 5% smaller than it would have continued in its pre-pandemic growth pattern.
Recovery from the declining economy will be challenging due to some setbacks, including Volkswagen AG and Mercedes-Benz Group AG’s inability to compete with Chinese automotive and the loss of cheap Russian energy.
The decline in national competition means every household is financially worse by €2,500 ($2,600) annually.
There is little hope that with Chancellor Olaf Scholz expected to lose a confidence vote, early elections might offer a chance for a shift in strategy.
But, the gradual decline trend needs a little urgency.
Years of poor choices mixed with unfortunate situations have shattered Germany’s economic framework when the rest of Europe wants its industrial strength to maintain pace with China, respond to Russia’s war in Ukraine, and react to a more isolationist America. But Germany is instead facing its biggest crisis since reunification.
Three and half decades ago, the fall of the Berlin Wall united Germans to support substantial spending to integrate the former communist East. In contrast, now the country is deeply divided, and a polarized electorate cannot provide a clear mandate for the government that takes office after elections.
Friedrich Merz, leading Christian Democrats, is the top candidate, but his conservative reforms may not be enough to prevent the economy from failing to give success to its 84 million residents.
He wanted to reestablish a policy that helped in Germany’s post-war recovery, like lowering taxes, reducing regulations, and essential social benefits.
Scholz’s Social Democrats are campaigning for significant changes to constitutional borrowing rules. They also want to protect jobs in declining industries, like steel and automotive, and give energy price subsidies to support businesses.
Currently, the ruling center-left party is in a distant third position. Scholz’s re-election campaign was on a belief that Merz would turn off voters due to his divisive comments about women and foreigners.
As economists and business leaders call for reduced bureaucracy, improving its infrastructure, and increased digitalization efforts, political division threatens to make Germany focus on maintaining the status quo instead of advancing toward the future. This trend was evident even before Scholz took office.
During her 16-year period as chancellor, Angela Merkel passed the controversial debt brake. It led to insufficient investments in the military, transportation, and education. She also increased Germany’s dependence on cheap Russian energy, a vulnerability that came to light after Vladimir Putin started a full-scale invasion of Ukraine in February 2022.
Merkel defended by claiming that she was not responsible for the issues happening in the country, stating that the SPD, her partner during three of four terms, showed little interest in improving military equipment spending.
According to the Council of Economic Experts, the growth of Germany without generating inflation has decreased to 0.4%.
Germany has to increase its investment in infrastructure and public goods by about a third to about €160 billion to catch up with other developing countries.
The private sector has been holding back. Investment in machinery is lower by 9% than pre-pandemic.
Some of the world’s greatest companies exist in Germany. Although the companies were small, they led globally in their respective fields.
Many belong to the so-called Mittelstand, century-old companies that have overcome wars and hyperinflation.
There is no denying that Germany is facing challenges. Economists at Bantleon predict that its once-admired automotive industry will soon lose its market and will shift its production overseas. The sector will lose 40% of its value added in Germany in the next 10 years.
These struggles are becoming more evident with Volkswagen facing strikes over plans to close its domestic plants and potential reductions at suppliers like AG, Robert Bosch GmbH, and Continental AG. German companies listed on the Fortune 500 have announced more than 60,000 layoffs so far.
Thyssenkrupp AG, the largest steel producer in the country and one of the foundational forces behind Germany’s industrialization, is planning to cut labor in its steel division by 40% and close two blast furnaces.