As Germans prepare for a snap election after the collapse of a fragile government coalition, one issue at the top of voters’ minds will be how the new government would revive the country’s once powerful economy at a time when energy prices are high and companies are cutting jobs.
Germany, Europe’s largest economy, has not seen significant growth in the past two years. On Friday, the country’s economy grew 0.1 percent growth from July to September, but it is forecast to contract over the entire year. And economists do not expect to see a return to growth in 2025, unless a new government can make significant changes quickly.
Driving that point home, Germany’s largest auto supplier, Bosch, said on Friday that it planned to cut 5,500 jobs, beginning in 2027. More than two-thirds will be at German factories.
High energy prices, a complex bureaucracy, an aging public infrastructure and geopolitical developments have hurt Germany’s export industry. Political paralysis under the previous government has exacerbated the situation.
The three-party coalition led by Chancellor Olaf Scholz spent the last year bickering over issues from energy to immigration before finally collapsing earlier this month. Early elections on Feb. 23 are likely to result in a new government, which will have the opportunity to turn things around.
But economists warn that this will require changes to tax and welfare policies, as well as deregulation and investment in infrastructure. “Without major policy changes, the German economy’s long-run growth potential is extremely limited,” said Salomon Fiedler, an economist at Berenberg, a private bank.
The Cost of Political Uncertainty
German industrial companies have seen production shrink more than 12 percent since 2018. Many point to a lack of clear signals from Berlin on where they should direct investment.
An example was an abrupt decision by the government to end subsidies for electric vehicles at the end of last year, in an effort to slim down the budget. Automakers, which had been ramping up production of battery-powered cars, saw demand plunge after spooked customers pulled back.
The fallout from that decision has led to enormous job cuts in the automotive industry this year. On Wednesday, Ford announced that it was eliminating 4,000 jobs in Europe, most of them in Germany. Volkswagen is threatening to close up to three of its 10 German factories as part of the restructuring needed to return the brand to profitability.
After losing natural gas from Russia following its invasion of Ukraine in 2022, Mr. Scholz’s government quickly pivoted to importing liquefied natural gas, which has kept homes warm and reserves full, but also has resulted in a 40 percent jump in prices from the year before. Nevertheless, the government went ahead with plans to shut down the country’s last nuclear reactor.
Analysts point out that such zigzag strategies make it difficult for business leaders to make investment plans or to predict costs. That frustration has translated into record levels of pessimism among Germany’s industrial leaders, according to a survey by the Ifo Institute in Munich.
“There was no clear line from politicians and therefore great uncertainty,” said Stefan Sauer, an economic researcher who worked on the report. “That’s probably one of the main reasons the mood is so bad and why competitiveness is suffering as a result.”
Industry Under Pressure
At the heart of Germany’s economic problems lies its once formidable industrial sector, which is expected to see production fall 3 percent in 2024 for the third year in a row, according to data compiled by the German industrial association BDI.
Faced with higher energy prices, environmental and digital services regulation and growing competition from China, companies that once dominated sectors from automotive to machinery and steel now find themselves needing to cut costs and restructure.
“German industry is under massive pressure,” said Tanja Gönner, managing director of the BDI. “A recovery in 2025 is not in sight.”
Earlier this month, Germany’s largest steel maker, ThyssenKrupp, was forced to write down the value of its steel division by 1 billion euros, or $1.04 billion, after posting a yearly net loss of €1.4 billion, or $1.2 billion. The company has been struggling for years to decarbonize its steel production, as the price of powering its existing coking plants has soared.
Beyond the industrial giants, the German economy also depends on innovation and expertise. But in an increasingly digital world, Germany is lacking new start-ups that will help drive the next generation of growth.
Government financing is available to help entrepreneurs start business, but when it comes time to scale them, many move to the United States where venture funding is more widely available and taxes are lower.
“Our main problem is not what is happening to ThyssenKrupp,” Danyal Bayaz, the finance minister for the southwestern state of Baden-Württemberg told the German American Conference at Harvard last week. “It is why is the last successful German start-up 50 years old?”
The Looming Threat of Trump Tariffs
Germany, the world’s third-largest exporting nation, sells cars, chemicals and machines around the world. But all three sectors are suffering, as geopolitics and supply chain shifts in recent years have disrupted global trade.
Last year, the United States replaced China as Germany’s most important trading partner, sending goods worth €157.9 billion, or $164.3, across the Atlantic. But with President-elect Donald J. Trump promising across-the-board tariffs as a cornerstone of his economic policies — including levies of 60 percent or more on goods from China — that number could drop, further hurting Germany.
Many German companies are already heavily invested in the United States, including BMW, Mercedes-Benz and Volkswagen and dozens of automotive suppliers, as well as leading chemical and pharmaceutical firms. But those companies also export from their U.S. factories and could be hurt if Mr. Trump’s plans set off a wider trade war.
In the last year, German companies invested €15.7 billion, or $16.3 billion, in the United States. Cheaper energy prices and lower taxes were the main attraction, but many companies also benefited from the incentives offered by the Inflation Reduction Act, which Mr. Trump has promised to repeal.
During his first term in office, Mr. Trump repeatedly targeted Germany for what he called its “massive trade deficit.” Germany’s trade surplus with the United States has not shrunk significantly over the last four years, reaching €63.3 billion in 2023, raising concerns that Mr. Trump could again make it an issue.
Regardless of how Mr. Trump’s economic policies play out, economists do not expect them to benefit Germany.
“Whether it’s the prospects of tariffs or U.S. tax cuts and deregulation indirectly undermining German competitiveness, it’s hard to see how U.S. economic policies will not be negative for the German economy,” said Carsten Brzeski, an economist with ING Bank.
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