FRANKFURT, Germany — Germany hasn’t seen significant economic growth in five years. It’s a stunning turnaround for Europe’s biggest economy, which for much of this century had expanded exports and dominated world trade in engineered products like industrial machinery and luxury cars.
So what happened?
Here are five reasons for Germany’s ongoing economic slump:
Energy shock from Russia
Moscow’s decision to cut off natural gas supplies to Germany in the wake of Russia’s invasion of Ukraine dealt a severe blow. For years, Germany’s business model was based on cheap energy fueling production of industrial goods for export.
In 2011, then-Chancellor Angela Merkel decided to hasten the end of nuclear power use in Germany while relying on gas from Russia to bridge the gap as the country moved away from coal generation and toward renewable energy. Russia was then considered to be a reliable energy partner; warnings to the contrary from Poland and the United States were dismissed.
When Russia discontinued the flow, prices in Germany skyrocketed for gas and for electricity generated from gas, both key costs for energy-intensive industries such as steel, fertilizer, chemicals and glass. Germany had to turn to liquefied natural gas, or LNG, super-cooled and imported by ship from Qatar and the U.S. LNG costs more than pipeline gas.
Electricity now costs industrial users in Germany an average of 20.3 euro cents per kilowatt hour, according to a study the research firm Prognos AG prepared for the Bavarian Industry Association. In the U.S. and China, where many competitors of German companies are located, the cost is the equivalent of 8.4 euro cents.
Renewable sources of energy haven’t scaled up fast enough to fill the gap. Homeowner and regional resistance to turbines slowed wind energy growth. Infrastructure to transport hydrogen as a replacement fuel for steel furnaces remains mostly on the drawing board.
China: From customer to competitor
For years, Germany benefited from China’s entry into the global economy – even as other developed countries lost jobs to China. German companies found a massive new market for industrial machinery, chemicals and vehicles. Through the early and mid 2010s, Mercedes-Benz, Volkswagen and BMW reaped fat profits selling into what became the world’s largest car market.
At the time, Chinese companies produced items like furniture and consumer electronics that didn’t compete with Germany’s core strengths. Then, manufacturers in China started making the same things that Germans did.
State-subsidized Chinese solar panels wiped out Germany’s makers. In 2010, Chinese panel makers depended on imported German equipment; today, global solar panel production relies on equipment from China. The government in Beijing has ramped up efforts to promote and subsidize manufacturing for export. The resulting goods — steel, machinery, solar panels, electric vehicles and EV batteries — now compete with German goods on export markets.
Germany, the most auto-centric of the European Union economies, had the most to lose from China’s export-oriented industrial policy. In 2020, China was not a net exporter of vehicles; by 2024, it was exporting 5 million a year. Germany’s net exports fell by half over the same period, to 1.2 million cars. Chinese factory capacity is estimated at 50 million vehicles a year, roughly half of global demand.
Skimping on investment
Germany grew complacent during the good times and put off investing in long-term projects such as rail lines and high-speed internet. The government balanced its budget and sometimes ran surpluses off the tax revenue from a booming economy.
These days, German commuters shake their heads at trains that don’t run on time and constant service disruptions while repairs are made to worn-out tracks. High speed internet hasn’t yet reached some rural areas. A transmission line to bring electricity from Germany’s windy north to factories in the south has run years behind and won’t be ready before 2028. A key bridge on the highway connecting the industrial Ruhr region with southern Germany had to be closed in 2021, 10 years after doubts about its durability emerged. A replacement won’t be ready before 2027.
A 2009 constitutional amendment handcuffed the government by limiting deficit spending. Whether to loosen the so-called debt brake will be a thorny issue for the German government installed after the country’s Feb. 23 election.
Lack of skilled workers
German companies are having trouble finding workers with the right skills, from highly trained IT workers to daycare providers, senior care workers and hotel staff members. In a German Chamber of Commerce and Industry survey of 23,000 firms, 43% of companies said they couldn’t fill open positions. The response rose to 58% for companies with more than 1,000 workers.
Fewer German students are interested in STEM fields, meaning science, technology, engineering and mathematics. An aging population compounds the problem, as does a shortage of affordable child care that keeps many women working part-time or not at all. Bureaucratic hurdles pose an obstacle to employing high-skill immigrants, though a law passed in 2020 and strengthened in 2023 aims to ease the process.
Bureaucracy
Lengthy approval procedures and too much paperwork are a drag on the economy, according to Germany companies and economists. Securing a construction permit for a wind turbine can take years. A few other examples, among dozens raised by German business groups:
— Companies installing solar panels need to register with both government regulators and their local utility even though the utility could pass on the information to the government level.
— Restaurants have to log refrigerator temperatures by hand and keep hard copies of the records for a month even if the data has been stored digitally.
— A law requiring companies to certify that their suppliers are obeying environmental and labor standards went beyond EU requirements, putting a heavier burden on German companies than their European competitors.
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