A week after German Chancellor Olaf Scholz’s coalition fell apart over the budget, his party and the main opposition have agreed to hold a snap election on 23 February 2025. The date for the new election comes as Germany prepares for an intense campaign over how to restart their ailing economy and cope with a new US administration under President-elect Trump.
For decades, German political parties have had to find coalition partners to ensure a majority in Parliament. If Scholz’s Social Democrats do not improve their vote share significantly, they will become a junior party in a coalition, meaning a new chancellor (Scholz succeeded Angela Merkel in 2021). The collapse of its governing coalition is an extraordinary moment for Germany, a country known for stable governments. It has happened only twice before in the 75 years since the modern state was founded. Germany has entered a new era of political fragmentation.
In many ways, Germany is still feeling the loss of Angela Merkel, even though she created many of the serious problems Germany now faces, or allowed them to fester unattended. At least she offered leadership. Her successor, Scholz, has been unimpressive and all but invisible at a time when Europe is crying out for strong leadership (and with the other would-be European leader, Emmanuel Macron of France, now effectively a lame-duck President). Consequently, while the European economy stagnates, the extreme right wing of politics climbs in the opinion polls, Putin’s rockets rain down on Ukraine, and Germany is like a deer in the headlights.
Once Europe’s growth engine, the German economy has been hit hard by the sharp increase in European energy prices following Russia’s invasion of Ukraine in 2022. Manufacturers had for years relied on imports of cheap Russian gas to make business profitable.
Source: Voronoi, Eurostat
Germany has become the weakest economy in the G7 group of rich countries. According to the International Monetary Fund (IMF), German GDP will stagnate this year, compared with 1.1% growth for the UK and 2.8% growth for the US. GDP in Germany shrank -0.2% year-on-year in Q3 2024, the sixth consecutive quarter of no growth, following a -0.3% fall in Q2. For context, the GDP annual growth rate in Germany averaged 1.8% from 1971 until 2024. The GDP annual growth rate in Germany is expected to be 0.3% by the end of this quarter and is projected to trend around 1.2% in 2025 and 1.6% in 2026, according to forecasts. Those forecasts may be optimistic.
Germany’s stagnating GDP is primarily due to declining investment, weak global demand for its exports, structural challenges like an ageing population and bureaucratic inefficiencies, over-regulation, lack of globally competitive technology companies, and increased competition in key industries like automotive.
As the largest economy in Europe, Germany is likely to drag down overall eurozone growth, with Germany falling behind the eurozone average in both current and projected growth forecasts.
Hedge fund manager Ray Dalio estimated that Germany will see a projected annual GDP change in the next 10 years of -0.5%, equal with fellow European economy Italy for last place among 32 major countries.
There has been a steady decline in German industrial production since 2017. The German economy is likely to shrink for the second year in a row, leaving it unchanged from its pre-pandemic level. That is before Trump’s new tariffs, which could cost the German economy €33 billion in GDP. Already, Germany’s exports have stalled since 2019 after adjusting for inflation.
Nearly every sector of the German economy has been hit by sluggish demand, underscoring the country’s weak economic environment as it grapples with an intensifying political crisis.
Researchers at the Munich-based Institute for Economic Research warned recently that downbeat spending by businesses and consumers continued to constrain economic growth in the Eurozone’s largest economy.
The institute said that 42% of companies suffered from a scarcity of new business in October, up from 39% in July and the highest share since 2009 when the global economy was gripped by a financial crisis. Nearly half of all companies in the entertainment sector complained of too few orders, while 32% of service providers also said that demand was insufficient.
German manufacturers are losing global market share as increasingly sophisticated and more affordable Chinese rivals capture their customers, both domestically and in other markets. German automakers are cutting jobs as sales in China decline, and their new electric vehicle (EV) models struggle to attract German buyers.
Rapidly expanding production of cheap petrol and electric cars in China has helped it to expand its share of the global automobile market, at Germany’s expense. A glut of Chinese vehicles entering the global market has put intense pressure on Germany’s car makers, alarming policymakers. Volkswagen (VW) announced in October that it would shut at least three plants in Germany, the first closures in the company’s history.
Donald Trump has suggested he will impose a tariff of up to 20% tariff on all imports, a levy that could heavily curtail German trade with the world’s biggest economy.
The German car industry has long been seen as a metaphor for the state of Europe’s largest economy. The announcement by VW has become a symbol of Germany’s current political and economic malaise — and its challenging future.
VW, founded by the Nazis and later a symbol of Germany’s postwar economic miracle, is no stranger to scandal and strategic missteps. Its corporate misbehaviour, manipulating exhaust data in the diesel scandal, and then its shortsighted neglect of electric cars, provide a case study of how Germany has messed up. There are similar examples in the German banking sector. The German legend has become a German albatross.
There appears to be no easy way out for Germany from the current low-growth regime, apart from doing some version of fiscal expansion. But that would require major legislative changes which are bitterly opposed in some quarters. Germany is bound by an absurd constitutional “debt brake” that bans it from running more than tiny deficits.
Wolfgang Münchau, a former Financial Times columnist, has a new book out called “Kaput: The End of the German Miracle” in which he paints a picture of an economy, political system, and society dysfunctional to the point of being terminally broken. Germany faces choices but is unable to summon the political and intellectual courage to make any decisive response.
At the time of the Russian invasion of Ukraine, Chancellor Scholz announced a complete rethink of his country’s basic model to suit a new age of geopolitics. It was, Scholz proclaimed, a Zeitenwende, or epochal turning point. Münchau is sceptical and sees that as mostly rhetorical, smoke and mirrors. He writes of poor or absent mobile telephony capacity, the anti-technical bias of school education (and more generally of German culture), the lagging universities, the unwieldiness of public bureaucracy, and a poor capacity to make use of the resources and skills brought by immigrants.
The EU cannot flourish without Germany. When Mario Draghi, the former ECB head, produced an important report on European competitiveness that emphasised the need for major reforms and a new push for the tech sector, a capital markets union, and other sensible steps, Berlin simply pushed back and ignored.
What has gone wrong is above all the product of a long-term political culture. Germany grew fat and complacent sucking up cheap power from Russia and taking advantage of America’s military umbrella to allow its own military to virtually disappear. Now with Trump 2.0, that will not work. Business as usual for Germany is over, and it needs to turn the page and take Zeitenwende seriously.
