“Speicherstadt” District in Hamburg, Germany.
Photo by Claudio Testa on Unsplash

According to former Financial Times’ journalist, Wolfgang Münchau, Germany’s economy would be Kaput.

How could that be?  After all, Germany has long been a world champion in manufacturing, especially for motor vehicles, chemicals, and machine equipment, and Europe’s leading economy.

However, geopolitics have undermined Germany’s model of economic dependence on China and Russia.  In addition, while other economies have been digitalising over the past two decades, Germany remains stuck in old-fashioned industry and analogue technologies.

Let’s first back up and see how we got here.

Germany’s golden age – from 2005 to 2015

This is not the first time that Germany’s economy has been Kaput. Some two decades ago, under Gerhard Schröder’s chancellorship, Germany was seen as the sick man of Europe. However, a confluence of reforms and market trends saw a resuscitation of the German economy, which enjoyed strong export-led economic growth from 2005 to 2015.

Chancellor Schroder’s welfare reforms fostered wage moderation, which enhanced Germany’s competitiveness. The euro crisis pushed down the euro exchange rate, which also benefited Germany. This was also a period of globalisation and the optimisation of supply chains, which German companies could take advantage of.

Another key factor was the stable supply of Russian gas at competitive prices.  Schroder was in a coalition government with the Green Party, which insisted on phasing out nuclear energy.  So, to plug the energy gap, Schroder developed a natural gas partnership with Putin’s Russia.  Schroder and Putin became close friends, and when Schroder left office in 2005, Putin offered him jobs in Russian state-owned energy companies Rosneft, Gazprom, and Nord Stream AG.  The latter built two pipeline systems for transporting gas from Russia to Germany.

China was another geopolitical factor.  Germany was a huge beneficiary of China’s rise.  The economies were complementary during the first decades of this century.  China bought plants and machinery from Germany.  German companies like Volkswagen and BASF invested heavily in China.  Some 30-40 percent of Volkswagen sales were in China.  For its part, China produced consumer goods that did not compete with German production.

But the good times began to unravel.

The unraveling of Germany’s golden age

Germany’s labour cost advantage was frittered away by the passing of the baby boom generation into retirement and rising labour costs. The COVID-19 pandemic highlighted the geopolitical risks of supply chains that had previously been ignored. Russia’s invasion of Ukraine brought an end to Germany’s access to cheap Russian natural gas.

Most importantly, China’s relationship with Germany flipped from complementary partners to competitors. For example, at the start of the 21st century, China’s solar panel industry found itself far behind those in Germany, Japan, and the United States. China then bought up Germany’s solar panel industry and took it back home, created its own indigenous capacity, and outcompeted its Western incumbents. Today, China’s global market share is over 80%, a near global monopoly.

The most humiliating trend for Germany is that of electric vehicles.  Once dominant in motor vehicle production, Germany is simply nowhere for electric vehicles. In contrast, China accounts for about 60 percent of all new electric cars sold worldwide today.  Chinese smartphone manufacturers like Xiaomi and Huawei are now emerging as EV producers.  This is not surprising, according to Münchau, as EVs are essentially iPads on wheels, with the key components being batteries and software – areas where Germany is not present.  In sum, China has become a massive problem for Germany, especially since, unlike Germany, China has invested in 21st-century digital technologies.

Germany is humbled

It is humbling for the great German manufacturing machine that the country has swung from having a trade surplus with China to having a trade deficit.  China has been building its own factories to replace much of German production because it is keen to reduce its dependence on Germany.  As relations have now soured between China and the West, Germany has been blocking China’s proposed purchases of German companies.

There were many warning signs for Germany that this golden age would not last.  For example, the US strongly indicated that it opposed the Nord Stream pipelines because they only increased Germany’s dependence on Russia.  Troubling developments with Russia date back to at least 2007 and the Munich Security Conference when Putin put the West on notice that he objected to its encroachment on Russia’s former satellite states.

Nevertheless, Germany imagined that the good times would continue to roll.

Technophobia catches up with Germany

 Germany’s export-led boom from 2005-15 was based essentially on the manufacturing industries of the “old economy.”  Over the same period, the advanced world was digitalising, while Germany was locked in 20th-century analogue technologies.

In sum, Germany became a digital dinosaur.

How could this be?

Münchau argues that the Internet was a technology that Germany did not have a role in creating.  Germans were thus suspicious of the Internet and did not take it seriously.  Today, many companies are not connected to the Internet.  The fax machine is still widely used in Germany.  People still use cash when they go to shops.  Germany has also made a huge effort to stop digitalisation in the education system.  Mobile phone networks are very poor in Germany, which is one of the worst in the whole EU, even though Germany is one of the richest countries in the EU.

Germany is not a leader in anything high-tech, including AI.  It does not have any high-tech companies.  In contrast to America’s relatively “new” tech companies like Apple, Google, Amazon, and Microsoft, the average age of Germany’s DAX 40 companies is about 160 years.  The government contributed to these problems by not investing sufficiently in mobile telephony infrastructure.  This is partly because of the government’s unduly strict “fiscal brake,” which prevents a government budget deficit and thus inhibits government investment, notably in infrastructure.

In 2013, Chancellor Merkel said the Internet was new territory for Germany! In 2024, one German car executive claimed that the Internet was a temporary phenomenon. Correcting such deeply entrenched attitudes is not easy, and certainly, the government has no plan to do so.

Conclusion

 What hope is there for Germany to break out of its economic funk?

Münchau is rather pessimistic.  Companies like Bosch and Mercedes are cutting jobs.  Volkswagen is closing factories.  This year, the German economy will be stuck in a second year of near-zero growth.  The nation is on standby as it awaits national elections in February 2025 – although the complex coalition-building process means that Germany will likely not have a new government before the northern summer.

But there is unlikely to be much new about a new government.  The same old leading four political parties will likely form a coalition government.  Their dream is a return to the good old days of 2005-15.  But that is not possible; the world has changed.  Unfortunately, none of the political parties has the ambition to move Germany towards a digital future with a greater diversity of economic partners.  They want to double down on what worked before.

Germany’s real problem is how the system works – with big business, banks, and the government working together and creating a system of groupthink.  There are never any dissenting voices.  One factor that could help modernise Germany and Europe would be to transform the bank-based financial system by developing a Europe-wide capital market (as also proposed by Mario Draghi), which would allocate finance more efficiently through stock and corporate bond markets, providing opportunities for new businesses.  But unfortunately, this is not on the leaders’ agenda.

All things considered, Germany is at a critical juncture.  Its economy is under stress.  Its politics seem unable to chart a realistic new future.  Social frustration, especially anti-immigration and pro-Kremlin sentiments, is fuelling the rise of the far-right AfD (Alternative for Germany) party.  Germany is under pressure to increase its defence spending.  The return of Donald Trump to the White House will be another source of multiple pressures through trade tariffs and his tough line on NATO.  And given Germany’s central importance for Europe and the EU, Germany’s malaise undermines the European project.

Germany has been in a funk before and dug itself out.  So, looking ahead, anything is possible.  But at this stage, it is very difficult to be hopeful.

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