FRANKFURT, Germany — Germany’s economy has experienced a significant downturn in the past five years. This marks a dramatic shift for a nation that, for much of this century, had thrived on robust export growth and dominated global trade in high-tech goods.
What accounts for this decline?
Here are five key factors contributing to Germany’s current economic woes:
Russia’s Energy Curtailment
Russia’s decision to drastically reduce its natural gas supply to Germany following the Ukraine conflict dealt a devastating blow. Germany’s economic model had long relied on inexpensive energy to fuel its industrial production and exports.
In 2011, Chancellor Angela Merkel accelerated Germany’s phase-out of nuclear power, relying on Russian gas to fill the energy gap during the transition to renewables. Despite warnings from Poland and the U.S., Russia was perceived as a dependable energy source.
The subsequent disruption in gas supply led to soaring energy prices in Germany, heavily impacting energy-intensive industries like steel, fertilizer, chemicals, and glass manufacturing. Germany’s shift to more expensive liquefied natural gas (LNG) from sources like Qatar and the U.S. exacerbated the problem.
Industrial electricity prices in Germany now average 20.3 euro cents per kilowatt hour, significantly higher than in the U.S. and China (8.4 euro cents), where many German competitors operate.
Renewable energy sources have been insufficient to compensate for the shortfall. Residential and local opposition to wind turbines has hindered wind energy expansion, and hydrogen infrastructure development remains largely incomplete.
China’s Rise as a Competitor
Germany initially benefited from China’s economic growth, finding a massive new market for its industrial products. Mercedes-Benz, Volkswagen, and BMW, for instance, reaped substantial profits from China’s burgeoning car market.
However, Chinese manufacturers eventually began producing goods that directly competed with German products.
State-subsidized Chinese solar panel manufacturers, for example, effectively displaced German competitors. In 2010, Chinese panel makers relied on German equipment; today, China dominates global solar panel equipment production. China’s aggressive industrial policies, heavily focused on export-oriented manufacturing, are producing goods—steel, machinery, solar panels, electric vehicles, and more—that now compete directly in export markets.
Germany, a major exporter, has been particularly hard hit. While China transitioned from a net vehicle importer to a net exporter of 5 million vehicles annually between 2020 and 2024, Germany’s net vehicle exports dropped by half to 1.2 million. China’s vehicle production capacity is estimated at 50 million units, roughly half of global demand.
Underinvestment
During periods of economic prosperity, Germany neglected crucial long-term investments in infrastructure, such as rail lines and high-speed internet. Government budget surpluses were prioritized over significant investments.
Germany’s aging rail infrastructure suffers from frequent service disruptions and delays. High-speed internet access remains limited in some rural areas. A major electricity transmission line connecting northern renewable energy sources to southern industrial centers is years behind schedule, with completion not expected before 2028. A crucial highway bridge connecting the Ruhr region to southern Germany, showing signs of structural weakness a decade ago, was closed in 2021 and won’t be replaced until 2027.
A 2009 constitutional amendment restricts deficit spending, making increased investment a contentious issue for the current German government.
Skills Shortages
German businesses face significant difficulties filling vacancies across various sectors, from highly skilled IT professionals to care workers and hospitality staff. A German Chamber of Commerce and Industry survey revealed that 43% of companies reported unfilled positions, rising to 58% for large companies (over 1,000 employees).
A decline in German students pursuing STEM fields, an aging population, and a lack of affordable childcare all contribute to this issue. While legislation passed in 2020 and strengthened in 2023 aims to simplify the process of employing foreign workers, bureaucratic hurdles remain.
Bureaucratic Inefficiencies
Excessive bureaucracy and lengthy approval processes hinder German businesses, according to companies and economists. Securing permits for wind turbines, for example, can take years. Other examples include:
— Redundant registration requirements for companies installing solar panels.
— Outdated manual record-keeping requirements for restaurants.
— Overly stringent environmental and labor standards exceeding EU requirements.