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Germany: Descent into Economic Stagnation

Updated: Oct 5, 2023

For many years, Germany basked in the glow of its economic success, often overshadowing underlying issues that were progressively eroding its economic foundation. The COVID-19 pandemic and a series of misguided energy policies have brought these issues to the forefront.

Germany's current coalition government has been criticized for its energy policies, which many experts believe are creating competitive disadvantages for businesses. The constant introduction of new regulations, from supply chain laws to waste disposal documentation, has left little room for companies to innovate and adapt. This has led to a sense that "everything seems to be frozen in Germany."

Despite efforts by the government to alleviate the crisis, including tax breaks for SMEs and promises to reduce bureaucracy, experts remain skeptical about their effectiveness. The International Monetary Fund predicts meager economic growth of 0.5 percent at best for Germany in the coming years, leaving it lagging behind competitor nations like the United States, Japan, France, and Canada.

The manufacturing sector, a historically strong pillar of the German economy, is facing challenges of its own. German automakers produced almost 40 percent fewer vehicles in 2022 than they did a decade ago, signaling a concerning trend of deindustrialization. Chemical giant Lanxess is even in the process of closing two plants, reflecting a broader issue within the industry.

The German Association of Small and Medium-Sized Enterprises reports that nearly one in five member companies is contemplating relocating production elements abroad. High energy prices are exacerbating this problem, with dire predictions suggesting that this could cost Germany up to 120 billion euros in economic output and 1.3 million jobs.

The German reluctance to embrace change and implement necessary reforms has been a significant hindrance. Economic prosperity has bred complacency, and despite calls for reforms to address issues like inadequate infrastructure, housing shortages, and digitalization gaps, little substantial action has been taken.

Economists agree that Germany's problems are deeply rooted in a developing supply crisis within the productive core of its economy. To reverse this trend, far-reaching reforms are essential. Germany must embark on structural reforms to improve its business environment, streamline regulations, and incentivize innovation. This includes addressing issues like housing shortages and digitalization gaps.

Revisiting the country's energy policies is crucial too. Balancing environmental concerns with the need for affordable energy prices is a delicate task, but it is essential to retain and attract businesses. Germany's political landscape has contributed to the crisis, with a lack of consensus and inconsistent policies. Political leaders must unite and work towards a coherent economic strategy.


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