The manufacturing output of the largest European economy has been on a downward trend since 2017, and the decline is accelerating as competitiveness erodes.
The foundations of the German industrial machine have collapsed like dominoes. The geopolitical environment, the end of globalization, and the emergence of regionalization in economies threaten the German model.
The United States has moved away from Europe and competes with its transatlantic allies in climate investment. China has become an increasingly important rival and is no longer an insatiable buyer of German products. In addition to its strategic shift towards advanced manufacturing, China’s slowdown further undermines the demand for German products. At the same time, cheap competition from the giant Asian economy worries sectors essential to the German climate transition. Solar panel manufacturers have announced workforce reduction plans. Solarwatt GmbH, based in Dresden, has already cut 10% of its workforce and could relocate its production abroad if the situation does not improve this year, according to its CEO, Detlef Neuhaus.
The final blow came from Russia, where the energy crisis was a significant catalyst. Germany’s alignment with the US position in 2022 cut Germany off from cheap energy, sending the German industry into years of turmoil. Even though the worst-case scenarios, such as housing freezes and rationing, were avoided, prices remain higher than in other economies. Worse, it forced Russia to turn to China. By the end of this year, a new pipeline with a capacity equivalent to North Stream 2 will connect Russia to China. Even in the unlikely event of a return to normalcy, Germany will compete with China for natural gas.
Alongside global volatility, political paralysis in Berlin has intensified long-standing national issues such as creaking infrastructure, an ageing workforce, and ubiquitous bureaucracy. Once a strength, the education system epitomizes a lack of long-term investment in public services. The Ifo Institute estimates that the decline in math skills will cost the economy around €14 trillion in production by the end of the century.
Germany still boasts an enviable list of agile small manufacturers, and the Bundesbank and others reject the idea that full-scale deindustrialization is near. But with reforms at a standstill, precisely what could slow the decline is still being determined. One of the hardest-hit sectors has been the chemical industry, a direct consequence of Germany’s loss of cheap Russian gas. As the transition to clean hydrogen remains uncertain, nearly one in ten companies is considering shutting down production processes, according to a recent survey by the VCI industry association.
The diagnosis is clear and indisputable: Germany is no longer competitive. Chancellor Olaf Scholz’s coalition was plunged into disarray in mid-November by a budget crisis triggered by a court decision regarding borrowing measures, leaving the government with little room to invest.
The German manufacturing sector accounts for just under 20% of the economy, nearly twice the US level. The stakes are enormous, especially in terms of employment.
Despite recent protests against the far right, the Alternative for Germany (AfD) leads the three ruling parties in the polls, behind the conservative bloc. Scholz’s Social Democratic-led alliance enjoys the support of only one-third of voters, according to a Spiegel analysis of recent polls.
The latest elections in Berlin only confirmed this trend. The three parties of the unpopular ruling coalition in Germany suffered losses in Sunday’s repeat of the 2021 federal elections in Berlin. The ruling coalition is expected to remain in power. Still, voters may penalize it in the June European Parliament elections and the three regional elections in September in eastern Germany, where the anti-immigration AfD is the most popular party.
The light seems far for a Germany in decline. It’s bad news for Europe.