Germany has reached a point of no return. Business leaders are keenly aware, and the public feels the strain, yet the politicians remain curiously paralysed. Europe’s largest economy, once a bastion of stability, is teetering on a path of decline that increasingly appears irreversible.
After five years of stagnation, Germany’s economy is now 5% smaller than it would have been had pre-pandemic growth trends held steady. Worse still, much of this shortfall may be permanent. The reasons are known: the loss of cheap Russian energy and the inability of automotive giants Volkswagen and Mercedes-Benz to keep up with China’s electric vehicle juggernaut. A decline in competitiveness has already cost each German household approximately €2,500 annually.
While the dismal outlook weighs heavily on Europe’s economic future, Germany’s political establishment seems alarmingly content to rearrange deckchairs. After Olaf Scholz’s defeat in a confidence vote on Monday, the prospect of early elections offers a fleeting opportunity for change—though with little urgency to address the deeper challenges.
This isn’t an overnight collapse. It’s a painfully slow decline—not of a company or a city, but of an entire country—and Europe is being dragged along with it. Germany’s slow decline is not merely the product of bad luck or a single leader’s missteps; it stems from a systemic inability to adapt to new realities. It is a predicament that Germany does not face alone. Across Europe, nations once at the forefront of industry and global leadership are now clinging to outdated models, paralysed by their fear of change. France, Germany’s closest peer and often its mirror, is a striking example of this continental failure to evolve.
The closure of century-old factories, like Vallourec’s tube plant in Düsseldorf, symbolises Germany’s industrial decay. Energy-intensive production is shrinking, exports are faltering, and domestic investment remains anaemic. As living standards erode, voters quickly blame anyone but themselves, fuelling social tensions and scaring off the skilled foreign workers the country desperately needs. The toxic cocktail of stagnation and resentment threatens to spread throughout Europe.
Years of questionable decisions and poor fortune have dismantled Germany’s economic model at the worst possible moment. Europe needs German industrial might to face China, counter Russia’s aggression in Ukraine, and respond to an increasingly isolationist United States. Instead, the EU’s linchpin is mired in its worst crisis since reunification.
Thirty-five years after the fall of the Berlin Wall united Germans in a bold economic project, the country is fractured. February’s elections will unlikely mandate any government to reverse the slow-motion disaster.
Friedrich Merz, the frontrunner from the Christian Democratic Union, touts a return to post-war orthodoxy: low taxes, minimal regulation, and a shrunken welfare state. But his recipe for stability needs more ambition to lift an economy of 84 million people back to prosperity.
Meanwhile, Scholz’s Social Democrats propose loosening constitutional borrowing rules and injecting €100 billion into infrastructure—a move critics dismiss as too little or too late. Cynically, Scholz’s re-election hopes hinge on Merz’s penchant for divisive rhetoric on women and immigration, which may alienate voters.
And then there’s the looming spectre of political extremes: the far-right Alternative for Germany (AfD) and the newly minted leftist BSW, both siphoning disillusioned voters. Together, they command around a quarter of the electorate, further complicating coalition-building in an already fragmented system.
Germany’s woes didn’t begin with Scholz. During Angela Merkel’s 16-year tenure, the so-called “debt brake” was enshrined in the constitution, starving public investment in defence, infrastructure, and education. Her government also deepened Germany’s reliance on cheap Russian gas—a vulnerability exposed when Vladimir Putin ordered the invasion of Ukraine in 2022.
Merkel, ever defiant, recently remarked that “blaming me won’t help the country”—a convenient absolution, given her role in the current predicament. But her legacy is undeniable: a hollowed-out industrial base, an aversion to spending, and a political system paralysed by self-imposed fiscal shackles.
According to the Council of Economic Experts, Germany’s potential growth rate—once the envy of Europe—has shrivelled to 0.4%. Combine this with cyclical fluctuations, and the risk of frequent brushes with recession becomes too real.
The country’s once-mighty automotive industry, facing fierce competition from Chinese EVs, could see 40% of its domestic value added vanish over the next decade, further eroding industrial dominance. Automakers like VW face strikes and factory closures, while suppliers like Schaeffler and Bosch cut thousands of jobs.
Economists argue that Germany must spend its way out of stagnation to turn the tide. Bloomberg Economics estimates that annual public investment needs to increase by €40 billion—roughly 1% of GDP—to catch up with other advanced economies. Yet loosening the debt brake requires political will, which Germany’s divided leadership sorely lacks.
Private Capital Flees, Innovation Wanes
Meanwhile, German firms are voting with their feet. Private capital flows abroad, and nearly half of the country’s family-owned businesses are reluctant to invest domestically, citing excessive red tape and unpredictable policies.
Germany’s troubles have far-reaching consequences for the European Union. The bloc’s economic backbone is faltering, threatening the EU’s ability to compete globally. If Germany cannot rekindle its industrial firepower, the entire European project risks becoming an exercise in mediocrity—trapped between Chinese competition, American isolationism, and internal inertia.
Will Germany rise to the occasion, or will it continue to drift into decline, dragging Europe down with it? For now, the answers are as elusive as the political will to act.