Germany's economic crisis: Is its business model broken?

The Financial Times’ article paints a stark picture of Germany's current economic crisis, drawing attention to a combination of structural issues, external challenges, and political dysfunction that has placed the country on the brink of a long-term economic decline. At the heart of the article is the question of whether Germany's business model is "broken." The piece delves into a variety of factors, including the country's industrial woes, the shift in its relationship with China, and rising domestic political instability. 

The article begins by emphasizing that the current economic decline in Germany is unlike any the country has faced in recent history. Consultant Andreas Rüter, drawing from over 30 years of experience in corporate restructuring, describes the situation as “unprecedented” and of a magnitude far greater than previous crises such as the dotcom bust or the global financial crisis.

Germany has not seen meaningful GDP growth since late 2021. In fact, it is poised to shrink for the second year in a row, which signals a prolonged stagnation in its economy.

The country’s industrial production, which had been a pillar of its economy, is down by 16 per cent since its peak in 2017. Specific sectors, like automotive, chemicals, and engineering, have seen notable declines, with significant corporate restructuring and job losses.

Corporate investment has been consistently low for the past five years, reflecting a lack of confidence in future prospects. Foreign direct investment has also dropped sharply, pointing to Germany's diminished appeal as a business destination.

Iconic companies like Volkswagen, Thyssenkrupp, and Continental are facing plant closures, restructuring, and downsizing. In particular, Volkswagen is dealing with the threat of domestic plant closures, which signals deep-rooted problems in Germany’s traditional manufacturing sectors.

The article highlights rising political instability within Chancellor Olaf Scholz's fragile coalition government, comprising the Social Democrats (SPD), Greens, and Liberals (FDP). The coalition's internal divisions have paralyzed effective governance, especially in the economic policy domain.

Business leaders are frustrated with what they perceive as indecision and a lack of coherent economic policy from the current government. There is a growing sense that the government is not addressing the root causes of the crisis and is unable to enact reforms in a timely manner.

The opposition, led by the Christian Democrats (CDU), has gained ground and is capitalizing on the government's economic missteps. Friedrich Merz, leader of the CDU, has directly blamed Scholz for the loss of industrial jobs and the country’s economic decline, and has promised to reduce bureaucracy, cut taxes, and improve the country’s competitiveness.

Germany’s economic woes are also tied to external factors, particularly the rise in energy prices following Russia's invasion of Ukraine. The chemical industry, heavily reliant on imported hydrocarbons, has been particularly hard hit by these soaring energy costs. Moreover, the rise in global competition from China, which has shifted from being a key importer of German capital goods to a competitor producing its own high-quality products, has exacerbated Germany's challenges.

The article provides examples like the chemical plant in Krefeld, which has been negatively affected by high energy costs, and the challenges faced by other sectors such as automotive and steel.

Germany’s once-thriving relationship with China has taken a turn. The Asian giant’s transformation into a producer and exporter has put immense pressure on traditional German sectors, especially automotive, where the Chinese market was once a significant profit driver. The shift from Chinese demand for German cars to domestic production has undermined German carmakers' competitiveness, with Chinese electric vehicles (EVs) now posing a direct challenge.

Germany’s industrial sector is facing a serious risk of deindustrialization, with a predicted 20% decline in industrial production by 2030. The traditional sectors, particularly automotive, are struggling to adapt to the new technological and market realities, particularly the shift to electric vehicles (EVs).

The German automotive industry, once a symbol of industrial strength, is experiencing a deep transformation. While German carmakers like VW, BMW, and Mercedes-Benz still maintain strong brands, their reliance on internal combustion engine (ICE) technology has made them vulnerable to the rise of electric-only competitors from China, which are not only more technologically advanced but also sell at lower prices.

Job Losses and Supply Chain Disruptions: The transition to EVs, which require fewer components than traditional vehicles, has led to massive job losses in the German automotive supply chain. ZF Friedrichshafen, a major supplier, has already announced plans to cut 14,000 jobs in Germany by 2028.

The article concludes by questioning whether Germany’s business model is "broken," echoing the concerns of prominent economists and business leaders who are increasingly pessimistic about the country’s economic future.

The German Council of Economic Experts has downgraded the country’s potential growth rate to just 0.4 per cent, signaling that low growth and poor economic performance are likely to be the "new normal."

Many leaders feel that Germany’s rigid economic and political structures — characterized by high taxes, labor costs, excessive bureaucracy, and a lack of flexibility — have become unsuited to the changing global landscape. This has led to increasing calls for major reforms to enhance competitiveness.

Despite the dire outlook, there are voices of cautious optimism. Some believe that Germany still has the capacity to recover, pointing to its strong labor market, its historical resilience, and the potential for growth in sectors like green technology and industrial automation. Bundesbank president Joachim Nagel and economists like Holger Schmieding argue that while the country is in a tough spot, it is not in terminal decline.

Optimists suggest that with the right policies and strategic investments in new industries, particularly in green technology and digital transformation, Germany could still regain its competitive edge.

The key issue is whether the government can overcome its internal divisions and implement the necessary reforms to revive the economy. The challenge remains to reduce bureaucracy, lower taxes, and address energy prices and labor shortages.

This Financial Times opinion piece provides a comprehensive and sobering analysis of Germany’s economic predicament. While the country’s industrial and manufacturing sectors face severe challenges, particularly in the context of rising energy prices, political instability, and global competition, the article suggests that Germany's business model is not necessarily "broken" but in need of urgent reform and adaptation.

The future of Germany’s economy will likely depend on the political will to enact substantial changes and the ability of businesses to pivot toward new technologies and sectors. Whether Germany can overcome its current crisis remains uncertain, but the risks of stagnation and deindustrialization are very real.

By Vafa Guliyeva