Germany's economic decline: Five key reasons behind struggles

Germany, once a powerhouse of economic growth and industrial innovation, is now facing a serious slump. Proceeding to a fresh article, AP describes that after years of leading global markets in machinery, luxury cars, and technology, the country’s economy is grappling with multiple crises. 

Germany has experienced no notable economic growth over the past five years, marking a surprising shift for Europe's largest economy. For much of this century, Germany thrived on expanding exports and leading global trade with high-end products such as industrial machinery and luxury vehicles.

Here are five key reasons behind Germany's ongoing economic decline:

Moscow's move to halt natural gas deliveries to Germany following Russia's invasion of Ukraine delivered a major setback. For years, Germany's economic strategy relied on affordable energy to drive the production of industrial exports.

Back in 2011, Chancellor Angela Merkel chose to accelerate Germany’s phase-out of nuclear power, depending on Russian gas to fill the energy gap while transitioning away from coal and towards renewable sources. At the time, Russia was seen as a dependable energy supplier, with warnings from Poland and the US being largely ignored.

When Russia halted its gas supply, prices in Germany surged for both natural gas and electricity generated from it—essential expenses for energy-heavy industries like steel, fertilizer, chemicals, and glass. As a result, Germany had to rely on liquefied natural gas (LNG), which is super-cooled and imported by ship from Qatar and the US, at a higher cost than pipeline gas.

Electricity prices for industrial users in Germany now average 20.3 euro cents per kilowatt hour, according to a study by Prognos AG for the Bavarian Industry Association. In contrast, the cost in the US and China, where many of Germany's competitors are based, is equivalent to just 8.4 euro cents. 

Renewable energy sources have not expanded quickly enough to bridge this gap. Resistance from homeowners and local communities to wind turbines has hindered wind energy development, and infrastructure for transporting hydrogen as an alternative fuel for steel production is still largely in the planning stages.

For years, Germany thrived on China's integration into the global economy, while other developed countries lost jobs to the country. German businesses tapped into a vast new market for industrial machinery, chemicals, and vehicles. Throughout the early and mid-2010s, car manufacturers like Mercedes-Benz, Volkswagen, and BMW reaped significant profits from sales in what became the world’s largest car market.

Initially, Chinese companies produced goods such as furniture and consumer electronics that didn’t directly compete with Germany's core industries. However, Chinese manufacturers eventually began producing the same products as German companies.

State-backed Chinese solar panel manufacturers overtook their German counterparts. In 2010, Chinese panel producers relied on German-made equipment, but today, China dominates global solar panel production. Beijing’s government has ramped up efforts to subsidize and promote manufacturing for export, leading to a surge in products such as steel, machinery, solar panels, electric vehicles, and EV batteries that now directly compete with German goods on international markets.

As the most auto-centric economy in the European Union, Germany had the most to lose from China's export-driven industrial policies. In 2020, China was not a major vehicle exporter, but by 2024, it was exporting 5 million vehicles annually. Meanwhile, Germany’s car exports dropped by half during the same period, falling to 1.2 million cars. Chinese factory production is estimated at 50 million vehicles per year, roughly half of the global demand.

By Naila Huseynova