As Germans prepare for a snap election following the collapse of a fragile government coalition, key issues for voters include how a new government might revitalize the country’s struggling economy amidst high energy prices and job cuts.
Germany, the largest economy in Europe, has experienced minimal growth over the past two years. Recent data shows a slight growth of 0.1 percent from July to September; however, the economy is projected to contract for the entire year, with economists not anticipating a return to growth until 2025 unless significant policy changes are implemented quickly.
The urgency for change is underscored by the announcement from Bosch, Germany’s largest auto supplier, which plans to cut 5,500 jobs starting in 2027, with the majority affected positions located in German factories.
High energy costs, complex bureaucracy, aging infrastructure, and geopolitical issues have adversely impacted Germany’s export sector. Political stagnation under the previous coalition government has further complicated matters.
The three-party coalition led by Chancellor Olaf Scholz faced internal disagreements over various issues, ultimately leading to its collapse this month. Early elections are scheduled for February 23, presenting an opportunity for a new government to address these challenges.
Economists emphasize that revitalizing the economy will require reforms in tax and welfare policies, alongside deregulation and infrastructure investment. Salomon Fiedler, an economist at Berenberg, stated, “Without major policy changes, the German economy’s long-run growth potential is extremely limited.”
German industrial production has contracted by over 12 percent since 2018, with businesses expressing frustration due to a lack of clear direction from the government regarding investment strategies.
A notable example includes the government’s abrupt decision to end subsidies for electric vehicles last year, which led to significant job losses in the automotive sector as demand plummeted. Ford Motor announced a reduction of 4,000 jobs in Europe, primarily in Germany, while Volkswagen is contemplating the closure of several factories to return to profitability.
Following the loss of natural gas supplies from Russia due to the invasion of Ukraine, the government shifted to importing liquefied natural gas, keeping homes warm but causing a 40 percent increase in prices compared to the previous year. Despite this, plans to shut down the last nuclear reactor in Germany proceeded.
Analysts highlight that inconsistent governmental strategies hinder businesses in planning investments or predicting costs, contributing to record pessimism among industrial leaders, as indicated by a survey from the Ifo Institute in Munich.
Germany’s industrial sector, once a powerhouse, is expected to see production decline by 3 percent in 2024, marking a third consecutive year of contraction. Companies in various sectors are facing challenges from rising energy prices, regulatory pressures, and increased competition from China.
Tanja Gönner, managing director of the BDI, remarked, “German industry is under massive pressure,” and indicated that a recovery by 2025 seems unlikely.
ThyssenKrupp, the largest steelmaker in Germany, recently reported a €1 billion write-down of its steel division after incurring a yearly net loss of €1.4 billion, highlighting the struggles of decarbonizing steel production amid soaring energy costs.
Moreover, the German economy is increasingly reliant on innovation, yet it lacks new startups essential for future growth. While government funding is available for new businesses, many entrepreneurs relocate to the United States for better scaling opportunities due to more accessible venture funding and lower taxes.
As the world’s third-largest exporter, Germany’s economy is also affected by geopolitical factors and supply chain disruptions. The United States recently surpassed China as Germany’s top trading partner, with trade worth €157.9 billion. However, potential tariffs proposed by President-elect Donald J. Trump could negatively impact this relationship.
Many German firms, including major automotive and chemical companies, have substantial investments in the U.S. and could be adversely affected by a potential trade war instigated by increased tariffs.
In the past year, German companies invested €15.7 billion in the United States, drawn by cheaper energy and favorable tax conditions, but concerns loom regarding the potential repeal of beneficial legislation like the Inflation Reduction Act.
Economists express skepticism about the prospects of U.S. economic policies benefiting Germany, with Carsten Brzeski of ING Bank stating that it is challenging to see how these policies would have a positive impact on the German economy.