There are three types of economic crises. The first responds to stimuli; the second, to reforms, and then there is the one that Germans have right now: a crisis about who they are, who they are with, what they are good at and what their role is in the world. Germans have been telling themselves all their lives that they are an old-fashioned industrial economy, that they must have a trade surplus against the rest of the world, and that they must resist the pernicious influence of a digital world dominated by the United States. This is how Germany succumbed to strategic partnerships with Russia for gas, and with China for trade and investment. This decade has brutally undermined the German worldview and the economic model on which it is based. The EU’s political stagnation and its inability to forge an ecosphere in a world dominated by geopolitical bullies has a lot to do with Germany’s structural recession.
In the UK it hasn’t been noticed until recently, but it started a long time ago. When the Anglo-Saxon country held the Brexit referendum in 2016, Germany was still considered an economic power. Angela Merkel was the most powerful leader in Europe. The Economist He called her the indispensable European. What only a few saw was that all the fateful decisions had already been made by then: the close relationship of successive German chancellors with Vladimir Putin that led Germany to become increasingly dependent on Russian gas; the excessive dependence on China for the supply chains of German companies, and Merkel’s unilateral decision in 2011 to bring forward the end of nuclear energy. Another issue that wasn’t on people’s radar screens as much is Germany’s chronic underinvestment in digitalization. China and Russia had become strategic partners of Germany in the last decade. I still remember my astonishment when I spoke to a fellow columnist in Berlin 10 years ago and he told me: “We Berliners look east, towards Moscow and Warsaw. Paris and London are cities of the past.”
I had never heard it expressed so brutally. That was the Germany of the Merkel era. The German-Russian relationship had become the most important bilateral axis in Europe. Its symbol was the Nord Stream gas pipelines through the Baltic Sea. They provided cheap gas to German companies, but Eastern Europeans considered it a threat to their national security. German illusions vanished overnight when Putin invaded Ukraine in February 2022 and with Olaf Scholz’s decision to firmly anchor Germany again in the Western alliance. The chancellor spoke of a change of era in German foreign policy. I think he meant it, but the German economy couldn’t stop the change. Their bet had been that the era of globalization would last forever. The new Cold War was a blow for which they were not prepared. The way companies now deal with this problem is by closing factories and relocating production to the United States and eastern and southern Europe. Volkswagen has recently announced the closure of at least three factories in Germany and massive job losses, the first time this has happened. This year, the German economy will stagnate in a second year of near-zero growth. A German business association has just predicted that 2026 will be the same. Indeed, this has all the earmarks of a structural recession.
The intricate relationship between politics and business in Germany is often underestimated, and not as easily visible to the outside world. German politicians of all parties have used business networks and government-owned banks as a launching pad to political power. One of them was Gerhard Schröder, former German chancellor. When he was prime minister of the northern German state of Lower Saxony, he was a member of Volkswagen’s supervisory board, due to Lower Saxony’s 20% stake in the company. In 2003, when he was German chancellor, he let a Volkswagen executive draft his labor market and social security reforms. The industry’s need for a stable and affordable gas supply was what led Schröder to establish a close political relationship with Vladimir Putin. He still calls him friend. After leaving politics in 2005, Schröder became an executive at Gazprom, responsible for Nord Stream. Some of his ministers held lucrative positions in the German energy sector.
The history of Russia is in some ways similar to that of Germany. Both countries have become dependent on only a few economic sectors: Russia, on raw materials; Germany, engineering and chemical products. They have also become dependent on each other. The SPD, the party of Schröder and Scholz, was the party that took over the bilateral relationship with Russia. A whole series of senior SPD political officials invested in this relationship. They are also the same politicians who express skepticism about Scholz’s support for Ukraine. They told themselves that Germans and Russians would never again be on opposite sides of an international conflict.
Scholz was not a member of the Putin connection of his party. But he was the leader of the Chinese club. The Chinese tried to win their friendship from the beginning. As mayor of Hamburg in the past decade, Scholz made increasingly frequent visits to China. When the EU voted last month to impose tariffs on Chinese cars, Germany was the only major member state to vote against. Scholz is totally obsessed with tariffs. Strong anti-EU sentiment is currently stirring in Germany because of this decision. The country has become so dependent on China that it has not been allowed enough degrees of political freedom, especially when it comes to trade policy. This is the thing about trade surpluses: you make money, but you become dependent.
Many of the largest German companies have become too exposed to the Chinese market. Volkswagen and Mercedes-Benz make more than 30% of their profits from China. The chemical company BASF even wants to increase its dependence on the Asian country, which it considers its most important future market.
But China has become a big problem for Germany. It has taken over markets previously dominated by Germany, such as automobiles. The Chinese are hypercompetitive. Unlike Germany, China has also invested in 21st century digital technologies. Chinese electric cars are not only cheaper than their German competitors, but also more advanced.
This is what makes Germany’s economic decline a structural recession, not a normal economic crisis. At this time, the strategy consists of reaffirming what was done before. Nobody in Germany talks about diversification, the only known remedy against excessive dependence. Scholz wants to address the problem with more subsidies to save jobs. I suppose that the next German Government will push to extend the 2035 deadline for the sale of combustion cars. This would be another short-sighted response. The reasons why German car manufacturers have so many problems is the loss of market outside Europe and especially in China. This is happening now, not in 2035.
Comparing Germany’s industrial decline to the five stages of grief, I saw the country stuck in the first stage of denial for a long time.
Now you are moving into the second phase: anger. This is the phase in which factories close and jobs disappear, and in which everyone points the finger at everyone else, and in particular at the EU. Brexit was also preceded by decades of insults to the EU. I am not predicting a departure of Germany from the European Union, but I observe a progressive distancing. People blame EU regulations. Scholz blames EU tariffs. The Franco-German relationship is also not as close as it used to be under Helmut Kohl and François Mitterrand. Emmanuel Macron and Olaf Scholz treat each other with courtesy, but they are not close friends.
Furthermore, Germany is increasingly unwilling to finance the EU. During the eurozone sovereign debt crisis of the last decade, Germany did the minimum it needed to do to prevent the breakup of the Monetary Union. The country is by far the largest contributor to the EU budget. And it was the largest contributor to the EU recovery fund, which was created during the pandemic. Successive German chancellors have tried to contain the EU budget, with some success, but have never managed to reduce Germany’s net contributions, which currently hover around €30 billion annually. In times of austerity, that is a lot of money that is not spent on German highways, roads and trains.
The EU budget is negotiated for seven years. The current period ends in 2027. By then, we may be in a different phase of the structural recession, but the crisis will not be over. I don’t think Friedrich Merz will demand his money back, as Margaret Thatcher did in her day, but I don’t think he will accept an increase in the German contribution either. And without an increase it is difficult to see how Ukraine’s accession to the EU could be financed. It would depend on other Eastern European countries, and especially Poland, accepting that they too will have to become net contributors.
It is possible that the biggest foreseeable crisis will occur between Germany and the United States. I struggle to see how Germany can remain economically tied to China to the point it is today and still depend on the United States for its national security. The transatlantic alliance, and the relationship between the United States and Germany in particular, would face a monumental test if a military confrontation between the United States and China over Taiwan were to come. The Dutch have already bowed to American pressure to end the export to China of lithography machines that produce high-performance semiconductors. It is relatively easy for the United States to put pressure on a small country like the Netherlands. Germany will not be so docile by any means. Germany’s structural recession is also a European political crisis.
And it is also a warning about how close economic success and failure are. The Germans were very lucky in the first two decades of this century. Everything went perfectly for them. In the early 2000s, they improved their price competitiveness through economic reforms. Globalization opened new markets. Cheap container shipping allowed companies to launch global supply chains. Russia provided cheap gas. China needed German facilities and machinery for its economic expansion.
Players know what streaks of good and bad luck are. Germany’s good fortune began to run out shortly after the United Kingdom voted in favor of Brexit. German exports to the Anglo-Saxon country were drastically reduced. The pandemic damaged supply chains. The Russian invasion of Ukraine upended the country’s energy policies. Currently, Germany’s main trading partners are the United States and China. It is not a very favorable situation, but it is symptomatic of an underlying problem: the general denial of geopolitics. If Germany had chosen to open up to new technologies, to diversify and stop depending on companies, countries and technologies, today it would be a very different country: more pro-European, safer, less extremist in its political discourse and clearer regarding its position. in the world.
Successive German governments have discovered the hard way that the corporate interests they defended are not the same as the national interest. The national interest would have been to diversify away from companies on which they were overly dependent. Now it is companies that are diversifying outside of Germany.
Wolfgang Münchau is director of eurointelligence.com. just published Kaput. The End of the German Miracle (Swift Press).
News Clips Translation.
How have historical economic partnerships with Russia and China shaped Germany’s current trade policies and relationships with other global powers?
Question 1: To what extent have German politicians’ and businesses’ historical ties with Russia and China influenced Germany’s current economic and geopolitical status?
Question 2: Can Germany maintain its traditional reliance on manufacturing and engineering industries in the face of increasing competition from emerging markets like China and nations such as the United States?
Question 3: How has Germany’s historical relationship with the European Union and its member states, particularly France, impacted the country’s economic policy and decision-making during this period of structural recession?
Question 4: How does Germany’s refusal to financially support the EU, especially during times of crisis, affect its relationship with Eastern European countries, and what are the potential long-term consequences of this approach?
Question 5: Can Germany reconcile its need for American military support with its economic ties to China in the event of a potential military confrontation between the United States and China over Taiwan?
Question 6: To what extent have successive German governments prioritized national interest over corporate interests in their handling of economic policy decisions?
Question 7: How could Germany diversify its economy to reduce dependence on a select few sectors and become less vulnerable to geopolitical shifts in the global marketplace?
