The economic crisis in Germany has been ongoing for the second year in a row. This is the longest stagnation in its entire post-war history. And the new year might turn out not to be better than the two previous years. Why is formerly largest economy doing worse than the others?
Germany has been demonstrating an economic downturn for the second consecutive year. In 2024, the economy of the largest European country shrank by 0.2 per cent following the reduction by 0.3 per cent in 2023.
‘Germany is experiencing the longest stagnation of its post-war history by far,” said Timo Wollmershäuser, economist at Ifo, a Munich-based think-tank, in an interview to FT. Actually, Germany has not reported any significant growth since the beginning of the pandemic. The industrial production rate is less than 10 per cent lower than its peak and unemployment has started growing after a drop to a record low.
Bundesbank believes the stagnation in Germany will continue this year: it has forecasted a growth of only 0.1 per cent and warned that a trade war with U.S. will cause another downturn year. The president elect Donald Trump is promising to impose comprehensive customs fees: up to 20 per cent for all imports.
There were plenty of reasons for the economic downturn. They included the consequences of 2020 coronavirus pandemic, the energy crisis of 2021-2021, the trade war with U.S. and China. But why exactly the German economy turned out to have the worst position compared to other European countries?
The problem is that Germany used to be EU’s economic leader, with its leadership rooted in strong industry, which had built products well demanded globally. Each of the mentioned events hit this industry specifically. ‘COVID-19 consequences continued to exert pressure on Germany’s economy due to its deep integration in the world economy’, says Yaroslav Kabakov, IC Finam Strategy Director.
‘Germany has a more complex export-focused economic structure, especially in the automotive and mechanical engineering industries, and this made it vulnerable. Second, the loss of Russian energy hit Germany stronger, as its industry relied on cheap oil and gas for manufacturing’, says Pavel Sevostyanov, Full State Counsellor of the Russian Federation, Associate Professor of Political Studies and Socio-Psychological Processes, Plekhanov Russian Economic University. ‘The energy crisis caused a significant impact. The industry became less competitive, as enterprises started to lag behind countries with lower energy costs’, Kabakov adds.
In 2021-2022, gas prices grew every month, overall from 300-400 dollars per thousand cbm reaching 2,000 at the end of 2021. Chemical industry and producers of fertilizers came to a halt at once, as they need lots of power for production. Other enterprises also started reducing outputs and closing down completely. With such prices, it was more profitable to close down than to keep working at a loss. Just to compare, gas prices reached 100 U.S. dollars per thousand cbm. German goods have simply gone uncompetitive in external markets with gas prices reaching several thousands. Plants started moving overseas. ‘Some German companies began moving production facilities to U.S. and India due to lower gas, utilities and labour prices’, says Kabakov. U.S. started getting goods production back, which they eagerly wanted.
The German car industry did not stand up to the competition either. ‘The trade war with China and a switch to electric cars additionally influenced Germany’s economy, which dealt a double blow to the German automotive industry’, indicates Kabakov.
Making cars in Germany became so expensive the German automotive conglomerate Volkswagen had to close some of its plants to cut costs for the first time in its 87-year history. Three facilities were affected at the same time. Moreover, the conglomerate decided to lay people off for the first time in 30 years breaching its labour commitments, which banned dismissals until 2029.
The group said it struggled to sell 500 thousand cars which accounted for the output of two plants. Two million fewer cars are sold in Europe after the pandemic. The Russian automotive market could have remedied the situation, but Western car brands deprived themselves of this market.
VW’s main problem like of any other plants in Germany is, of course, sky-rocketing costs and lower margins. This, effectively, was caused by the growing cost of utilities after the gas supplies from Russia stopped and by the overall restructuring of energy mix by Europe. Germany was the biggest buyer of Russian gas, also enjoying lowest rates, which gave it economic preferences. Now it has to purchase LNG on standard terms and at a higher price.
Germany also abandoned nuclear energy, which generated cheap electricity too, and opted for renewables. But when there is no wind or sun, energy prices grow quickly.
To make things clear, the cost of electricity in Germany was EUR 17 per megawatt-hour back in April 2020 but then it has been growing on and on reaching record EUR 470 by August 2022. This dealt a huge blow to Germany’s whole industry. Prices reduced to EUR 80 later. But this is still a lot, four times higher than in 2020.
Also, the prices might return to record highs at any moment. This is what happened early this year.
Today, the cost of electricity in Germany is setting records again: its wholesale price jumped to EUR 377 per megawatt-hour in peak hours on January 15, 2025. The reason was that a no-wind period happened for the third time during this season, with no nuclear generation available. Gas generation has been on the rise, but today it is not cheap.
Expensive power hits any industrial companies without exception. Automotive is just a vivid example.
Germany sets records in the number of bankruptcies for the second year in a row. ‘The main driver causing the growing number of defaults and bankruptcies among German companies is the tightening of ECB’s monetary policy. A decade of low interest rates in Europe led to the birth of business, which cannot exist under current loan interest rates’, says Yaroslav Kabakov.
‘Bureaucracy and labour deficit also became the factors hampering the development of the German economy. Authorities’ mistakes such as underinvestment in infrastructure and slow reforms in the labour market are making things worse. Political instability increases economic uncertainty’, says the economist.
According to Kabakov, there are various forecasts for 2025 about Germany: stagnation is possible, but growth can be also probable in case of stabilization of prices and an increase of public investment. However, with the current policy, the first scenario seems more likely, he says.
‘To restore stable growth, Germany must invest in infrastructure and innovation, subsidise focusing on local manufacturing and reform the labour market. Without structural reforms, Germany is facing the risk of losing the status of EU’s top economy’, Kabakov concludes.