Germany, long regarded as Europe’s industrial anchor, is entering a period where its traditional growth drivers are under strain from both global and domestic shocks. The combined impact of energy disruptions, weakening industrial output, and rising competitive pressures, particularly in key sectors like automotive, has challenged the stability of its once-dependable economic model. These developments mark a turning point for a country whose performance has historically shaped the trajectory of the wider European economy.
Germany’s Economic Foundations
Germany stands as the largest economy in Europe and one of the foremost globally, making its economic health pivotal to the European Union (EU) and international markets. With a gross domestic product, GDP, of approximately €4.3 trillion in 2024, Germany is the world’s third largest economy by nominal GDP after the United States and China. It alone accounts for roughly one quarter of the EU’s total GDP, underscoring its role as the EU’s economic engine. Germany is also an export powerhouse: in 2024 it was the third largest exporter worldwide with about $1.66 trillion in exports. Its industrial sector (automotive, machinery and chemicals) is the largest in Europe, comprising about one third of the EU’s manufacturing output. This outsized economic stature means that Germany’s fortunes strongly influence Eurozone financial stability and investor sentiment. For capital markets participants, German economic indicators, from GDP growth to bond yields, serve as a measure of the broader European economic health.
Germany’s economic model has long been referred to as the “Modell Deutschland,” a framework characterized by a coordinated market economy, strong industrial clusters, and a collaborative relationship between firms, labour unions, and the state. At its core are the Mittelstand companies which are highly specialized small and medium-sized enterprises (SMEs) that form the backbone of German manufacturing. These firms, many of them family owned, excel in precision engineering, industrial components, and niche technologies, often ranking as global market leaders (“hidden champions”). This decentralised industrial structure supports resilience and innovation, while Germany’s dual vocational training system ensures a steady pipeline of skilled workers. Furthermore, export oriented policies and Germany’s commitment to fiscal discipline, embodied in the constitutional debt brake (Schuldenbremse), have contributed to stable public finances and strong international competitiveness. For decades, this model facilitated high levels of industrial output, export surpluses, and sustained productivity which distinguished Germany as Europe’s industrial powerhouse.
A central pillar of this economic system is the automotive industry, which represents roughly 5% of Germany’s GDP and supports more than 800,000 direct jobs. Home to global giants such as Volkswagen Group, Mercedes-Benz, BMW, Porsche, and Audi, Germany has long dominated Europe’s vehicle production landscape. The sector accounted for approximately 25% of German manufacturing revenues pre-2020, and more than 15% of total exports, making it Germany’s single most important industrial industry. However, recent years have exposed deep vulnerabilities. The transition toward electric vehicles, increasing regulation on emissions, and competition from U.S. and Chinese EV producers, especially companies like Tesla and BYD, have put pressure on German automakers to accelerate innovation. Supply chain shocks during the pandemic, notably semiconductor shortages, led to production cuts and exposed reliance on Asian manufacturers. Meanwhile, investment requirements for electrification and battery technology have surged, pushing up capital expenditures while compressing margins. The war in Ukraine further intensified these challenges, rising energy and input costs eroded competitiveness, and the loss of Russia as a major sales market forced German automakers to adjust global strategies.
Germany stands as the largest economy in Europe and one of the foremost globally, making its economic health pivotal to the European Union (EU) and international markets. With a gross domestic product, GDP, of approximately €4.3 trillion in 2024, Germany is the world’s third largest economy by nominal GDP after the United States and China. It alone accounts for roughly one quarter of the EU’s total GDP, underscoring its role as the EU’s economic engine. Germany is also an export powerhouse: in 2024 it was the third largest exporter worldwide with about $1.66 trillion in exports. Its industrial sector (automotive, machinery and chemicals) is the largest in Europe, comprising about one third of the EU’s manufacturing output. This outsized economic stature means that Germany’s fortunes strongly influence Eurozone financial stability and investor sentiment. For capital markets participants, German economic indicators, from GDP growth to bond yields, serve as a measure of the broader European economic health.
Germany’s economic model has long been referred to as the “Modell Deutschland,” a framework characterized by a coordinated market economy, strong industrial clusters, and a collaborative relationship between firms, labour unions, and the state. At its core are the Mittelstand companies which are highly specialized small and medium-sized enterprises (SMEs) that form the backbone of German manufacturing. These firms, many of them family owned, excel in precision engineering, industrial components, and niche technologies, often ranking as global market leaders (“hidden champions”). This decentralised industrial structure supports resilience and innovation, while Germany’s dual vocational training system ensures a steady pipeline of skilled workers. Furthermore, export oriented policies and Germany’s commitment to fiscal discipline, embodied in the constitutional debt brake (Schuldenbremse), have contributed to stable public finances and strong international competitiveness. For decades, this model facilitated high levels of industrial output, export surpluses, and sustained productivity which distinguished Germany as Europe’s industrial powerhouse.
A central pillar of this economic system is the automotive industry, which represents roughly 5% of Germany’s GDP and supports more than 800,000 direct jobs. Home to global giants such as Volkswagen Group, Mercedes-Benz, BMW, Porsche, and Audi, Germany has long dominated Europe’s vehicle production landscape. The sector accounted for approximately 25% of German manufacturing revenues pre-2020, and more than 15% of total exports, making it Germany’s single most important industrial industry. However, recent years have exposed deep vulnerabilities. The transition toward electric vehicles, increasing regulation on emissions, and competition from U.S. and Chinese EV producers, especially companies like Tesla and BYD, have put pressure on German automakers to accelerate innovation. Supply chain shocks during the pandemic, notably semiconductor shortages, led to production cuts and exposed reliance on Asian manufacturers. Meanwhile, investment requirements for electrification and battery technology have surged, pushing up capital expenditures while compressing margins. The war in Ukraine further intensified these challenges, rising energy and input costs eroded competitiveness, and the loss of Russia as a major sales market forced German automakers to adjust global strategies.
From Labour Market Miracle to Structural Vulnerability
Historically, Germany’s economy has been characterized by high productivity and a robust export oriented industrial base. After struggles in the 1990s and early 2000s, when it was called the “sick man of Europe” Germany undertook substantial structural reforms that dramatically improved its economic performance. Notably, a series of labor market reforms in the mid 2000s (the Hartz reforms under the Agenda 2010 program) transformed a rigid job market into a far more dynamic one.
From 2005 to 2019, Germany experienced what economists call a “labour market miracle.” During this period, employment surged by over 15%, rising from about 39.3 million workers in 2005 to 45.3 million by 2019. Unemployment fell to record lows, and workforce participation climbed, making Germany an economic leader by the 2010s. This job rich growth, combined with low interest rates and a stable policy environment, fostered strong domestic demand and helped Germany attract businesses and investments. However, one side effect of this boom was a shift toward service sector jobs with lower productivity growth. In fact, annual labor productivity gains slowed significantly after 2005 to roughly 0.7% per year, down from 1.7% in the decade prior. Even so, Germany’s overall economic model with high quality manufacturing, a skilled workforce, and moderated wage growth remained highly competitive. By the end of the 2010s, Germany enjoyed a massive trade surplus, low inflation, and robust fiscal health, ensuring its reputation as Europe’s economic anchor.
Entering the 2020s, Germany’s longstanding strengths were suddenly tested by a combination of adverse events. The outbreak of the Russia Ukraine war in early 2022 marked a turning point for Germany’s economy. For years, Germany had become increasingly reliant on cheap Russian energy, especially natural gas, which powered its industries and heated its homes. Just before the outbreak of war, Russia supplied more than half of Germany’s natural gas, along with a third of its oil and a significant share of coal. This heavy dependence, once economically beneficial, became a severe vulnerability when Russia’s invasion of Ukraine provoked an energy standoff. In 2022, Russian gas deliveries plummeted, due to sanctions, leaving Germany struggling for alternative energy sources.
The immediate economic consequences were stark: energy prices skyrocketed and supply uncertainties mounted. European natural gas benchmark prices hit unprecedented highs in 2022, and Germany’s import costs for fuel increased so much that in May 2022 the country recorded a trade deficit of about €1 billion, its first monthly trade deficit since 1991. This rare deficit, caused by a 30% year on year surge in import prices (mainly energy) outdoing export growth, underscored how the war’s energy shock ensured Germany’s usual trade surpluses. German exports also suffered from the collapse of trade with Russia and weaker global demand, but it was the import bill for energy that fundamentally altered the trade balance. The cumulative impact of these disruptions left Germany in a vulnerable position, laying the groundwork for the stagnation that became increasingly evident in 2025.
Historically, Germany’s economy has been characterized by high productivity and a robust export oriented industrial base. After struggles in the 1990s and early 2000s, when it was called the “sick man of Europe” Germany undertook substantial structural reforms that dramatically improved its economic performance. Notably, a series of labor market reforms in the mid 2000s (the Hartz reforms under the Agenda 2010 program) transformed a rigid job market into a far more dynamic one.
From 2005 to 2019, Germany experienced what economists call a “labour market miracle.” During this period, employment surged by over 15%, rising from about 39.3 million workers in 2005 to 45.3 million by 2019. Unemployment fell to record lows, and workforce participation climbed, making Germany an economic leader by the 2010s. This job rich growth, combined with low interest rates and a stable policy environment, fostered strong domestic demand and helped Germany attract businesses and investments. However, one side effect of this boom was a shift toward service sector jobs with lower productivity growth. In fact, annual labor productivity gains slowed significantly after 2005 to roughly 0.7% per year, down from 1.7% in the decade prior. Even so, Germany’s overall economic model with high quality manufacturing, a skilled workforce, and moderated wage growth remained highly competitive. By the end of the 2010s, Germany enjoyed a massive trade surplus, low inflation, and robust fiscal health, ensuring its reputation as Europe’s economic anchor.
Entering the 2020s, Germany’s longstanding strengths were suddenly tested by a combination of adverse events. The outbreak of the Russia Ukraine war in early 2022 marked a turning point for Germany’s economy. For years, Germany had become increasingly reliant on cheap Russian energy, especially natural gas, which powered its industries and heated its homes. Just before the outbreak of war, Russia supplied more than half of Germany’s natural gas, along with a third of its oil and a significant share of coal. This heavy dependence, once economically beneficial, became a severe vulnerability when Russia’s invasion of Ukraine provoked an energy standoff. In 2022, Russian gas deliveries plummeted, due to sanctions, leaving Germany struggling for alternative energy sources.
The immediate economic consequences were stark: energy prices skyrocketed and supply uncertainties mounted. European natural gas benchmark prices hit unprecedented highs in 2022, and Germany’s import costs for fuel increased so much that in May 2022 the country recorded a trade deficit of about €1 billion, its first monthly trade deficit since 1991. This rare deficit, caused by a 30% year on year surge in import prices (mainly energy) outdoing export growth, underscored how the war’s energy shock ensured Germany’s usual trade surpluses. German exports also suffered from the collapse of trade with Russia and weaker global demand, but it was the import bill for energy that fundamentally altered the trade balance. The cumulative impact of these disruptions left Germany in a vulnerable position, laying the groundwork for the stagnation that became increasingly evident in 2025.
Analysis of the Macroeconomic Environment
In the third quarter of 2025, the German economy showed signs of stagnation. The seasonally and calendar-adjusted gross domestic product (GDP) recorded no quarter-over-quarter growth (0%) and a year-over-year increase of 0.3%. Despite an increase in investment in equipment, exports fell compared with the previous quarter. Moreover, the country experienced an inflation rate of 2.3%, according to the CPI in October 2025. This figure remained stable around 2% throughout the year, peaking at 2.4% in September. Core inflation (excluding food and energy) stood at 2.8%. Food prices moderated from 2.1% in September to 1.3% in October, while energy prices continued to decline by 0.9%.
Regarding the manufacturing sector, the stock of orders increased by 0.6% quarter-over-quarter in real terms and 4.1% year-over-year. The quarter-over-quarter increase was driven by growth in the production of electrical equipment (2.4%), computer, electronic and optical products (1.8%), and automotive manufacturing (0.7%). The investment in equipment was reflected in the expansion of the capital goods sector, which rose by 0.4% compared with August 2025.
To foster growth and investment in defence, the parliament approved a budget increase in 2025 that includes an expansion of the fiscal deficit. The new budget amounts to €502.5 billion, €22 billion more than the previous year. The deficit will be financed through an increase in public debt of €143 billion. The funds will be directed to infrastructure and the armed forces as a consequence of the ongoing war. Expenditure will reach €86 billion and is expected to rise to €153 billion by 2029. Germany aims to stimulate economic development amid concerns over deindustrialisation and slow growth.
Challenges and Outlook in the Automotive Industry
The slowdown of the industrial sector is particularly significant in Germany because of its impact on one of its largest industries: the automotive sector. This segment plays a pivotal role in the German economy due to its contribution to GDP, employment, and tax revenues. In recent years, companies in the sector have struggled with high energy prices, international competition, and regulation. Despite the slowdown in energy CPI, it remains substantially above pre-crisis levels. In 2021, the energy CPI (base year 2015) stood around 115. In 2022, prices reached 164.5 by October. Although recent data show improvements from 2022, the October 2025 CPI of 145.1 is still high, creating difficulties for energy-intensive industries.
The slowdown of the industrial sector is particularly significant in Germany because of its impact on one of its largest industries: the automotive sector. This segment plays a pivotal role in the German economy due to its contribution to GDP, employment, and tax revenues. In recent years, companies in the sector have struggled with high energy prices, international competition, and regulation. Despite the slowdown in energy CPI, it remains substantially above pre-crisis levels. In 2021, the energy CPI (base year 2015) stood around 115. In 2022, prices reached 164.5 by October. Although recent data show improvements from 2022, the October 2025 CPI of 145.1 is still high, creating difficulties for energy-intensive industries.
Germany Consumer Price Index: Energy
Major players in the industry have already shown the effects of these shocks. In October 2024, Volkswagen (VW) announced the shutdown of factories in Germany and massive layoffs due to rising costs for energy, materials, and personnel. At that time, costs were twice as high as those of competitors and 25–50% higher than planned, according to Thomas Schaefer, Volkswagen Brand CEO. The issues persisted in the first quarter of 2025, when VW, BMW, and Mercedes reported significant profit declines, further worsened by tariffs. VW’s operating income fell 37% year-over-year, BMW’s EBIT dropped 28.3%, and Mercedes’s EBIT declined by 29% (adjusted for one-time factors, according to the company).
Among these struggling automakers, Porsche (majority-owned by VW) was severely damaged by the tariff environment and cost pressures. In Q3, operating performance plunged to a €966 million loss. The performance deterioration becomes even more evident when compared to the €974 million profit recorded in the same period of 2024. This result is driven by fluctuating sales in Europe, North America, and especially China, which puts pressure on margins due to intense price competition. The decline in sales in this region is expected to continue. The crisis has forced Porsche to plan cost reductions by cutting 1,900 jobs in the coming years.
This is not only explained by rising costs but also by the loss of market share to Chinese competitors offering cheaper and more advanced EV alternatives. China’s position as the world’s leading electric vehicle manufacturer was confirmed in 2023, when the country’s BEV exports accounted for 29% of the global total, while Germany’s share stood at 15%. The EU was the main export market for Chinese BEVs, representing 40% of China’s BEV export revenues. The cost advantage reflects China’s decades-long efforts to promote electric mobility. Some key structural factors include the electrification of public transport, restrictions on combustion engine vehicle traffic, and local integration of the supply chain. In fact, the share of domestic value added in Chinese car production rose to almost 80% in 2020, compared with less than 60% in Germany.
Among these struggling automakers, Porsche (majority-owned by VW) was severely damaged by the tariff environment and cost pressures. In Q3, operating performance plunged to a €966 million loss. The performance deterioration becomes even more evident when compared to the €974 million profit recorded in the same period of 2024. This result is driven by fluctuating sales in Europe, North America, and especially China, which puts pressure on margins due to intense price competition. The decline in sales in this region is expected to continue. The crisis has forced Porsche to plan cost reductions by cutting 1,900 jobs in the coming years.
This is not only explained by rising costs but also by the loss of market share to Chinese competitors offering cheaper and more advanced EV alternatives. China’s position as the world’s leading electric vehicle manufacturer was confirmed in 2023, when the country’s BEV exports accounted for 29% of the global total, while Germany’s share stood at 15%. The EU was the main export market for Chinese BEVs, representing 40% of China’s BEV export revenues. The cost advantage reflects China’s decades-long efforts to promote electric mobility. Some key structural factors include the electrification of public transport, restrictions on combustion engine vehicle traffic, and local integration of the supply chain. In fact, the share of domestic value added in Chinese car production rose to almost 80% in 2020, compared with less than 60% in Germany.
Regulatory Pressures and Structural Challenges in the Automotive Industry
In addition, the German automotive industry faces further pressure from EU regulation, especially the 2035 rule. In 2023, EU countries gave final approval to legislation setting zero tailpipe CO₂ emissions for all new cars and vans. This means that only BEVs/FCEVs or engines running on certified e-fuels can be sold. The rule has had a major impact on industry margins, which were already affected by high energy prices and tariffs. Large investments in EVs have amplified existing structural costs in Germany. On the other hand, this has strengthened China’s leadership in the EU market, pushing the bloc to consider measures such as tariffs to reduce the price gap and maintain domestic industry competitiveness. The EU and Germany have a high dependency on external inputs since the battery value chain is dominated by Asian companies. German electric vehicle manufacturers must import all their batteries, exposing them to international trade risks and emphasizing the dominance of Chinese firms with established cost-efficient supply chains.
Another key regulation to consider is Euro 7. The new EU vehicle emissions standard sets stricter limits on air pollutants emitted by cars. It will apply from July 2025 for new car and van types, from July 2026 for all new car and van registrations, and between July 2027 and 2030 for heavy-duty vehicles. According to an evaluation by Frontier Economics, industry experts estimate incremental direct costs of Euro 7 at €2,000 per internal combustion engine car/van and €12,000 per diesel bus/lorry. These figures are four to ten times higher than the original estimate in the Euro 7 Impact Assessment. The German government already expressed opposition to the regulation in 2023. Volker Wissing, the Transport Minister at the time, said: “If such a big investment like Euro 7 brings such a small advantage, it is obvious that we should drop it. That’s why I reject it.”
Germany’s industrial and economic crisis results from a combination of macroeconomic factors and increasing regulation that negatively affect the industrial sector, with consequences for trade balances, employment, and automotive manufacturers.
In addition, the German automotive industry faces further pressure from EU regulation, especially the 2035 rule. In 2023, EU countries gave final approval to legislation setting zero tailpipe CO₂ emissions for all new cars and vans. This means that only BEVs/FCEVs or engines running on certified e-fuels can be sold. The rule has had a major impact on industry margins, which were already affected by high energy prices and tariffs. Large investments in EVs have amplified existing structural costs in Germany. On the other hand, this has strengthened China’s leadership in the EU market, pushing the bloc to consider measures such as tariffs to reduce the price gap and maintain domestic industry competitiveness. The EU and Germany have a high dependency on external inputs since the battery value chain is dominated by Asian companies. German electric vehicle manufacturers must import all their batteries, exposing them to international trade risks and emphasizing the dominance of Chinese firms with established cost-efficient supply chains.
Another key regulation to consider is Euro 7. The new EU vehicle emissions standard sets stricter limits on air pollutants emitted by cars. It will apply from July 2025 for new car and van types, from July 2026 for all new car and van registrations, and between July 2027 and 2030 for heavy-duty vehicles. According to an evaluation by Frontier Economics, industry experts estimate incremental direct costs of Euro 7 at €2,000 per internal combustion engine car/van and €12,000 per diesel bus/lorry. These figures are four to ten times higher than the original estimate in the Euro 7 Impact Assessment. The German government already expressed opposition to the regulation in 2023. Volker Wissing, the Transport Minister at the time, said: “If such a big investment like Euro 7 brings such a small advantage, it is obvious that we should drop it. That’s why I reject it.”
Germany’s industrial and economic crisis results from a combination of macroeconomic factors and increasing regulation that negatively affect the industrial sector, with consequences for trade balances, employment, and automotive manufacturers.
Anatomy of a Crisis: the Causes
To fully understand how Germany got to this point, it is essential to investigate all the causes that have triggered the crisis.
One of the factors that has impacted the German economy most significantly in recent years is undoubtedly the imposition of sanctions on Russia, following the outbreak of the conflict with Ukraine. In the past few years, the EU has prohibited the import of seaborne crude oil and refined petroleum products from the Russian Federation, and many other countries have done the same. The impact of this policy has undoubtedly been significant, considering that in 2021 the European Union alone imported approximately €71 billion worth of oil from this country. The imposition of sanctions has resulted in a complete reshaping of the German energy market.
Prior to the invasion, Germany imported 95% of its total gas requirement and 55% of that from Russia, which was also the primary source of Germany's oil and coal imports. Although the European Commission tried to respond to the energy emergency immediately with the “REPower EU” plan (launched on 8 March 2022), its implementation proved to be not so straightforward. The impact on energy costs has been clear: in the first quarter of 2025, only four countries in the world (Bermuda, Denmark, Ireland, and Belgium) had higher household electricity prices than Germany. The already complex situation has been exacerbated by a series of policies aimed at reducing the use of nuclear energy. Inspired by a series of accidents such as those of Three Mile Island (USA, 1979), Chernobyl (Ukraine, 1986) and Fukushima (Japan, 2011), this energy transition (known as Energiewende) has been promoted in particular by the Greens and aimed to increase the reliance on renewable energy sources. Despite Germany's early leadership in championing renewable sources, as of 2024 they accounted for just over 52% of the country's electricity supply, insufficient to meet industrial demands.
Monthly wholesale electricity prices in Germany 2019-2025 (in euros per megawatt-hour)
Shifts in the global market are another factor that has recently affected the German economy. In a report dated January 2024, the Deutsche Bundesbank warned about the risks facing Germany as a result of its economic ties with China. Although this strong interdependence may have been a strength in the last few decades, especially following China's emergence as an economic power, the recent slowdown in Chinese economic growth due to the trade war has impacted German exports. In 2022, Germany exported €107 billion of goods to China (7% share of total), its fourth biggest importing country. This, combined with a series of supply chain disruptions caused by geopolitical events (such as the attacks on merchant ships in the Red Sea claimed by the Houthis), strongly impacted the German industrial sector.
According to several analysts, the decline in property values observed across the entire continent (but particularly in Germany) is an additional factor which contributed to the worsening of the crisis. This trend led to an increase in insolvency and difficulties in refinancing debt, with a consequent impact on the ability to make new investments. The housing emergency witnessed in recent years has certainly not improved the situation: suffice it to say that in 2024, Germany was the only country in the European Union with more tenants than homeowners, with over half the population not owning their own home. According to the International Monetary Fund, the weakening of the German economy was then exacerbated by a number of elements such as trade tariffs imposed by the United States, cutbacks in consumption due to inflation, interest rate hikes by the European Central Bank, the reduction in the country's working-age population, and a decline in the German education system.
According to several analysts, the decline in property values observed across the entire continent (but particularly in Germany) is an additional factor which contributed to the worsening of the crisis. This trend led to an increase in insolvency and difficulties in refinancing debt, with a consequent impact on the ability to make new investments. The housing emergency witnessed in recent years has certainly not improved the situation: suffice it to say that in 2024, Germany was the only country in the European Union with more tenants than homeowners, with over half the population not owning their own home. According to the International Monetary Fund, the weakening of the German economy was then exacerbated by a number of elements such as trade tariffs imposed by the United States, cutbacks in consumption due to inflation, interest rate hikes by the European Central Bank, the reduction in the country's working-age population, and a decline in the German education system.
Economic and Political Consequences
One of the most obvious consequences of the German crisis has been its effect on employment. The figures speak for themselves: the unemployment rate is set to rise to 3.6% in 2025, and job vacancies in Q2 2025 stood at 1.06 million, half their 2022 peak. According to EY, over 100,000 jobs have been lost in the German industrial sector in 2024 alone. Since mid-2024, the industrial workforce has shrunk by 1.8%, reaching 5.46 million people (at its peak in 2018, it was 5.7 million). The automotive segment suffered the most (with 48,700 jobs cut in the past year), followed by machinery, metals and textiles. Not only existing jobs are affected, but also newly created ones: in August 2025, there were 631,000 job openings, 68,000 fewer than in the previous year. In addition to the number of jobs, the consequences of the crisis are also reflected in wages. Although real wages grew by 0.4% between Q1 2024 and Q1 2025, they remained 0.2% below the Q1 2021 level.
It is then particularly interesting to analyse how German politics reacted to this situation. According to some analysts, the delay in implementing certain measures and the application of poor decisions may have contributed to the onset of the crisis. The Parliament's blocking of a series of measures aimed at stimulating the economy (including a law to reduce the country's bureaucracy) was an inadequate response to several crisis signals already identified by economists. The lack of homogeneity and the clash between political forces within Scholz's majority undermined the possibility of intervention, also reducing the consensus in favour of the government itself. With regard to the energy issue, the most significant interventions were a series of measures approved with the aim of switching to liquefied natural gas, facilitating the development of LNG terminals to accelerate this transition. In addition, the German state-owned investment and development bank began to guarantee short-term credit lines to small and medium-sized German enterprises, to compensate for the sharp increase in prices on exchanges.
The economic slowdown has therefore had a series of political consequences, which then resulted in the latest German government crisis. The trigger for the dissolution of the coalition was the proposal of an 18-page policy paper, presented on 1 November 2024 by the Finance Minister Christian Lindner. Interpreted as a provocation by the Greens and SPD, this document suggested the introduction of new tax cuts and the reduction of public spending in order to solve the country's economic crisis. On 6 November, after meeting with Lindner, Chancellor Scholz asked German President Frank-Walter Steinmeier to dismiss the finance minister from his position, in accordance with the powers granted to him by the Constitution. The decision has been justified as a measure to prevent damages to the country and support the government's ability to act. Following Lindner's dismissal, Scholz announced his intention to call for a vote of confidence in his government on 15 January: the outcome of this vote led to the dissolution of the Bundestag and to early elections in February 2025.
One of the most obvious consequences of the German crisis has been its effect on employment. The figures speak for themselves: the unemployment rate is set to rise to 3.6% in 2025, and job vacancies in Q2 2025 stood at 1.06 million, half their 2022 peak. According to EY, over 100,000 jobs have been lost in the German industrial sector in 2024 alone. Since mid-2024, the industrial workforce has shrunk by 1.8%, reaching 5.46 million people (at its peak in 2018, it was 5.7 million). The automotive segment suffered the most (with 48,700 jobs cut in the past year), followed by machinery, metals and textiles. Not only existing jobs are affected, but also newly created ones: in August 2025, there were 631,000 job openings, 68,000 fewer than in the previous year. In addition to the number of jobs, the consequences of the crisis are also reflected in wages. Although real wages grew by 0.4% between Q1 2024 and Q1 2025, they remained 0.2% below the Q1 2021 level.
It is then particularly interesting to analyse how German politics reacted to this situation. According to some analysts, the delay in implementing certain measures and the application of poor decisions may have contributed to the onset of the crisis. The Parliament's blocking of a series of measures aimed at stimulating the economy (including a law to reduce the country's bureaucracy) was an inadequate response to several crisis signals already identified by economists. The lack of homogeneity and the clash between political forces within Scholz's majority undermined the possibility of intervention, also reducing the consensus in favour of the government itself. With regard to the energy issue, the most significant interventions were a series of measures approved with the aim of switching to liquefied natural gas, facilitating the development of LNG terminals to accelerate this transition. In addition, the German state-owned investment and development bank began to guarantee short-term credit lines to small and medium-sized German enterprises, to compensate for the sharp increase in prices on exchanges.
The economic slowdown has therefore had a series of political consequences, which then resulted in the latest German government crisis. The trigger for the dissolution of the coalition was the proposal of an 18-page policy paper, presented on 1 November 2024 by the Finance Minister Christian Lindner. Interpreted as a provocation by the Greens and SPD, this document suggested the introduction of new tax cuts and the reduction of public spending in order to solve the country's economic crisis. On 6 November, after meeting with Lindner, Chancellor Scholz asked German President Frank-Walter Steinmeier to dismiss the finance minister from his position, in accordance with the powers granted to him by the Constitution. The decision has been justified as a measure to prevent damages to the country and support the government's ability to act. Following Lindner's dismissal, Scholz announced his intention to call for a vote of confidence in his government on 15 January: the outcome of this vote led to the dissolution of the Bundestag and to early elections in February 2025.
A Turning Point
The recent example of Germany has shown how demographic and political factors can contribute to the origin of a complex economic phenomenon such as a crisis. The implications can then be reflected in different areas, affecting the entire productive force of a country, and impacting some sectors more severely than others (as in the case of the German automotive industry).
Germany is now preparing to face a moment of extraordinary importance: after two years of contraction and a 2025 of substantial stagnation, the country is preparing to recover, with estimated GDP growth of 1.2% in 2026 and 2027. According to several analysts, higher public spending and generally looser fiscal policy will support consumption and overall investment, two key elements for reviving the competitiveness of the German economy in the global market.
The recent example of Germany has shown how demographic and political factors can contribute to the origin of a complex economic phenomenon such as a crisis. The implications can then be reflected in different areas, affecting the entire productive force of a country, and impacting some sectors more severely than others (as in the case of the German automotive industry).
Germany is now preparing to face a moment of extraordinary importance: after two years of contraction and a 2025 of substantial stagnation, the country is preparing to recover, with estimated GDP growth of 1.2% in 2026 and 2027. According to several analysts, higher public spending and generally looser fiscal policy will support consumption and overall investment, two key elements for reviving the competitiveness of the German economy in the global market.
By Filippo Ariaudo, Aaron Smith Soko, Stefaniya Yakubovskaya
Sources
- BDE (Banco de España)
- Clean Energy Wire
- Coface
- Destatis (German Federal Statistical Office)
- European Commission
- EY
- Financial Times
- Frontier Economics
- Il Sole 24 Ore
- International Monetary Fund
- IPE Berlin
- OECD
- OSW – Centre for Eastern Studies
- Reuters
- Trading Economics
- YCharts
- The Guardian
- International Trade Administration
- European Commission Country Report (Germany)