Germany’s rude economic awakening 

BERLIN — Germany is finally emerging from the first stage of economic grief: denial.

After years of turning a blind eye to what the rest of the world could plainly see, Germans are slowly coming to terms with the reality that they are in deep trouble as the four horsemen of their economic apocalypse come into view: an exodus of major industry; a rapidly worsening demographic picture; crumbling infrastructure; and a dearth of innovation. 

While Germans have been preoccupied in recent years with migration and the war in Ukraine, their economy has quietly been imploding. The economic malaise is stoking fears that the country could see a further swerve to the political extremes. Chancellor Olaf Scholz’s coalition, hampered by constitutional spending limits that make it all but impossible for the government to undertake ambitious economic stimulus, has been beset by infighting and appears to have run out of ideas over what to do. 

While the economy’s struggles have been in the back of Germans’ minds for some time, they have suddenly moved to the fore following a spate of dour economic news involving Germany-based plants for blue-chip companies including Volkswagen and Intel. Asked to rank the country’s “most important problems,” Germans put the economy second behind migration in a recent public television survey.

That’s bad news for Scholz and his embattled three-party coalition. Even before the recent economic troubles, he had already earned the lowest approval ratings ever recorded for a German leader. Only 18 percent of Germans are satisfied with Scholz’s job performance. By comparison, the lowest level ever recorded for Angela Merkel during her 16 years in office was 40 percent. Gerhard Schröder, her predecessor, hit bottom at 24 percent.

For Scholz, more humiliation looms this Sunday in the form of another potential far-right win in an eastern regional election, this time in his home state of Brandenburg. Scholz’s center-left Social Democratic Party (SPD) has ruled in Brandenburg since Germany’s reunification. But polls show the far-right Alternative for Germany (AfD) party leading there. If the far right wins again in the East, as it did in Thuringia earlier this month, it would amount to another repudiation of Scholz’s leadership, heightening speculation that his weakened coalition won’t last until the next federal election scheduled a year from now.

The latest economic indicators certainly won’t help Scholz’s chances. Germany is already the weakest economy in the G7.

The waning magic of ‘Made in Germany’

 Just 15 years ago, as much of the West was still reeling from the financial crisis, Germany looked as if it had cracked the code to enduring prosperity. It managed to compensate for weakness in the U.S. and Europe by ramping up exports to China, where demand for its capital goods remained strong. No more.

With an industrial base rooted in 19^th-century technologies such as chemicals and machinery and a massive digital deficit, Germany is increasingly finding it difficult to compete. Once home to some of the premier global companies, from BMW to Adidas, the country is increasingly an also-ran. Of the 100 most valuable companies in the world, for example, just one — software developer SAP — is German. 

Much to the chagrin of Germany’s storied engineering sector, the Chinese have caught up and are less reliant on the waning magic of “Made in Germany.” Meanwhile, a lethal combination of aggressive American industrial policy and ingenuity have put the Germans at a growing disadvantage in the U.S. Tesla, a company German car executives once scoffed at, is now worth more than four times the German auto industry combined. In addition, Chinese consumer spending is struggling.

The latest salvo of German doom landed late Monday with the announcement by U.S. chip giant Intel that it was placing its planned €30 billion German expansion on ice. The investment, which promised to create 3,000 jobs, would have been the largest by a foreign company in German history. Though Intel said the project would be delayed for “approximately two years,” there is no guarantee it will ever materialize.

The Intel move, dubbed the “Chip Flop” by the tabloid Bild, follows news earlier this month that Volkswagen is considering shuttering factories in Germany for the first time in its 87-year history. The car giant, along with the rest of Germany’s once-vaunted auto industry, was slow to invest in electric vehicles and has struggled to catch up with the likes of U.S. rival Tesla and China’s BYD. Now it’s paying the piper. 

The revelation by Volkswagen management that big cuts are likely inevitable shook Germany out of its collective torpor. Though Germany’s economic data has been suboptimal for some time — the country has been in a prolonged period of stagnation that began in 2020 — the depth of the malaise didn’t hit home because employment remained robust. 

But that may not be the case for much longer. It looks like the economic outlook will only get gloomier. As the highly-respected, Munich-based Ifo economic institute recently put it: “Germany’s economy is mired in crisis.” 

The threat of rising unemployment

In addition to the deep-rooted challenges facing Germany, such as its rapidly aging society and the low productivity of its workforce, the country has also been hit hard by cyclical developments, including the slowdown in China and a drop in domestic consumer spending. 

That said, unemployment, a lagging economic indicator, has remained fairly tame until now. It hit 6.1 percent in August, a rise of 0.3 percent from a year earlier. But the employment climate could shift quickly if the likes of VW and other big industrial players start to trim their workforces.

Those concerns aren’t limited to the auto industry. Though German energy prices have stabilized following the shock triggered by Russia’s full-scale invasion of Ukraine in 2022, which cut off German industry’s access to cheap Russian gas, companies continue to cite high energy costs as a competitive disadvantage, a situation compounded by increasingly strict environmental norms for Germany’s traditional industries.

In Duisburg, home to Europe’s largest steel-making plants, workers are bracing for substantial cuts. ThyssenKrupp, the erstwhile national steel champion, is struggling to remain competitive despite the promise of about €2 billion in government subsidies to ease its “transformation” away from CO2-emitting production.  

The government’s goal is to turn Duisburg into a center for “green” steel, replacing coal-fired steel furnaces with new ones powered by hydrogen. Whether that’s a realistic goal is a matter of dispute, given that creating “green hydrogen,” or hydrogen produced with renewable energy, requires copious amounts of both wind and electricity, which is both expensive and logistically difficult.  

Bärbel Bas, the SPD president of the German parliament and a native of Duisburg, visited her hometown this week for a “steel summit” to discuss the crisis enveloping the industry. Invoking the tens of thousands of jobs at stake, Bas insisted “there must be a future” for the Duisburg steel hub.    

“Domestic steel production is also essential for Germany,” she added. “Germany shouldn’t become dependent on others for this important raw material.” 

The question, however, is how the steel industry will survive given an additional challenge: lagging demand. Germany’s steel industry employs about 80,000 workers, but most producers have reduced output amid a growing glut, triggered by the weakness in Germany’s car and machinery sectors. ThyssenKrupp shares have dropped nearly 60 percent over the past year. Last month, several board members of ThyssenKrupp’s steel subsidiary, including former SPD leader and economy minister Sigmar Gabriel, resigned amid a dispute over management’s strategy for the business. 

Trouble in the Social Democratic heartlands

A few months ago, it seemed like things could hardly get worse for the SPD. In the European election in June, the party suffered its worst showing in a national election in well over a century. Then, in state elections in Germany’s East earlier this month, the parties in Germany’s SPD-led coalition suffered big losses.

Now, the economic trouble is hitting particularly hard in what is left of the SPD’s traditional manufacturing strongholds, from Germany’s steel country in the West to VW’s base in Lower Saxony.

That means the task of turning around the Germany economy is likely to fall to the center-right opposition and Friedrich Merz, the leader of the Christian Democratic Union (CDU), which is currently polling far ahead of all other parties. This week, Merz, a former corporate lawyer with close ties to German business, announced that he will run as the conservatives’ top candidate, making him the likely next chancellor.

Merz is running on a platform to bring back the good old days of the Germany economy, including by saving the combustion engine and by boosting productivity.

“We want to and must remain an industrial country,” he recently said in Berlin.

But given the structural problems the German economy is facing, it’s unlikely any party will be able to spark an industrial turnaround anytime soon.

In other words, it’s about time Germans move on to the next stage of grieving over their once-great economy: acceptance.