Here are five key reasons why Germany's economy is struggling


Here are five key reasons why Germany

Published on 17/02/2025 - 11:52 GMT+1•Updated 12:29 Here are five key reasons why Germany's economy is struggling as voters decide on 23 February who will run their next government. Germany hasn't seen significant economic growth in five years. It's a stunning turnaround for Europe's biggest economy, which for much of this century had expanded exports and dominated world trade in engineered products like industrial machinery and luxury cars. So what happened? Here are five reasons for Germany's ongoing economic slump: Energy shock from Russia Moscow's decision to cut off natural gas supplies to Germany in the wake of Russia's invasion of Ukraine dealt a severe blow. For years, Germany’s In 2011, then-Chancellor Angela Merkel decided to hasten the end of nuclear power use in Germany while relying on gas from Russia to bridge the gap as the country moved away from coal generation and toward renewable energy. Russia was then considered to be a reliable energy partner; warnings to the contrary from Poland and the United States were dismissed. When Russia discontinued the flow, prices in Germany skyrocketed for gas and for electricity generated from gas, both key costs for energy-intensive industries such as steel, fertiliser, chemicals and glass. Germany had to turn to liquefied natural gas, or LNG, super-cooled and imported by ship from Qatar and the US LNG costs more than pipeline gas. Electricity now costs industrial users in Germany an average of 20.3 euro cents per kilowatt hour, according to a study the research firm Prognos AG prepared for the Bavarian Industry Association. In the US and China, where many competitors of German companies are located, the cost is the equivalent of 8.4 euro cents. Renewable sources of energy haven't scaled up fast enough to fill the gap. Homeowner and regional resistance to turbines slowed wind energy growth. Infrastructure to transport hydrogen as a replacement fuel for steel furnaces remains mostly on the drawing board. China: From customer to competitor For years, Germany benefited from China's entry into the global economy - even as other developed countries lost jobs to China. German companies found a massive new market for industrial machinery, chemicals and vehicles. Through the early and mid 2010s, Mercedes-Benz, Volkswagen and BMW reaped fat profits selling into what became the world's largest car market. At the time, Chinese companies produced items like furniture and consumer electronics that didn't compete with Germany's core strengths. Then, manufacturers in China started making the same things that Germans did. State-subsidised Chinese solar panels wiped out Germany's makers. In 2010, Chinese panel makers depended on imported German equipment; today, global solar panel production relies on equipment from China. The government in Beijing has ramped up efforts to promote and subsidize manufacturing for export. The resulting goods — steel, machinery, solar panels, electric vehicles and EV batteries — now compete with German goods on export markets. Germany, the most auto-centric of the European Union economies, had the most to lose from China's export-oriented industrial policy. In 2020, China was not a net exporter of vehicles; by 2024, it was exporting 5 million a year. Germany's net exports fell by half over the same period, to 1.2 million cars. Chinese factory capacity is estimated at 50 million vehicles a year, roughly half of global demand. Skimping on investment Germany grew complacent during the good times and put off investing in long-term projects such as rail lines and high-speed internet. The government balanced its budget and sometimes ran surpluses off the tax revenue from a booming economy. These days, German commuters shake their heads at trains that don't run on time and constant service disruptions while repairs are made to worn-out tracks. High speed internet hasn't yet reached some rural areas. A transmission line to bring electricity from Germany's windy north to factories in the south has run years behind and won't be ready before 2028. A key bridge on the highway connecting the industrial Ruhr region with southern Germany had to be closed in 2021, 10 years after doubts about its durability emerged. A replacement won't be ready before 2027. A 2009 constitutional amendment handcuffed the government by limiting deficit spending. Whether to loosen the so-called debt brake will be a thorny issue for the German government installed after the country's Feb. 23 election.