German economy in crisis: What can the next government do?

Lower energy costs, lower taxes, more financial incentives for investment, more flexible labor laws, an end to social security payments and above all, less bureaucracy — that is what German businesses are demanding from the country's next government.

"The economy is shrinking. Unemployment is growing. Germany has become unattractive for investors," that is how Rainer Dulger, president of the Confederation of German Employers' Associations (BDA), summed up the situation at the last employers' conference in late October 2024.

Well-trained and specialized employees have become rare. Regulations and bureaucracy, said Dulger, have grown at a rate proportional to the growth of other burdens heaped on companies — such as rising employment and production costs. Germany, he said, is no longer competitive globally.

Germany's economy relies very heavily on its now faltering industry

Germany's economic strength depends heavily on industry, which is responsible for roughly a quarter of GDP. After two years of recession, the Federation of German Industry (BDI) calculated that production output is now far lower than it was five years ago. The result: Less is produced and built in Germany, and less is bought and consumed.

In their latest annual advisory report to the German federal government's Council of Experts, economists documented a continuing downturn across all sectors of the economy. Especially disconcerting are indications that fewer German products now find their way abroad.

Germany no longer the world's leading exporter

For decades, German's successful business model was based on a simple formula: purchase raw materials and parts abroad at a good price, then use German engineering prowess and cheap energy to transform them into valuable products "made in Germany."

Russia's invasion of Ukraine, the energy crisis, inflation, and the forced transition to a climate-neutral economy sent energy prices rising, which hit energy intensive companies hardest.

"Important economic sectors such as manufacturing or electro-technologies were especially hard hit, whereas the chemical industry stabilized at a low level after the setbacks it suffered in 2023," wrote the Council of Experts.

Businesses packing up and leaving Germany

Businesses are demanding a significant reduction in energy prices to make Germany competitive again. But at the top of the corporate wish list is an even greater reduction in the price of bureaucracy. According to the Ifo Institute, a Munich-based economic research outfit, German businesses spend €65 billion ($68 billion) annually on compulsory documentation and reports related to planning and certification processes.

The mood in Germany's businesses is grim, and uncertainty about economic development is growing. Rather than investing at home, many companies are now looking for more attractive production bases abroad. In response to a recent BDI survey, roughly one-third of businesses said they had already offshored research and development operations. This caused BDI president Peter Leibinger to warn that Germany's very "foundation" as a place to base businesses was under threat.

Businesses to sound the alarm on January 29

An alliance of some 100 economic and lobbying associations is calling for nothing less than a complete economic policy turnaround from Germany's next government. The group is calling for a day of nationwide action on January 29. On that day, businesses across the country will draw attention to their problems and demands, with a major demonstration to be staged at Berlin's famous Brandenburg Gate.

Organizers say businesses will use the demonstration to send an "SOS" to politicians.

"The situation is serious. We are at an economic tipping point and are massively hemorrhaging economic substance like never before," reads a "wake-up call for politics" on a special dedicated website. The page, set up by organizers, also claims that Germany's upcoming February 23 vote will be one that determines the country's "destiny."

Making rural Germany more attractive for life and work

In an urgent letter to the leaders of Germany's parliamentary parties, BDA President Rainer Dulger and the heads of the country's other large business federations called on politicians to help make rural regions more attractive for companies after the election. Among those things deemed most necessary in this regard are adequate, comprehensive digital, transport and energy infrastructure for housing, health and mobility, as well as for educational, cultural and social institutions.             

In opinion polls, the economy and migration are the two topics that most concern voters. When voters were asked which party they saw as best equipped to deal with those issues, the so-called Union parties (CDU/CSU) were mentioned most often. The center-right parties and their chancellor candidate, Friedrich Merz, currently lead all other parties in pre-election polls. 

Still, the Union parties will be dependent upon coalition partners to govern. That likely means the center-left Social Democrats (SPD) or the Greens, which currently comprise a minority government after the departure of the business-friendly FDP and the implosion of the so-called "Traffic Light" coalition. Key to any upcoming coalition negotiations will not only be the political convictions of the individual partners, but also outside influences, especially the global geopolitical shifts taking place with the return of US President Donald Trump to the White House.

What next in the US?

German companies are now peering across the Atlantic with consternation. In 2024, for the first time in more than 10 years, the US became Germany's biggest trading partner once again — with roughly 10% of German exports going to the US.

Many German businesses expect a negative impact on their global competitiveness because Trump wants to control trade and introduce import tariffs. The US market is key for Germany's pharmaceutical but also its manufacturing and automobile sectors.

And Germany sells more to the US than it buys from them. That is a thorn in Trump's side. He wants to lower America's trade deficit with Germany and is trying to lure German companies into producing more in the US.

Investment premiums and a Germany fund

That will put even more pressure on the next government to take steps to make Germany once again attractive as a place to base a business. The CDU/CSU has promised to slash corporate taxes to a maximum of 25% as well as significantly reducing energy costs. The SPD has proposed investment premiums, adding that the restoration and modernization of rural infrastructure is urgently needed. That will all be very expensive, and that's the catch.

The so-called debt brake anchored in Germany's Basic Law says the state cannot spend more cash than it takes in. The next government will have to do some creative thinking to figure out how to deal with that fact. Getting rid of the debt brake is a non-starter. A reform allowing loans for financial investments to bolster Germany as a place to do business is more likely.

This article was originally published in German and translated by Jon Shelton.