What's Wrong With Germany? transcript

Europe's biggest economy has a bit of a crisis on its hands. The economic model is not working anymore. Germany was the largest exporting nation on the planet. And now it very much isn't. Big companies announce restructuring programs, closing factories, closing plans, laying off workers. Now, historically, Germany's economic story was one of almost uninterrupted growth, but that changed in recent years when a post-pandemic rebound turned into a contraction and the economy began to stagnate.

There is little doubt that the German industry, especially the energy-intensive sector, has been in crisis for years. And the effects are reaching jobs and industrial communities. Economic anxiety is also pressuring politicians. So what's behind Germany's industrial crisis and why do some experts think it's running out of time to fix it? It's a moment in history when you don't act now, Europe or Germany might be as well a huge open-air museum.

For decades, German industry made premium objects, sent them abroad, and made a tidy Deutsche Mark, now Euro, and it still does. It accounts for roughly 20% of the country's total value added. It's higher than other big countries in the EU like France or Spain or Italy. And it's also closely linked to other sectors outside industry like business services. Germany also makes the things, inside the things, that make the other things, like a kind of hi-viz hydraulic inception.

The car that has a coating that is chemicals. Road markings or cycling lane markings, that's also chemicals. The paint on your wall, chips in your phones, all of that is chemicals. Germany's economy is Europe's engine. If factories thrive, the economy tends to grow. But the reverse is also true and now a concern. Here's a measure of Germany's industrial output since 1991. By the early 2000s, German industry was lagging behind the European average.

From 2003, a series of labor market reforms helped revive the economy until the global financial crisis. After that, output climbed for a decade, peaking in 2018. Then COVID hit, and it's been pretty much downhill ever since. The German economy has also fallen well behind its former peer economies. Look at Germany's GDP over the last 20 years compared to a weighted combination of those former peers, Korea, Japan, Finland, Canada, and Sweden.

That, right there is a six to seven percent difference. And that's massive. It really is. And the longer the weakness persists, the clearer it becomes that this is not just a cyclical downturn the German economy is facing, but it's rather a lasting loss of its economic potential. So where did the machine start to sputter? The three pillars of Germany's economic success were cheap Russian gas, an open global rules-based trade and industrial leadership, especially in areas like machinery, automotive, and engineering.

All three pillars developed structural concerns for multiple reasons and in quick succession. The supply of cheap Russian gas to Germany stopped, which increased energy costs in Germany, well above those in countries like the United States or China. The rupture from Russia's full-scale invasion of Ukraine exposed Berlin's national energy gamble. Russia supplied about half of Germany's natural gas demands. Europe relies heavily on fossil fuels for its industry, and it doesn't produce those fossil fuels.

So they need to import it. Higher energy costs have taken a particular toll on energy intensive sectors like the chemical industry. They cannot switch from gas and oil that quickly. They need gas and oil not only for energy, but they need the carbon molecules. And this hurt the competitiveness of the German industry. Within three years, 2022 to 2025, nearly 10% of European chemical capacity was earmarked to close. In places like this, those numbers translate to job losses.

The BASF site in Ludwigshafen is one of the biggest chemical complexes worldwide. That's where the chemical industry in Germany was kind of born. They now employ less than 30,000 people. That's the first time since the 1950s. But at the same time, you see that they built a whole new plant for billions of euros in China. The chemical industry is a prime example of a so-called China Shock 2.0. The first China Shock began roughly in the early 2000s after China joined the World Trade Organization.

And the surge in exports from China hit in particular labor-intensive low tech industry. The German industry that focused on producing high-value manufacturing goods like machinery and cars was less vulnerable. Germany did more than avoid the first shock. It actually benefited from it. For a very long time, China was one of Germany's biggest customers. Once upon a time, 'Made in Germany' was a global badge of quality.

When China wanted nuclear reactors, bullet trains, and cars for dignitaries, it called the Germans. Note, the past tense there. After moving up the value chain, Chinese manufacturers now compete with Germany in its core markets. China Shock 2.0 now refers to a new wave of export competition that has gathered pace since around 2020. German companies didn't really take this competition seriously. Now seeing that other countries caught up, but also in parts just produce better products than them is something that is currently hitting home.

Take solar panels, for instance. They were produced in the 2000s still in Germany and then completely shifted basically to China. It's machinery, also electrical engineering, energy infrastructure, and industrial components. Exports of those and some other products from Germany to China decreased about 10% in 2025, while imports of those same items from China increased. It changed from a trade surplus a couple of years ago to a notable and widening trade deficit now.

And one factor behind this is a decline in export of cars from Germany to China. Vehicle exports to China were down more than 30% last year. Meanwhile, Germans are snapping up Chinese EVs. In the span of five years, China leapfrogged the largest automakers in the world. Germany was complacent about China's EV for a very long time. They switched gears now, but it might be difficult to catch up. China also controls supplies of critical minerals and rare earths.

German factories depend on those supplies, giving China added leverage. It's not so much that China has stopped supplying Germany with rare earths or critical minerals. It's rather that they delayed it. That's a problem in itself because companies need certainty to plan ahead. We've seen rising protectionism all around the globe. Donald Trump has ordered his administration to consider imposing reciprocal tariffs on trading partners.

You know how many cars we have? Mercedes-Benz and BMW. They don't want anything from us. Free trade is fragmenting. You have a lot of authoritarian states across the globe for whom it's much easier to push forward specific sectors by subsidizing them. In Europe, that's a bit more difficult. Germany is part of the European Union so it cannot just come up with subsidies on its own. Germany did support its industry in face of higher energy costs, especially during the acute phase of the energy crisis in 2022 and then in 2023.

These were temporary and expensive measures. Permanent subsidies would prove trickier. It would require the government to commit a large share of its budget. And it remains an open question whether this is economically sound and politically feasible. Last year, Chancellor Friedrich Merz loosened one of the German government's fiscal constraints, the so-called debt break, and unleashed a huge spending package for defense and infrastructure.

The full impact of this though will take time to filter through the broader economy. It's one of several pressures facing the government. Merz has been fairly hawkish with China. We are still far too slow. China builds within a few months. In the EU, it take years. He's got to have that tricky balancing act, protect German interests, but also engage with China. To be sure though, China is a big problem, but not the only one.

Those energy costs remain expensive. Demand is weak and fiscal room is tight and workers are feeling it too. You will see no real wage growth or very depressed or muted wage growth in the future in those industry sectors when they're not as competitive as they used to be. Another long-term hurdle for companies is a shrinking, aging workforce. This will have consequences and we'll explain them in just a sec. The consequences of Germany not growing anymore might be that it can't afford its very expanded social system.

Already, the government's cutting social benefits, pensions, and healthcare. The system relies on strong growth because Germany gets tax revenues from companies producing and being successful. The most serious fallout may come at the ballot box though. For some voters, fear of decline is fueling support for political extremes. And this fragmentation makes it even more difficult to reform. And if you can't reform, then growth is hindered.

And at the same time, you lose tax revenues and the trust of, of the people. So it's a kind of a vicious cycle. The consequences wouldn't stop at the national border either. The German industry is at the heart of the European manufacturing economy. Many countries also depend on the German industry through tightly integrated supply chains. A key question whether Germany can maintain its status as Europe's economic engine will be whether industry can, to a certain degree, at least stay and manufacturing excellence can stay.

Germany's challenge is to transform its industry-heavy economy for an era of rapid technological change, geopolitical fragmentation, and higher energy costs. If we bring this chart back from earlier, you can see a glimmer of hope for recovery. In 2025, the country saw very modest GDP growth. The stock market has also hit record highs. But Germany's deeper challenges remain, in particular, the reinvention of its industrial model.

German companies are now looking if they can leverage that to, yeah, build a new industrial AI that can compete with other AI models put forward from, from the US or from China and kind of get an edge there. It's not the first time that Germany faces a challenging time. Germany has shown that it's capable of, of getting up and rebuilding innovating and getting back on track.