It is well documented that Germany’s post world war recovery was remarkable, facilitated by the Marshall Plan (America’s post-war economic aid package to Europe) and its ordoliberal approach to the economy. By the Fall of the Berlin Wall, the economy of West Germany was the world’s second largest. Despite post-war fragility and economic stagnation in the 1990s, under the guidance of Angela Merkel Germany’s economy performed better than the US on a per capita basis. Whilst other advanced economies saw a decline in manufacturing, Germany added half a million jobs to this sector. In contrast, the EU as a whole lost 6.3 million jobs in manufacturing over this period.

However, a very different picture is painted when examining Germany in recent years.  Unemployment sits at 5.9%, its highest rate in two years. Furthermore, inflation is nearly 6%, and Germany has had two consecutive years of recession for the first time since the early 2000s. At Davos 2024 finance minister Christian Lindner described it as the “tired man” of Europe, and that its economy needed a “strong cup of coffee”. Coffee may cure tiredness, but is Germany once again Europe’s “sick man”?

Germany’s problems are extensive. Economically, they can be traced to three main causes: geopolitical turbulence, high inflation, and weak global growth.

According to the German Institute for Economic Research, the German economy contracted by $107 billion in 2022, or 2.5% of its GDP, due to the Ukraine War. This was primarily due to Germany’s prolonged dependence on Russia for energy, with 55% of its natural gas sourced from Russia prior to the war^[1]. In the post-Cold-War years, Germany intertwined its economy heavily with that of Russia. This began in the 1960s with the Pipelinepolitik policy, which connected both nations with a gas pipeline. Initially, the aim of this was to increase diplomatic ties with the Soviet Union and reduce hostility with the West. Over the following decades, despite the breakdown of the Soviet Union and domestic political turmoil, Russia remained a reliable supplier of natural gas to Germany. Thus, when Vladimir Putin weaponised energy supplies by threatening to shut off Russian gas to Europe in April 2022, Germany was unprepared. In the two weeks following the invasion, the price of natural gas increased by 180% globally. By January 2023, its finance minister Christian Lindner announced that Germany was no longer dependent on Russian gas. Nevertheless, for such an energy intensive economy, the transition was never going to be smooth.

Though this might be attributed to sheer bad luck or a miscalculation on Germany’s behalf, two key factors heightened the impact of the Ukraine War. First, not only was Germany dependent on Russian gas, but this dependence had hindered its alternatives. For example, since the 2011 Fukushima Nuclear Meltdown, Germany has phased out its supply of nuclear power.  Germany’s last three nuclear power plants were shut down in April 2023. Despite  the ever increasing demand for clean energy, Chancellor Olaf Schulz rejected appeals by lawmakers to block the closure. This was due to fears of the reactors’ safety and viability. Another alternative is Liquified Natural Gas (LNG), a form of natural gas that can be transported over long distances. However, Germany’s infrastructure is lacking in this respect, and LNG is highly expensive – average spot prices were 435% higher on-year in Asia, the key market for the fuel. As a result, it is now sourcing 43%^[2]of its gas from Norway; however, in the two winters after the Ukraine invasion, Germany’s energy regulator has still warned of gas shortages. Whilst a gas supply emergency was thankfully avoided, an economic crisis was not. Thus, not only did Germany rely too much on Russian gas, it gave itself few alternatives, dangerously hindering recovery.

Furthermore, Germany’s economic structure is fragile to a change in energy supply. This is due to its high share of energy intensive industry, and reliance on exports and global supply chains. In 2022, manufacturing accounted for 18.45% of Germany’s GDP, contributing $750 billion to its economy. To put this into context, manufacturing in the UK  is 9 percent, contributing a mere $183 billion. Manufacturing accounted for 40% of Germany’s energy consumption in 2022. Germany’s export heavy economy relies on this energy in order to produce 3 million cars a year and $122 billion worth of pharmaceuticals. In times of peace, Germany’s manufacturing sector is the powerhouse of its economy; in times of war, it can be its Achilles heel. 

It would be easy to trace all of Germany’s current problems, such as its high rate of inflation and high interest rates, to the war in Ukraine alone. Whilst these factors were certainly heightened by the war, they must be seen in the context of both the domestic and global economy. Germany’s high rate of inflation, whilst initially a symptom of the war, has been a persistent problem which has not been dealt with. In 2022, the inflation rate was 7.9% (the highest figure in 70 years). This was brought on by the increasing prices of energy and food due to the war. In 2023 the inflation rate was still hovering at 5.9%. In response to the war, the government announced a $457.6 billion stimulus package. Whilst this may have cushioned the economic impacts of the war, it has not only  failed to revive the economy (having contracted in 2022 and 2023), but it prolonged the high rate of inflation. This, in turn, exacerbates the effects of the war in a vicious cycle. With the war having already cost $2000 per resident, this reduced purchasing power parity even further. Moreover, with the European Central Bank maintaining interest rates at their record high level of around 4.75%, the cost of borrowing increased, leading to a decrease in household spending by 1.2% in 2023. 

It seems the German economy is caught in a paradoxical scenario. The additional issuing of stimulus packages would have an inflationary effect. However, if it does not issue stimulus packages, then it risks recession. Chancellor Olaf Schulz captured this sentiment in August 2023: “Measures to promote the economy (must be) so targeted and so precisely developed that they do not lead to a new surge in inflation, but that they only help to stimulate growth”.  With inflation now largely under control, (2.9% in January 2024) the first scenario has been avoided. However, as a result, so has the latter. The result has been stagnation.

Despite its domestic mistakes, Germany has been hindered by the wider picture of the global economy. The criticism of Germany’s reliance on Russia brought another of its weaknesses to the fore: its close association with China, its largest trading partner. According to the OECD (Organisation for Economic Co-operation and Development) sluggish growth in China has hit the global economy hard with Germany suffering the most. Imports from China account for around 12% of Germany’s trade, with Germany exporting 8% (20% of Germany’s total trade). However, China’s economy, like Germany’s, is in crisis. Its growth has slowed to a three decade low of 5.2%, and this crisis has been exacerbated by its property market over-leverage predicament and its ageing population. It is said that when the United States sneezes, the rest of the world catches a cold. Well, this is certainly true of China and Germany.

Ties with China also pose a geopolitical threat to Germany. Should a conflict similar to the Ukraine War break out in Taiwan, Germany will have to de-couple from China in a similar way to Russia. This would be disastrous. The Kiel Institute for the World Economy predicts that should trade with China come to an abrupt halt, Germany’s economy would shrink by 5% in the short term. This would comparable to the 2008 financial crisis or the COVID crisis. 

It is clear that the last few years have created a perfect storm for Germany’s economic woes. Already fragile from the COVID crisis, Germany’s economy underwent great turbulence following Russia’s invasion of Ukraine in early 2022. This exposed existing structural weaknesses in the economy, in particular, in its energy sector. Nevertheless, the response to this has been inadequate, with two consecutive years of economic contraction and struggles to control inflation. Germany’s economic condition runs deeper than mere tiredness. Ultimately, recovery will depend on whether Germany learns its lessons from the Ukraine War, whether this be with fiscal policy, or with its foreign policy to China. However, the outlook is not promising – expect Germany’s sickness to be chronic.