German dependence on China and its foolhardy energy policies have brought low what was once an economic colossus. With tariffs and cabinet instability on the horizon, its prospects are unlikely to improve.
Germany has an acute need to change—politically, diplomatically, and economically. Revolution might not be too strong a word. The power dynamics between its various political parties will doubtless shift dramatically in the coming years. Germany’s role in the Western alliance will need revision well beyond the recent estrangement from the Trump White House and Berlin’s decision to increase defense spending. Immigration concerns will only become more intense over time. Propelled in part by these issues (while also propelling them) is Germany’s urgent need to adjust its economic model away from the long-held emphasis on heavy manufacturing and exports. The nation’s prosperity hangs in the balance.
Economic pressures spring from an unlikely source: China. For a long time, China’s rapid development was a boon to Germany, a natural counterpart to the country’s heavy emphasis on manufacturing and exports. China’s rapid pace of development created a seemingly insatiable appetite for German machinery, medical and other instruments, telecommunications gear, electronics, autos, and other high-end technical goods.
Newly wealthy Chinese purchased Mercedes, BMWs, Audis, and Porsches faster than German plants could assemble them. Between 2000 and 2014, German exports to China grew almost 13 percent a year. At the same time, German consumers and businesses, like so many others in the developed world, eagerly bought low-priced clothes, household goods, toys, and the like that formed the backbone of China’s economy. In this symbiotic arrangement, China became Germany’s main trading partner and support for the country’s economic model.
Matters, however, have greatly changed, especially from the Chinese side. Since the COVID-19 pandemic, China’s pace of growth has slowed markedly. Whereas the Chinese economy grew at an average of 8 percent a year between 2009 and 2019, it has, in the years since 2020, had trouble meeting the official real growth target of 5 percent a year, and many China-watchers suggest that the actual rate of growth is a good deal slower. And as the pace of growth has slowed, so has the once seemingly unquenchable thirst for German manufacturing. To make matters worse for German exporters, the loss of confidence surrounding China’s property crisis has all but halted any capital investment by private Chinese firms and, with it, the consumption of German machinery. Accordingly, German exports to China have actually declined more than 40 percent from 2019 levels.
Also destroying the old symbiotic arrangement is Beijing’s decision to compete head-to-head with the German products it once so eagerly bought. China’s government has pushed state-owned enterprises to reach for production capabilities in high-value electronics, machinery, medical devices, automobiles, and the like, not just to replace what German firms previously sold in China but also to challenge German goods on world markets. Beijing has not explicitly aimed at Germany, but the substitution has begun, nonetheless. Autos are a prime example. Chinese-made electric vehicles (EVs) have gone far in displacing Audi and Volkswagen sales. Almost half of all vehicle sales in China are now Chinese-made EVs. Moreover, these inexpensive cars have eroded German auto sales in Europe. A recent EU decision to block Chinese EV “dumping” (the EU claims) with steep tariffs speaks to how far Chinese vehicles have penetrated the European auto market.
The demise of the old Chinese arrangements alone would deliver a severe blow to German economic prospects, but there is also the question of energy. Past policy errors have made energy highly expensive in Germany, an especially heavy burden for an economy so oriented toward energy-intensive heavy industry.
Two mistakes stand out. One is Berlin’s push to shut down the country’s nuclear power plants. The other was to turn completely away from coal, a resource the country possesses in abundance, in favor of solar and wind power. While environmentally justified, these policies rendered Germany highly dependent on imports of Russian natural gas.
The consequences of German vulnerability became apparent in 2022 when Russia’s invasion of Ukraine forced Western sanctions that cut off Germany’s supply of gas. Energy prices skyrocketed. They have come down a bit since Germany has substituted liquified natural gas (LNG) imports from the United States and Qatar for some of the Russian gas. Still, prices remain high and are three times what American industry pays for energy. The resulting increase in production costs has erased German industry’s competitive edge.
Signs of this economic pickle are already evident. Unlike the United States and many other economies, Germany never recovered from the shutdowns and quarantines of the COVID-19 year 2020. Germany underperformed compared to the rest of the world in 2021 and 2022, and its economy shrank in 2023 and 2024. These declines were modest, but they were the first back-to-back yearly declines since the early 1950s. Germany’s real economy has effectively stagnated since 2019, compared to the United States and even Europe as a whole.
Since Germany is one-quarter) of the EU’s economy, that 5 percent total indicates much better economic performance elsewhere on the continent. Industrial production in the Federal Republic is 15 percent lower than in 2018. Unemployment brims over 6 percent of the German workforce, up from 5 percent as recently as 2022. Utilization of industrial capacity at last measure was 5 percent below normal recessionary lows, killing any appetite in German industry to spend on new facilities. Nor does the most recent run of statistics suggest anything but continued decline. Noteworthy are the layoffs recently announced by Volkswagen.
Adding to this pressing need for economic adjustment are the tariffs recently imposed and threatened by the Trump White House. A 25 percent tariff has already been put in place for steel and aluminum. More threatening to Europe and Germany is Trump’s insistence that the value-added taxes (VATs) widely used in these countries are equivalent to a tariff and, therefore, subject to the reciprocal levies he said he would impose on the goods of any country that imposes tariffs on U.S. goods.
Trump’s threats are a serious matter since the United States accounts for almost 10 percent of all German exports. Perhaps still more threatening is how the U.S. tariffs will evoke retaliation around the world and consequently slow the global pace of growth. How much of an effect will depend on how currency values shift, but there is no denying that the tariffs will slow the growth of world trade and the pace of economic expansion generally. Certainly, that is the conclusion of the Organization for Economic Cooperation and Development(OECD).
Nor does the republic’s recent election offer hope for a quick adjustment. However much establishment politicians and German media ignore the Alternative for Germany (AfD) party, its growing presence promises to make governing difficult for the presumed next chancellor, Friedrich Merz, especially with a strange coalition of the right-leaning Christian Democrats (CDU/CSU) and the left-leaning Social Democrats (SPD). A contemplated uptick in defense spending may create an economic stimulus. Still, such gains would also carry longer-term disadvantages by slowing the needed adjustment toward a different economic mix and by forcing debt issuance, thus ending Germany’s reputation as one of the few fiscally reliable developed countries in the world. This is far from a bright picture.
Milton Ezrati is a contributing editor at The National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and chief economist for Vested, the New York-based communications firm. His latest books areThirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live andBite-Sized Investing.
Image: Photocosmos1 / Shutterstock.com.