Does Germany Need an Economic Pivot?

Alexander Privitera

AGI Non-Resident Senior Fellow

Alexander Privitera a Geoeconomics Non-Resident Senior Fellow at AGI. He is a columnist at BRINK news and professor at Marconi University. He was previously Senior Policy Advisor at the European Banking Federation and was the head of European affairs at Commerzbank AG. He focuses primarily on Germany’s European policies and their impact on relations between the United States and Europe. Previously, Mr. Privitera was the Washington-based correspondent for the leading German news channel, N24. As a journalist, over the past two decades he has been posted to Berlin, Bonn, Brussels, and Rome. Mr. Privitera was born in Rome, Italy, and holds a degree in Political Science (International Relations and Economics) from La Sapienza University in Rome.

With customary fanfare, Germany’s political heavyweights recently opened the construction site of a new semiconductor facility in Saxony. For Chancellor Olaf Scholz and the newly confirmed European Commission President Ursula von der Leyen, the ceremony was another opportunity to highlight Europe’s much-trumpeted strategic autonomy. Promoting the critical tech sector is widely seen as one way to reduce the continent’s over-dependence on China.

However, new figures about German direct investments in the Asian country undercut the political message. Led by its car industry, rather than retreating from China, German investments have soared in 2024. Despite a rapidly declining market share, carmakers are far from giving up on the country. De-risking from the largest Asian economy is easier said than done.

Is this a sign of strategic confusion in the biggest European economy, of a split between political and corporate Germany? Or do these contradictory developments merit a different interpretation? More broadly, is Germany approaching a tipping point in which only an economic Zeitenwende, a more radical, epochal change, will be able to address some of the current economic weaknesses, or does the country merely need to undertake some added adjustments to its model to regain the lost momentum?

A bit of context first. It is an undisputed fact that the expected post-COVID and post-Ukraine war shock recovery has not yet materialized. For Germany, shaking off the role of laggard among its European partners has become a frustrating undertaking. Even in 2024, after a mild recession in 2023 that prompted some observers to ask if the country was once again the sick man of Europe, the German economy is still underperforming compared to most European peers. According to the latest projections by the International Monetary Fund, it is now expected to only grow by 0.2 percent this year, supported by wage growth, lower inflation, and, increasingly, lower interest rates. Unemployment is still low, and Germany has even regained its position as export champion. In 2023, the trade surplus reached 4.3 percent of GDP—although it is unclear whether it will be able to sustain a similar level this year. Despite the comfort some of these data should provide, since 2019, the country has stopped being the growth engine of Europe, consistently lagging behind all other big EU nations, France, Spain, and even Italy.

Earlier signs that Germany was losing momentum had already appeared when the lingering impact of the euro crisis started to fade. As crisis-hit countries finally recovered, mostly by adopting the very German, export-led growth model, Germany’s competitive advantage started to suffer, not least because of its own lack of new reforms.

The dual COVID- and war-induced energy supply shocks between 2019 and 2022 made things more difficult, exposing the short-sighted decisions to overly rely on cheap Russian energy and the Chinese export market to fuel the German economy. Russia’s role ended abruptly with the start of the war in Ukraine, while the Chinese economy, and demand for German goods, never fully recovered from the COVID slump. They are unlikely to recover unless Chinese authorities revisit their decision to grow out of their problems by flooding world markets with—often subsidized—products. While demand for German brands in the largest Asian market continues to suffer, the picture at home is just as dark. There, German companies face stiff headwinds because of a loss of competitiveness in Europe but also, and importantly, because of increased Chinese competition in many fields where Germany used to have an advantage, such as advanced manufacturing and chemicals.

Against this challenging backdrop, the more recent German political obsession with the need to stringently apply its own debt brake becomes even more puzzling. It is an added drag on an already weak economy, as it robs Germany of the chance to support more demand and investments with greater infusions of public money.  Add structural factors such as a complicated bureaucracy that slows down approval processes, an aging working population, and the need to decarbonize and digitize the economy, and the result is a particularly challenging environment.

Better aligning corporate and political priorities will be key.

In fact, so far Germany’s response to its problems looks rather confused. For the first time in twenty years, since structural reforms were introduced by then-chancellor Gerhard Schröder, corporate Germany and the political leadership in Berlin have more difficulties seeing eye-to-eye. This is not only due to the almost chronic inability of the ruling government coalition to agree on a comprehensive plan and stick to it but also because companies see a world in flux but cannot yet recognize a clear end destination. Is globalization as we know it truly over? Is the world really fragmenting into competing blocs, and if so, how porous will they be? What is the future role of China? How about an increasingly protectionist America? And the Global South? What role can Germany and Europe play?

These are questions that no CEO or politician can answer conclusively. The result is that corporate Germany, and especially its car industry, is hedging against risks rather than embarking on a well-defined journey. Such behavior includes avoiding hasty departures from China. For a car-dependent economy such as Germany’s, this is no small matter. The German industry’s main goal may be to defend the shrinking market share of its brands in China, but it is also to make sure that through its strengthened presence it will not miss key technological developments made in China, specifically in the EV (electric vehicle) sector. This is a dramatic shift in the bilateral relationship that traditionally was based on Germany’s companies sharing their technology with Chinese counterparts in exchange for access to a lucrative market.

Given all these challenges, better aligning corporate and political priorities will be key. They include clarifying whether Germany wants to keep its role of ‘Export Weltmeister’ (world export champion), or whether instead it will focus on rebalancing its overly export-dependent economy by strengthening its service sector, the European market, and deepening its economic relationship with the United States. The former implies a “weiter so,” continuity with tweaks; the latter a much more ambitious push for the completion of the EU’s single market, including its capital markets and banking union and the deployment of greater common European financial firepower. For now, the German answer to such fundamental question is a Solomonic both.

But a look in the rearview mirror reveals that the last wave of reforms, pushed by Chancellor  Schröder twenty years ago, mainly succeeded because CEOs had recognized their companies needed to change to make it in a well-defined form of globalization. Politicians provided some of the reforms needed for them to ease the process. Clarity was key. Unfortunately, the close alignment of political and business priorities eventually became so blinding that it ended up causing obvious strategic blunders. Corporate Germany at times even seemed to dictate the political agenda of the government of Angela Merkel toward Russia as well as China.

Today, German CEOs face a world in which clarity is simply no longer available. Geopolitical uncertainties have become one of the key factors in making business decisions. Most corporate leaders recognize they need to think politically, but the temptation to shift blame for their current problems is all too present. Their recipes for the battered economy range from calls on Germans to work harder to urgent appeals to the government to reduce burdens on businesses. Public admissions that they may have made strategic mistakes are rare.

The government in Berlin has tried to respond to requests from businesses and economists by simplifying Germany’s slow bureaucracy. It has successfully managed to cut red tape for the deployment of renewable power plants. But in many other areas, including a faster and more effective integration of foreign professionals, the results are mixed at best.

For now, Germany continues to look for the elusive right mix of policy and strategy to succeed in uncertain times. The most important EU member state may not be the new sick man of Europe, but its economic model is showing its age. It may well need some deeper rethinking.