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Germany’s Economy in 2026
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.
Turnaround or another year of gloom?
Will 2026 mark the turnaround for the German economy? While many international investors seem to believe in a debt-fueled comeback, fiscally conservative German authorities remain cautious. They have accepted the need to deploy fiscal tools to rearm and revive the economy. But they are still a long way from fully embracing Keynesianism.
The German central bank, the Bundesbank, now expects growth to gradually pick up in the course of 2026 and 2027. Even the latest government’s outlook sees the economy expanding by 1 percent this year and 1.3 percent in 2027. But German business lobbies are still in a funk. The industry association DIHK complains that the economy is still weak, noting that since 2019 the United States has grown by 15 percent and Italy by 6 percent, just to highlight the best and usually worst performer amongst transatlantic allies, while Germany has not grown at all. And even the economy ministry shares the gloomy view, admitting that in any case growth will fail to be broad-based. Two-thirds of the expected expansion will be due to the public spending splurge that is about to kick in. Overall, nobody in Berlin is in a celebratory mood. It is true that the global context remains challenging and none of the structural headwinds that have been slowing down Germany in recent years have dissipated. But does this mean the gloom is justified? Yes and no.
Take Germany’s problem child number one, German manufacturing, and especially the car industry: while BMW is betting the house on a new electric model that could finally address the current competitive advantage of Chinese carmakers, the biggest German car group, VW, is still struggling to regain its footing. Any modest German expansion will not be able to address the so-called second China shock, as the Asian powerhouse continues to address its own domestic economic weaknesses by flooding global markets with cheap and subsidized high-end goods, including its electric cars. If the United States’ drawbridges stay where they are, halfway up, China will further intensify its focus on the rest of the world. This while the German industry is still desperately trying to catch up and regain its lost competitiveness.
To be sure, the recent European decision to soften the impact of the green transition should offer some mild support for the industry’s efforts. Even AI could eventually play a pivotal role. In fact, for manufacturing companies, there is no need to indiscriminately hoover up all kinds of data as general language AI models do. A focused use of more narrow data sets would be more helpful to improve both the quality of companies’ products as well as the customers’ experience. German brands have proven in the past that they can rise to new challenges. They have the tools and know-how to do so again. It just will take time. In the short term, the government expects Germany’s share of global trade to continue to shrink, despite the rush to close new trade deals between the European Union and some of its partners.
Making Germany more competitive and resilient today means allowing Europe to grow and integrate.
Of course, the biggest geoeconomic challenge for a country that so heavily depends on exports remains trade. The good news is, so far, all talk of de-globalization has not yet translated into a breakdown of international commerce. Sure, flows have been hit by tariffs. But they have been diverted, not stopped. Tension between various jurisdictions—the United States, Europe, and China—remains high and still clouds the future. But the global trade system is not yet broken beyond repair. If the result of the current, volatile phase was a mere recalibration of globalization, the result could even prove to be net positive for Western societies, including Germany. The bad news is the government in Berlin needs to fully recognize that the best way to offset the weakening global role of German industries is to support its domestic market, which in this case means European growth and demand. How? By following most of the recipes provided by the Draghi and Letta reports on what to do about European competitiveness and the single market. This has proven to be easier said than done. Germany and European partners are facing the harsh reality that merely paying lip service to the reports in public is not sufficient. In fact, it risks undermining their goals in practice.
From the integration of European energy markets to AI, to industrial policies and capital markets or the much-trumpeted simplification of rules, making Germany more competitive and resilient today means allowing Europe to grow and integrate. It will require a quantum leap, not a series of minor adjustments. Unfortunately, Germany and most of its EU partners still struggle to abandon a narrow national approach, especially when privileges of their incumbents appear to be threatened, such as in the case of Germany’s car industry.
Even the simplification drive in Brussels risks becoming a double-edged sword. There is nothing wrong with making things simpler, for citizens, companies, or global investors. Equally, there is nothing wrong with breaking the many impasses that slow down legislative files in Brussels with pragmatic coalitions of the willing. But the endeavor becomes risky if simplification turns into the hasty dismantlement of common rules. It would increase fragmentation, rather than reduce it. The irony of the simplification drive is that traditionally the biggest champion of a rules-based approach has been Berlin—at home, in Europe, and globally.
For all the newfound pragmatism of its political leaders, German society is still rules-obsessed. This is part of a deeply rooted cultural and historical heritage. Every time a problem arises, Germans instinctively respond, “das müssen wir regeln,” for which the closest translation is “we need to sort this out—with rules.” For all the stern finger-pointing toward Brussels, the fact that common institutions in Brussels instinctively seek to regulate every time the EU faces a challenge is, after all, also a very German legacy. That is why Germany’s current tasks go beyond the need to rekindle a sputtering growth engine. They are all part of a difficult cultural as well as economic policy shift.
