Germany, Europe’s largest economy, known for its skilled labor force and high-end exports, faces significant hurdles, prompting a renewed debate over its constitutionally enshrined debt brake.
Now in its second year of economic contraction, the country has been struggling with the loss of affordable Russian gas, historic Volkswagen plant closures, and fierce competition from cheaper Chinese electric vehicles.
That was before the ruling coalition collapsed in November, prompting snap elections scheduled for Feb. 23, 2025.
According to analysts, the combination of energy crises, political instability, and declining competitiveness, threaten Germany’s long-standing status as the major industrial force of the European Union.
The economic turmoil has also revived questions about the country’s constitutionally enshrined debt brake.
Introduced in 2009 under former Chancellor Angela Merkel to prevent burdening future generations, it leaves no room for structural borrowing, apart from exceptional circumstances.
Though recently Merkel called for dropping it as she said the world faced graver times.
“Since Russia’s invasion of Ukraine, we are in a totally new situation. And it coincides with the climate challenge,” she said.
“In that situation, I say we won’t be able to make do with the scale of investment possible within the debt brake.”
The debt brake caps the federal government’s structural net borrowing at 0.35 percent of GDP, adjusted for the economic cycle.
It also prohibits Germany’s 16 federal states (Länder) from running structural deficits or taking on new debt in normal economic conditions.
Richard Schenk, a research fellow at MCC Brussels and a political scientist told The Epoch Times that “the German federal government is not allowed to take on any debt in a normal year.”
“And it worked very well, actually, in the 2010s because the economy was thriving, so the interest rates were low,” he said.
Schenk said the big question is how the government will continue spending if the economy is not growing. He noted that around 60 percent of Germans are in favor of keeping the debt brake.
“The German word for debt and guilt is the same,” he said.
He noted several factors contributing to Germany’s current economic woes.
In 2019, German production was already declining. After COVID-19, there was only a small recovery.
‘Very Toxic Mix’
Furthermore, he said another factor was that the European Union increasing CO2 limits for emissions on cars to a level “where it was basically clear that the internal combustion engine is forbidden.”Germany is Europe’s top car manufacturer by revenue. Its manufacturing model, Schenk said, is now struggling to compete with Chinese EV production.
“The mix of lack of technological innovation in areas where the politics set targets and low energy prices, alongside other structural problems, set the economic trajectory negative since 2018. This effect was first masked by COVID but returned with force afterward,” Schenk said.
He said that Germany has “a very toxic mix” of factors that have led to surging energy costs.
“First of all, high energy prices because Germany got rid of nuclear for ideological reasons, they got rid of coal because of climate policies,” he said.
“At the same time, they introduced Russian gas as a substitute for the first two, but now that Russian gas is gone or only available at very high prices, renewables cannot replace everything at once.”
‘Victim of its Own Success’
Alan Tonelson, economist and the founder of the blog RealityChek, told The Epoch Times that Germany’s economy has been heavily export-dependent for decades, with Eurozone countries as its main markets.“I would expect that without some relief on the austerity front, Germany’s overall growth is unlikely to accelerate anytime soon,” Tonelson said. “In fact, it will struggle to avoid continued stagnation, or possibly worse.”
He said the German automobile industry “is a victim of its own success.”
“It’s such an important sector, not only in the German manufacturing industry but also because automobiles use so many different parts, components, and materials, in which Germany has traditionally been very strong.”
He said the country has been “so outstanding in producing extraordinarily well-engineered internal combustion cars that it simply hasn’t seen much urgency in pushing green automotive technologies.”
Dying Technologies
Investment adviser and macroeconomic writer Mike “Mish” Shedlock identified broader concerns within the Eurozone, which he has written about, and predicted, for many years on his Mish Talk site.Shedlock notes that Germany’s struggle to grow exports coincides unhappily with President-elect Donald Trump’s threats to put more tariffs on EU goods.
Germany’s long-term investment strategies are also proving to be outdated, Shedlock told The Epoch Times.
“Germany invested for decades in dying technologies—diesel engines, for example—right as diesel was becoming obsolete. It invested in analog phones just as the world was moving away from analog,” he said.
The country also missed the train to invest in new technologies, Shedlock said.
“It underinvested in critical infrastructure, artificial intelligence, and modern technologies like wireless fiber-optic networks,” he said.
“Now, all of this is catching up to Germany. Diesel and analog technologies are disappearing, and Germany has fallen behind. China is leading in electric vehicles, the United States is leading in artificial intelligence, and Germany is struggling to keep up.
“Even in EVs, it’s lagging behind the United States.”
He said Germany is not alone in this dilemma.
“This isn’t just a German problem—it’s an EU problem. Rather than investing in AI and innovation, the EU is focused on putting up barriers against the United States and China. Instead of advancing, they’re threatening sanctions on companies like Google,” he said.
He noted that through the TARGET2 system, a key participant in the European Central Bank’s real-time payment network, countries like Italy, France, Portugal, and Greece owe money to Germany.
Shedlock said the debts and trade imbalance between Germany and other southern European countries is becoming a problem for the region’s economy.
“Germany runs a trade surplus with all of them, which means these countries owe Germany money. But we have to ask—how will this debt ever be repaid? How is Greece ever going to pay back Germany? How will Spain pay back Germany?” he said.
‘Fundamental Problems’
Politically, whoever picks up the mantle to govern faces a few difficult years.According to a survey conducted on Dec. 13 and published by INSA, the alliance of the Christian Democrats (CDU) and their Bavarian sister party, the Christian Social Union, is on track to win the federal election, with a survey putting them at 31 percent.
They are followed by the Alternative for Germany (AfD) at 20 percent, Scholz’s Social Democrats at 17 percent, and the Greens at 11 percent.
Schenk, the MCC Brussels research fellow, said he thinks “the next government will not be able to tackle the fundamental problems.”
“They will not be able to prioritize the fundamental political strategy problem behind the budget problem,” he said.
Schenk said one political problem is that, according to the current polls, the Germans will elect the most “right-wing Parliament” since the 1960s.
However, he expected that, due to Germany’s coalition government pledging to keep the populist Alternative for Germany (AfD) from power despite its polling second, another center-left coalition would form, meaning more of the same policies that caused the fundamental problems.
