By Vaibhav Tandon

German exports are synonymous with quality.  Their vehicles and household appliances are luxurious; their beer is brewed to meet purity standards that date back for centuries.  But despite sustaining a reputation for excellence, German products are not selling nearly as well around the world as they once did.  If the country hopes to overcome its recent economic struggles, it will need to open its checkbook.   

Germany’s economy has stalled over the past five years.  It is the only major nation to have seen its real gross domestic product (GDP) contract two years in a row.  Manufacturing is vital for the nation’s prosperity, accounting for 18.5% of GDP in value-added terms, the highest share among major advanced economies.  But Germany’s heavy industries are staring at a lasting decline.

Industrial production has fallen by more than 15% from its peak in 2017.  Around one-fifth of German factory output is in danger of fading away by 2030, according to a report compiled by the Boston Consulting Group and the German Economic Institute.

Though headwinds in the automotive sector are common to all European carmakers, it is being felt more acutely in Germany.  The country’s auto manufacturers have seen their market share in China, their biggest export destination, decline from 25% to 15% over the past four years.  Caution among the Chinese consumers and the nationalistic trend of buying domestic cars have made German brands lose ground.  Demand globally is trending toward vehicles that Germany doesn’t yet make particularly well; China’s excellence in the production of electric vehicles has narrowed Germany’s market share in this space. German vehicle manufacturers have resorted to historic job cuts and slashed production capacity in plants. 

Germany’s industrial and economic declines are not limited to the auto sector.  A variety of structural dislocations like a shrinking working population, infrastructure challenges, overregulation, low digitalization and elevated production costs have become a burden on manufacturing activity.  External influences, such as protectionism, are also weighing on German industries. 

Domestic policies are compounding Germany’s industrial decline.  The self-imposed debt brake rule, which limits public deficits to 0.35% of GDP, has done more harm than good.  While the enshrined principle has instilled fiscal policy discipline and credibility, it has also kept a brake on the ability of the government to support growth in the evolving landscape.

German government debt stands at 64% of GDP, half that of the U.S.  Yet policymakers have been unable to invest in physical, human and digital infrastructure.  The deficiency of public spending has resulted in underinvestment in their formerly world-class railways and roads, poor network connections, declining productivity, a slower green transition and inability to reduce dependence on China.  

Calls for debt brake reform have intensified.  Upcoming elections in February provide a chance to tackle fiscal austerity.  Friedrich Merz, leader of the Christian Democratic Union party, is likely to head the next coalition government with the Social Democratic Party.  He seeks to reform the debt brake, a rule that was introduced by his party under Angela Merkel in 2009, to fund pro-growth programs.

That said, the passage of the debt brake reforms will not be easy.  As a constitutional matter, such action would require a two-thirds majority in the upper and lower houses of parliament.  Germany’s fiscal arithmetic could also worsen if the constitutional court rejects a reunification-era tax, creating an estimated additional €12 billion budget gap in 2025 alone. 

Other reforms like lowering taxes for businesses, reducing energy costs for industries and toughening eligibility criteria for welfare beneficiaries would go a long way toward reviving Germany’s international competitiveness and labor force participation.

Amid growing global trade challenges, Germany’s fiscal policy should focus on promoting growth over attaining specific budget deficits or debt levels.  Without realigning government support, even the highest-quality beer cannot wash away the bitter taste of economic decline.