Why is the German economy floundering?

A year has passed since the German Bundestag approved on March 18, 2025, the easing of the “debt brake” introduced in 2009, which limits annual government borrowing to no more than 0.35% of GDP. Now, borrowing restrictions will not apply to military spending above 1% of GDP, and a 500 billion euro infrastructure fund will be created, designed to be implemented over 12 years. Will this move the locomotive of the German economy, which has been stalling for six consecutive years?

The German economy has been experiencing problems for a long time. In 2020, GDP fell by 4.1%, in 2021 it grew by 3.7%, in 2022 it grew by 0.4%, in 2023 it fell by 0.3%, in 2024 it fell by 0.2%, in 2025 it grew by 0.2%. Industrial production – the basis of the German economy – is showing alarming dynamics: if we take January 2021 as the base, as of January this year the industrial production index was 89.1, that is, the decrease for the specified period is 10.9%.

The simplest way to explain this is the impact of the coronavirus and the cessation of supplies of Russian energy carriers. But everything is much more complicated (by the way, industrial production began to decline in 2018) – the problems are technological, structural and fiscal in nature, complicated by socio-cultural features and demographic factors.

Ten reasons for the stagnation of the German economy

I will outline ten reasons for the problems in the German economy that have led to the slowdown of its growth and development.

1. First. A lot of savings and little investment – ​​the German state and households are prone to restrained investments and restrained consumption. And investment and consumption are two important components of GDP (GDP = consumption + private investment + government spending + “net” exports (exports minus imports)).
2. Second. The constant excess of savings over investment means a relative contraction of local economic activity in exchange for dividend payments from abroad (savings are invested outside Germany) and may be related to the aging of the population. People rely less on economic activity in old age than on income from savings. The German pension system has long had a huge savings component. Germany is undergoing a transformation to a more “pension” model of life and functioning of the economy.
3. Third. The share of gross public investment in Germany’s GDP in 2018-2022 was 2.5% – the lowest among high-income countries, with the exception of Spain.
4. Fourth. Reluctance to spend both at the federal and state budget levels, which is reflected in the attitude towards debt. In 2009, at the initiative of the rich southern states, a provision on a “debt brake” (Schuldenbremse) was introduced into the Constitution – the increase in state debt per year cannot exceed 0.35% of GDP (the rich states were against the fact that the increase in state debt throughout Germany is carried out mainly in the interests of the poor states of the former GDR). There were exceptions – the effect of the “debt brake” was suspended in 2020 due to the COVID epidemic and in 2022 due to energy problems. But the additional 195 billion euros raised by the state only alleviated the problems. Now, there is hope for a positive impact of 500 billion euros from the infrastructure fund announced on March 18 last year.
5. Fifth. If there is underutilization of resources, whether capital or labor, then the lack of investment due to debt is a lost benefit.
6. Sixth. Exhaustion of the main growth driver – exports. For a long time, the economy was pulled by exports – Germany was the No. 1 industrial exporter in the world. But the change in the global technological and economic paradigm is gradually leveling the possibilities of exports as a driver of growth for the German economy. Trump’s tariff war will additionally negatively affect the main driver of the German economy.
7. Seventh. Weakness of innovations in advanced technologies. In the USA, most R&D spending is directed to high-tech sectors, while in Germany it goes to the medium-tech segment (mainly the automotive industry and classic heavy industry). That is, the USA and some other countries (South Korea, Taiwan, etc.) create fundamentally new things, while Germany produces industrial innovations of the old technological order. This is good in itself, but it gives less effect than investing in R&D in high-tech sectors. And it is becoming more difficult to compete in the usual segment for Germany – for example, due to competition from dynamic Asian countries.
8. Eighth. The last successful large startup in Germany was the software company SAP, founded when Franz Beckenbauer led the German national team to victory at the European Football Championship in 1972. The system of financing innovations and startups in Germany (and in Europe) is unfavorable, because it is built on bank lending, which by definition assumes careful repayment of the loan and therefore prevents the risks without which innovations are impossible.
9. Ninth. German industry, especially its medium-sized businesses, are introducing innovations gradually. Because of this, they were unprepared for technological shocks, for example, such as the invention of the electric car. There are convenient connections between business, banks and politicians, which creates complacency. Which does not contribute to technological change.
10. Tenth. Very suboptimal solutions in the energy sector – the phase-out of nuclear power and the accelerated unbalanced development of “green” energy (German industry has been falling since 2018, the cessation of Russian gas supplies exacerbated the problems, but was not the root cause).

The possibility of growth in the current paradigm is doubtful

It seems that the limits of growth of the German economy have been reached. In Germany, there is a huge advantage of private savings over investment. The surplus of private savings in Germany is mainly invested abroad.There is a lack of investment because it makes little sense – there is no high return on capital. There is an aging population and “lifestyle inflation”.

Germany somewhat missed the moment to transform its export-oriented development model and remained a hostage to its mercantilist strategy, which did not take into account the challenges of the 21st century – from the side of technological changes and innovations in the most promising industries, which were emerging before our eyes and have been developing rapidly over the past 10-15 years. The world is entering an era of fragmentation and trade wars – this will be especially negative for the German economy, which is dependent on foreign trade.

There is no clear answer as to whether the abolition of the “debt brake” will give a sustainable impetus to economic growth – a chain of decisions is needed that sooner or later require adjustments to economic behavior. Germany “bathed in money”. If there were political will, vision, demand from the population, money would be found for modern technologies. Only by abolishing the debt brake and creating an infrastructure fund will the will not appear.

The forecast is cautiously encouraging

It is objectively very difficult to deploy such an inert machine as the German economy. It is especially difficult to do this if the key problems are rooted in the mentality – a tendency to save and restrained consumption. Germany has always, in any situation (except for the Covid pandemic), chosen to tighten its belts. The mental desire to solve problems through savings does not give reason for optimism in the current global economic situation.

Perhaps the key hope is for a sharp increase in the militarization of German industry, its reorientation to the production of military equipment and ammunition, and especially to spending from the announced infrastructure fund. The model of economic development according to the infrastructure type has examples of successful implementation, as was the case in China in the first 15 years of the 21st century.