Germany's Economic Problem Is Europe's Problem

Europe's largest industrial economy is growing again. 
But the weaknesses underneath - energy, investment, productivity, demographics and global competition - have not disappeared.

Management Summary

Germany's economy is recovering, but its underlying competitiveness problem remains unresolved. The industrial model that benefited from relatively cheap Russian energy, expanding global trade and strong Chinese demand now faces higher energy costs, weaker investment and productivity, demographic pressure, and a China that is simultaneously customer, supplier and increasingly powerful competitor. Some weaknesses are external; others - infrastructure, bureaucracy, skills, investment and reform capacity - are domestic.

Germany matters because many of these are European problems in concentrated form. Europe needs greater scale through a deeper Single Market, better mobilisation of European savings for investment, more affordable energy, stronger innovation, and a disciplined China policy: compete where Europe can compete, protect where competition is distorted, and reduce dependencies where they create strategic vulnerability.
The EU increasingly understands the diagnosis; implementation speed is becoming the decisive test. Ultimately, Europe's welfare, climate, defence and strategic ambitions depend on the same productive economic foundation.

Germany has an economic problem. The more difficult question is what kind of problem it is.

Nikolas Stihl, chairman of the supervisory and advisory boards of German manufacturer STIHL, recently offered a stark diagnosis. German industrial production, he wrote in Euronews, has fallen by about 15% over eight years; around 15,000 industrial jobs are currently being lost each month; and private net investment has fallen close to zero. Only a competitive economy, he argues, can ultimately sustain Germany's prosperity and welfare state. [1]

Stihl writes as an industrialist, and some of his proposed remedies - longer working hours, lower labour costs and social-security reform - are consequently part of a political debate. But the underlying concern is harder to dismiss.

The IMF, OECD, European Commission and Germany's Council of Economic Experts all identify structural weaknesses alongside the external shocks Germany has suffered. Seven years of weak growth, the German Council argues, cannot be explained as a normal economic downturn. [2][3]

The implications extend beyond Germany. They raise a larger European question:
Can Europe generate the economic strength required to preserve prosperity and its social model while simultaneously financing the energy transition, technological renewal, defence and greater strategic independence?

Part I - Germany: What Happened?

For decades, the German model worked extraordinarily well. A skilled workforce, world-class engineering, specialised Mittelstand companies and industrial champions produced cars, chemicals, machinery and sophisticated capital goods for global markets.

Several favourable conditions reinforced those strengths: relatively inexpensive Russian energy, expanding world trade, the European Single Market and enormous demand from industrialising China.

Several of those conditions have now changed at the same time.

Energy became more expensive

Russia's invasion of Ukraine abruptly ended Germany's dependence on cheap Russian pipeline gas. Energy-intensive industries such as chemicals, metals, glass and paper were particularly exposed.

Ending that strategic dependence was necessary, but necessity does not eliminate economic cost. German industry has had to adapt to a different energy environment while simultaneously financing decarbonisation.

Yet energy cannot explain everything. Germany's economic weaknesses predate the Ukraine shock. The OECD points to weak investment, declining business dynamism, slow productivity growth and growing shortages of skilled labour. [4]

China changed from customer to competitor

Perhaps the most important transformation has occurred in Germany's relationship with China.

For years, China's industrialisation created enormous demand for German cars, machinery, chemicals and industrial technology. China remains a major market, but Chinese companies increasingly manufacture the sophisticated products Germany once specialised in exporting - from electric vehicles and batteries to machinery and clean technologies. [5]

The shift is already visible in trade.
In the first five months of 2026, German machinery exports to China fell 17.5% year-on-year and motor-vehicle and parts exports 26.1%. Meanwhile, China supplied more than 86% of Germany's imported photovoltaic modules. [6]

China has become customer, supplier and competitor simultaneously.
That is a much more difficult economic relationship to manage.

Some problems are made in Germany

It would nevertheless be misleading to blame Germany's difficulties principally on Russia, China or American trade policy.

Germany has accumulated domestic problems: inadequate investment, ageing infrastructure, slow digitalisation, cumbersome planning and permitting, administrative burdens, demographic ageing and shortages of skilled workers.
The OECD and IMF consequently emphasise structural reform alongside additional investment. [3][4]

That distinction is important. External pressures can be negotiated with, diversified away from or defended against. A competitiveness problem generated at home ultimately has to be repaired at home.

Recovery is not yet renewal

But the diagnosis should not be exaggerated. Germany is not in economic collapse.

After GDP contracted in 2023 and 2024, the economy returned to slight growth in 2025. Growth strengthened during the first half of 2026, and recent forecasts have become more optimistic, helped by stronger exports and substantial government expenditure on infrastructure, climate measures and defence. [7][8]

Where government spending helps stimulate demand and modernise infrastructure, private investment, productivity and industrial competitiveness do not show to have recovered.

Germany therefore presents a mixed picture: growth is returning and its industrial base retains enormous strengths, but the country has not yet demonstrated that its economic model has successfully adapted to the world that replaced the one in which it prospered.

Part II - Why Germany's Problem Becomes Europe's Problem

Germany sits at the centre of European production networks. Its factories depend on components produced elsewhere in Europe; German machinery equips European industry; German demand supports neighbouring economies; and German fiscal resources increasingly matter for European defence.

But the deeper reason Germany matters for Europe is that many of its problems are European problems in concentrated form.

Europe as a whole faces slow productivity growth, relatively high energy costs, insufficient investment in new technologies, fragmented capital markets, demographic pressure and increasingly intense competition from the United States and China.

Mario Draghi's competitiveness report captured the challenge in three broad tasks:
Close the innovation gap, combine decarbonisation with competitiveness, and reduce dangerous external dependencies. [9]

Germany is therefore not simply a national economy Europe needs to rescue. It is a warning about what Europe itself needs to repair.

Scale, capital and competitiveness

Europe possesses an economic advantage Germany alone cannot create: continental scale.

The Single Market gives European companies access to roughly 450 million people, but national differences in services, regulation, finance and administration still prevent it from functioning as seamlessly as the American or Chinese home markets.

Completing that market matters particularly for innovative companies. Europe is good at creating them but less successful at enabling them to grow rapidly into global businesses.

Europe also has capital. European households hold around EUR10 trillion in savings, yet European companies - particularly innovative and rapidly growing ones - have greater difficulty accessing risk capital than their American counterparts. [9]

Hence the EU's effort to create a Savings and Investments Union: mobilising more European savings for productive European investment.

Europe will need it.
Electricity grids, renewable energy, AI, semiconductors, defence production, industrial decarbonisation and infrastructure all require enormous investment.

China: protect without retreating behind walls

Europe must also reconsider how it deals with China.

Economic separation is neither realistic nor desirable. China remains an important market, supplier and trading partner. And where Chinese companies simply produce better or cheaper products, protectionism can preserve inefficiency rather than competitiveness.

But openness does not require economic naivety.

Where competition is materially distorted by state subsidies, protected domestic markets or other non-market advantages, Europe has legitimate reasons to defend a level playing field. The EU has already done so through measures including countervailing duties on Chinese electric vehicles.

Europe also needs to distinguish ordinary economic interdependence from dangerous strategic dependence. The experience with Russian gas demonstrated what can happen when efficiency produces excessive reliance on one external power. China's dominance in several critical supply chains creates a different version of the same strategic question.

Compete where Europe can compete. Protect where competition is distorted. Reduce dependencies where they create strategic vulnerability.

Protection alone, however, cannot restore competitiveness. Tariffs around an industry that remains expensive, fragmented or technologically behind merely protect weakness.

European protection must complement European renewal, not substitute for it.

Europe increasingly knows what it needs to do

There is an important difference between today's situation and that of several years ago: Europe increasingly understands the problem.

The Draghi report has been followed by the EU's Competitiveness Compass, Clean Industrial Deal, Affordable Energy Action Plan, Savings and Investments Union, regulatory simplification and renewed attempts to deepen the Single Market. The One Europe, One Market roadmap now sets the end of 2027 as a deadline for agreement on a range of measures. [9][10][11]

The EU's own 2026 competitiveness assessment nevertheless remains sobering. Investment and venture capital remain inadequate, energy costs high and strategic dependencies substantial. [12]

The question is therefore becoming less: Does Europe understand its competitiveness problem?
And increasingly: Can Europe implement the necessary changes quickly enough?

Some answers must come from Brussels:
Completing the Single Market, integrating capital markets, building cross-border energy infrastructure and providing trade defence all require European action.

Others remain national. Germany itself must address infrastructure, education, taxation, labour supply, pensions, administrative capacity and the conditions for private investment.

The productive foundation of European power

This brings us back to Stihl's warning.

One does not have to accept his particular prescriptions to recognise the relationship between competitiveness, prosperity and the welfare state.

For Europe, that relationship is now broader.
Europe wants to preserve its social model. It wants to complete the energy transition. It needs modern infrastructure and technological capacity. It must spend considerably more on defence. And it increasingly wants the ability to act independently when American, Chinese or Russian interests differ from its own.
All these ambitions ultimately make claims upon the same productive economy.

That is why Germany's economic problem is Europe's problem.

The choice should not be presented as competitiveness versus the European social model. Economic competitiveness is increasingly what makes that social model - together with Europe's climate, security and strategic ambitions - sustainable.

The challenge is therefore more demanding:
Europe must become productive enough to sustain all of them.

Germany is currently discovering how difficult that transition can be. Europe should regard its experience not simply as a German problem, but as a warning - and as another reason to accelerate an economic renewal that has become part of Europe's strategic independence.

References

[1] Nikolas Stihl, “Time for reforms - this is how we retain prosperity and the welfare state,” Euronews, 5 September 2026.
https://www.euronews.com/business/2026/09/05/boss-of-stihl-time-for-reforms-this-is-how-we-will-safe-prosperity-and-welfare-state

[2] German Council of Economic Experts, Spring Report 2026.
https://www.sachverstaendigenrat-wirtschaft.de/en/spring-report-2026.html

[3] International Monetary Fund, Germany Article IV Consultation, 2026.
https://www.imf.org/en/news/articles/2026/02/11/pr26042-germany-imf-executive-board-concludes-2025-article-iv-consultation

[4] OECD, Germany Economic Snapshot.
https://www.oecd.org/en/topics/sub-issues/economic-surveys/germany-economic-snapshot.html

[5] Associated Press, September 2026, reporting on the intensifying Chinese competitive challenge to German manufacturers.

[6] German Federal Statistical Office (Destatis), Germany-China trade data, 2026.
https://www.destatis.de/DE/Presse/Pressemitteilungen/2026/07/PD26_255_51.html

[7] German Federal Statistical Office (Destatis), German GDP data.
https://www.destatis.de/EN/Press/2026/01/PE26_017_811.html

[8] Ifo Institute economic forecast, September 2026.

[9] European Commission, Draghi Report on EU Competitiveness and EU Competitiveness Compass.
https://commission.europa.eu/topics/competitiveness/draghi-report_en

[10] European Commission, Single Market.
https://commission.europa.eu/topics/single-market_en

[11] European Commission, One Europe, One Market roadmap.
https://commission.europa.eu/topics/competitiveness/one-europe-one-market-roadmap_en

[12] European Commission, Annual Single Market and Competitiveness Report 2026.
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A52026DC0046