The German locomotive has stopped, here’s why it’s a loss for all of Europe

Europe’s ‘locomotive’ has stopped. For Germany, 2024 is the year of stagnation. The Ifo Institute has GDP growth estimates cut to zero for this year from the previously indicated +0.4. The German research institute has revised forecasts for next year too: +0.9% in 2025, instead of the 1.5% indicated in the previous estimates. The German economy is expected to reach a growth of 1.5% only in 2026. A damage for all of Europe and the common market.

Thirty-five years after reunification, which made the Teutonic economy take off in conjunction with the acceleration of the growth process of the community institutions and then with the advent of the euro, Germany is facing a crisis that the Ifo defines “structural”. The country’s production chain and infrastructure do not seem to keep up with the competition, especially that of Asian markets starting from China. The repercussions of more than two years of conflict in Ukraine also weigh heavily, given that Germany had important commercial ties with Russia, starting from the energy sector.

From economic crisis to political uncertainty, the transition is short. After 16 years of centrist government by Angela Merkel, a bastion of growth and stability, the country is struggling to find a new political balance. Olaf Scholz’s SPD-led government is in difficulty, with the far-right AfD having come out on top in the state elections for the first time, first in Saxony and second in Thuringia. For years the far right in Germany is growing, starting from the former territories of the GDR, where the wage gap with the rest of the country has never been completely closed.

“The German economy is stuck and languishing in depression,” explains Timo Wollmershauser, head of the Ifo Forecasts department. He speaks of a structural crisis with “too little investment, especially in manufacturing,” and productivity that “has been stagnant for years.” Decarbonization, digitalization, demographic change, the Covid pandemic, energy price shocks, and China’s new role in the global economy have put established business models under pressure and are forcing companies to change their production structures.

In the last few days the case of the possible staff cuts at Volkswagen. The Wolfsburg-based carmaker has not ruled out the possibility of closing one of its plants in Germany to reduce costs. The company plans to cut ten billion euros in expenses by 2026. It would be the first closure of a production site in the company’s nearly ninety-year history. At the same time, unions in Belgium have raised the alarm over the possibility of a shutdown for the Audi plant – the same Group – in Brussels.

It is the sector manufacturing to mark the pace, a sector that traditionally has a significant impact on economic production in Germany. Energy-intensive industries that react to high energy costs, such as mechanical engineering and automotive, have a greater impact than in other countries.
The weak private investment activity, analyzes the Ifo, will probably lead to the closure of companies and the relocation of production. The stagnation of productivity is accompanied by shifts in job creation. In the construction and manufacturing sectors, the order book of recent years has also stalled. New orders are still slow to arrive.

Amid uncertainty, Germans are keeping their money in the bank. The savings rate is now 11.3%, significantly higher than the 10-year average of 10.1%. There is at least one positive figure regarding inflation, which is expected to fall from 5.9% last year to 2.2% this year and then to 2% and 1.9%. The unemployment rate will rise from 5.7% last year to 6% this year, before falling to 5.8% next year.