Friedrich Merz, the German chancellor, says his country\u2019s \u2018industry is very critical in some places\u2019 – Ludovic Marin\/AFP via Getty Images <\/p>\n
Europe\u2019s sick man is in a critical condition.<\/p>\n
Germany\u2019s economy has barely grown since 2022 when Vladimir Putin ordered 200,000 soldiers across the Russian border into Ukraine.<\/p>\n
Four years on and the country has partly managed to wean itself off its dependence on Russian oil and gas<\/a> \u2013 but with unemployment now close to three million and big losses in key industries like carmaking as Donald Trump\u2019s trade war wreaks havoc on its manufacturing industry, Europe\u2019s biggest economy now faces an identity crisis.<\/p>\n Friedrich Merz, the German chancellor, outlined the near-term challenges<\/a> in a letter to his coalition partners in the Bundestag last week. He warned it was do or die for swathes of industry.<\/p>\n \u201cThe situation of German industry is very critical in some places,\u201d he warned.<\/p>\n \u201cIndustry giants as well as considerable numbers of mid-sized and small businesses are facing major challenges, in many companies jobs are being lost.\u201d<\/p>\n Greg Clark, the former UK business secretary, noted in 2017 that it takes people in Germany four days to make what people in the UK take five days to produce. It was a jibe at Britain\u2019s dire productivity levels.<\/p>\n But Merz warned last week that the country\u2019s productivity growth is \u201cno longer good enough\u201d.<\/p>\n He blamed \u201cchanged global economic conditions\u201d as well as high labour costs and red tape for holding back growth.<\/p>\n b’<\/p>\n ‘<\/p>\n Recent data suggests this weakness is set to continue for the foreseeable future.<\/p>\n Despite Berlin\u2019s much-lauded spending spree on defence and infrastructure, the country\u2019s central bank lowered its growth forecast for 2026 to just 0.6pc. The Ifo, a think tank, predicts a similar expansion of just 0.8pc.<\/p>\n Others are more optimistic, with signs that the country\u2019s \u20ac500bn (\u00a3430bn) stimulus package is starting to bear fruit.<\/p>\n Holger Schmieding, the chief economist at Berenberg Bank, notes that domestic orders are starting to pick up even though exports continue to be weak.<\/p>\n Berenberg also expects the economy to expand by a meagre 0.7pc this year, with government spending accounting for more than half of this increase.<\/p>\n Schmieding believes growth will strengthen to 1.3pc in 2027 as the stimulus reaches \u201cfull force\u201d and consumers and businesses start to spend more.<\/p>\n However, he adds that Germany\u2019s decision to change its constitution to allow unlimited debt financing for defence spending<\/a> above 1pc of GDP would not be the game-changer for growth that some claim it to be.<\/p>\n \u201cSome companies will struggle to fill all the new orders for tanks and drones and to upgrade as many railway tracks as they could with their rising backlog of orders,\u201d he said.<\/p>\n Story Continues <\/p>\n Germany has another problem. Its workers are ageing, fast.<\/p>\n The International Monetary Fund recently warned that Germany\u2019s working-age population was on course to decline more sharply than any other G7 economy over the next five years, with almost 30pc of the current workforce due to retire by 2036.<\/p>\n This presents not only challenges for balancing the books but exacerbates the country\u2019s skilled worker shortage.<\/p>\n b’<\/p>\n ‘<\/p>\n As well as more training, economist Peter Bofinger \u2013 who has served as one of Germany\u2019s so-called wise men on the Council of Economic Experts \u2013 worries that policymakers will focus too much on subsidising old industries instead of supporting new ones.<\/p>\n \u201cThe problem is we don\u2019t have a vibrant digital sector,\u201d he says.<\/p>\n 1001 No end in sight for growth woes <\/p>\n
1001 Employment growth has stalled <\/p>\n