Written By Aryan Samaga
Introduction
Throughout the last 30 years, the German economy has been the envy of much of Western Europe, with consistent growth, a booming manufacturing sector, and genuine individual prosperity. However, due to various factors, since the onset of the 2020s, the German economy has seen a massive slowdown and, at times, has even faced recessions. While the most obvious reason for the slump might be due to German reliance on Russian Oil, a commodity stripped away from them following the Russian invasion of Ukraine, it can arguably be said that all the invasion has done is further expose the underlying issues with the German economy.
The Challenges Currently Presenting the German Economy
To begin with, one of Germany’s former strengths and how it is unique from many other countries of similar stature, such as the USA and France, is its reliance on high-end manufacturing instead of the service industry to prop up its economy. Specifically, 26.6% of the German GDP comprises the manufacturing sector, while France is only 16.8% and the USA 18.4% (Orth, 2023). Perhaps more illuminating is the fact that data published by the Fed shows that merely 50 years ago, the US also had a similar clip of its economy accounted for by manufacturing (Chien and Morris, 2017). Meanwhile, France’s OECD Economic Survey from 1968 shows that 35.6% of economic production came from manufacturing and mining (“Basic Statistics of France” 1970). This shift suggests that while manufacturing economies once dominated the world’s most robust economies, many developed countries have been moving away from them in recent times. So, while this strategy has continued working for Germany into the 2010s, as other countries, namely China, catch up to Germany in producing high-end products, the German economy faces increased challenges in trying to remain profitable and thriving as a manufacturing-centric economy.
What is more worrying is that due to the relatively favorable government benefits that the German government provides for retired individuals as well as the lack of skilled workers migrating into the country, Germany is also having an issue filling vacant jobs, with some estimates putting the number of unfilled jobs at 1.7 million (O’Connor, 2024). While this would not have been much of a problem under ordinary conditions for Germany, in recent years, the number of skilled immigrants that Germany has been able to attract from abroad has rapidly diminished. This can largely be attributed to the difficulty in obtaining professional certifications in Germany and the language barrier. The issue with these two concerns is that neither is particularly easy to remedy. With the professional certifications, these high regulatory standards ensure that German goods retain the quality that makes them so desirable in the first place. With the language barrier, little can be done to reverse the trend of skilled workers heading to English-speaking countries. To further compound these underlying issues, the increase in oil prices due to the lack of Russian oil has similarly drastically affected the German economy. For context, Germany imports 70% of its energy, of which Russia was the leading provider pre-2021 (Wettengel, 2024). While this has put undue stress on many European economies, Germany’s reliance on manufacturing and overreliance on oil to fuel its economy have made the impact on Germany’s economy especially pronounced.
A Potential Solution to the Crisis
One potential way Germany can help circumnavigate these issues is by moving towards a service economy; specifically, instead of relying on in-house labor to produce these high-end goods, whether BMV or Volkswagen, many of these roles can be moved offshore. While it may be logical to conclude that doing so would result in a devaluation of German products in the eyes of consumers, data has suggested that this may not necessarily be the case. For instance, many of the BMWs sold in Europe today already come from China, yet due to the consistent quality with production, consumers have yet to bat an eye (Paul, 2022). This suggests that people value German products because they are German brands rather than because they were manufactured in Germany, enabling a shift to offshore production without harming the valor German products hold. A change like this would set Germany up to become a service-oriented economy like the USA or France. While this may seem like a clear-cut solution, significant roadblocks remain with the solution, namely the presence of unions in Germany as well as the lack of guarantees that the lost manufacturing jobs will be amply replaced in the economy with service sector jobs (Burnand, 2024). Additionally, the worry would always remain that if a defect were to pop up, the shine that German manufactured goods still hold today might begin to wear off and further hinder the German economy. All in all, while there are specific measures that the German government and German companies can take to help ease the strain on the German economy, there is still plenty of risk and uncertainty involved due to the unique composition of the German economy.
Another Potential Solution to the Crisis
Another potential solution would be to mix both a return to the roots of what made Germany so successful in the first place, R&D, with an emphasis on promoting its startup culture. In many of the past Industrial Revolutions, Germany was a world leader, whether in locomotives, cars, or high-end manufacturing; however, the onset of this fourth Industrial Revolution in Germany has left the German economy in its wake. Specifically, in their paper “The Rise and Fall of German Innovation,” Wim Naudé and Paula Nagler highlight how Germany is not a leader in “semiconductors, computing, 3D printing, nanotechnology, robotics or molecular biology (Naudé and Nagler, 2021). While it is not imperative that one must be a leader in these “revolutions” to remain as a strong economy, Germany’s past and economic model reliant on high-end manufacturing, make them especially susceptible to the effects of being left behind. To compound these issues, data from the European AMECO database shows that capital investment in Germany remains nowhere near its level in 1992 (“AMECO”). While Germany has remained a strong economy through the 2010s, it appears as if the lack of investment and cutting edge has finally caught up to the German economy. Therein, however, lies the chance for the German economy to redeem itself. Specifically, according to many ranking sites, such as Startup Genome, Berlin holds the second most conducive setting for European tech startups (“Global Startup Ecosystem Ranking 2023”). If the German economy actively looks to support these startups through grants and facilities, they could help propel the German economy back to being the epitome of innovation. Additionally, since Berlin is ranked second in Europe, only behind London, with proper guidelines and incentives from the German government, it can once more become a hotspot in attracting Eastern European talent. While this may not solve all of the underlying issues regarding the German economy, with time, it can help jumpstart the German economy and help it find its footing and identity as one of Europe’s powerhouse economies.
Conclusion
While the days of the German economy of the old are likely numbered, with the proper alterations to its structure complemented by support from the German government, it can once more become a European powerhouse.
References
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