Germany’s lost decade: How the Fortune 500 Europe giant is flirting with long-term irrelevance

For most of the 21st century, economists and neighboring countries have looked to Germany with admiration and envy as it managed to weather economic storms with relative ease, capitalizing on trade with growing economies and expanding the power of its industrial giants in the process.

However, a shifting world order has pulled the carpet out from underneath Germany. The industrial quirks that once helped it outgrow its European peers are fast becoming a burden, and crisis after crisis has exposed a lack of planning at the top of government.

As the Fortune 500 Europe shows Germany yet again dominating the list of Europe’s biggest companies, many are left with a difficult question: What is going wrong in Germany?  However, any reader of the list with even a cursory knowledge of the European economic landscape will view the figures with skepticism, with the Fortune 500 Europe measuring companies’ revenues from 2023. That’s because Germany, and the companies that drive its economic engine, are in peril.  The country’s government expects the German economy to contract by 0.2% in 2024, following a 0.3% decline in 2023. The economic pinch was felt in German companies’ top line last year. 

Germany’s challenges span the structural and cyclical, domestic and geopolitical, creating a perfect storm for the country’s economy that few economists see little way out of in the short run.  Red signals are flashing all over the country’s economic indicators. Exports to its main trading partner, China, have fallen, while energy imports following Russia’s invasion of Ukraine have tanked.

Understanding the scale of Germany’s challenges requires a careful look at its strengths, or more appropriately, how it built them.  Manufacturing makes up 18.4% of Germany’s economy. For context, neighboring France’s share is 9.5%, while the U.K.’s is 8.4%. Most economies move away from manufacturing as they mature, but Germany has been an outlier—defying that trend to great economic success.  Around half of Germany’s GDP is drawn from exports, well above other European nations. In the century’s first 20 years of global expansion, that has proved a gold mine for Germany.  However, exports from Germany have shrunk since, owing to weakening consumer sentiment in China and the rise of homegrown Chinese rivals.  Protectionism is also on the rise, with the U.S. and China engaging in tit-for-tat tariffs that have spilled over into Europe.  Then there’s the question of how Germany powers its increasingly exposed manufacturing sector.  Fueled by Russian gas, the cost of doing business skyrocketed in Germany after the West slapped sanctions on Russian energy.  The result has been a manufacturing sector stuck in recession for more than two and a half years.

The problem for Germany is that it doesn’t have a competitive advantage in other high-value sectors, for example, something comparable to the U.K.’s strong financial sector. Ditto for any kind of burgeoning tech sector.  At the same time as it tackles structural issues in its economy, Germany is also facing the existential pressure of a shrinking working-age population.

There are few easy options for Germany to climb out of its structural and cyclical holes and hold on to its spot as Europe’s biggest economy. Structural reforms are a necessity, but as the de facto leader of the EU, overhauling trade or introducing widespread subsidies is unlikely. The country has made changes to introduce high-skill immigration from outside the EU, but sweeping reforms here are unlikely in a hot political environment.   Finding new export partners is another urgency for Germany. However, ING’s Brzeski doesn’t predict another country will expand like China did 20 years ago. Downside risks are more likely, including the potential for major import tariffs if Donald Trump is reelected as U.S. president this November.  Germany’s three-pronged coalition government is not well suited to enacting sweeping reforms owing to the dueling interests of the governing parties. The country has also seen growing popularity for parties on the left and right of the political spectrum.

There is a high risk that Germany wakes up too late, but it remains the largest economy in Europe. There is still relatively good infrastructure, so it still has the potential to be stronger 10 years from now than it is right now.

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