Germany's Economic Downturn reflects an energy crisis, deindustrialization risks, export weakness, and manufacturing stress, amid Russia gas loss, IMF and EU recession forecasts, and debates over electricity price caps and green transition.
Key Points
An economic contraction from energy price shocks, export weakness, and bottlenecks in manufacturing and digitization.
✅ Energy shock after loss of cheap Russian gas
✅ Exports slump amid China slowdown and weak demand
✅ Policy gridlock on power price cap and permits
Germany went from envy of the world to the worst-performing major developed economy. What happened?
For most of this century, Germany racked up one economic success after another, dominating global markets for high-end products like luxury cars and industrial machinery, selling so much to the rest of the world that half the economy ran on exports.
Jobs were plentiful, the government’s financial coffers grew as other European countries drowned in debt, and books were written about what other countries could learn from Germany.
No longer. Now, Germany is the world’s worst-performing major developed economy, with both the International Monetary Fund and European Union expecting it to shrink this year.
It follows Russia’s invasion of Ukraine and the loss of Moscow’s cheap Russian gas that underpinned industry — an unprecedented shock to Germany’s energy-intensive industries, long the manufacturing powerhouse of Europe.
The sudden underperformance by Europe’s largest economy has set off a wave of criticism, handwringing and debate about the way forward.
Germany risks “deindustrialization” as high energy costs and government inaction on other chronic problems threaten to send new factories and high-paying jobs elsewhere, said Christian Kullmann, CEO of major German chemical company Evonik Industries AG.
From his 21st-floor office in the west German town of Essen, Kullmann points out the symbols of earlier success across the historic Ruhr Valley industrial region: smokestacks from metal plants, giant heaps of waste from now-shuttered coal mines, a massive BP oil refinery and Evonik’s sprawling chemical production facility.
These days, the former mining region, where coal dust once blackened hanging laundry, is a symbol of the energy transition, as the power sector’s balancing act continues with wind turbines and green space.
The loss of cheap Russian natural gas needed to power factories “painfully damaged the business model of the German economy,” Kullmann told The Associated Press. “We’re in a situation where we’re being strongly affected — damaged — by external factors.”
After Russia cut off most of its gas to the European Union, spurring an energy crisis in the 27-nation bloc that had sourced 40% of the fuel from Moscow, the German government asked Evonik to turn to coal by keeping its 1960s coal-fired power plant running a few months longer.
The company is shifting away from the plant — whose 40-story smokestack fuels production of plastics and other goods — to two gas-fired generators that can later run on hydrogen amid plans to become carbon neutral by 2030 and following the nuclear phase-out of recent years.
One hotly debated solution: a government-funded cap on industrial electricity prices to get the economy through the renewable energy transition, amid an energy crisis that even saw a temporary nuclear extension to stabilize supply.
The proposal from Vice Chancellor Robert Habeck of the Greens Party has faced resistance from Chancellor Olaf Scholz, a Social Democrat, and pro-business coalition partner the Free Democrats. Environmentalists say it would only prolong reliance on fossil fuels, while others advocate a nuclear option to meet climate goals.
Kullmann is for it: “It was mistaken political decisions that primarily developed and influenced these high energy costs. And it can’t now be that German industry, German workers should be stuck with the bill.”
The price of gas is roughly double what it was in 2021, with a senior official arguing nuclear would do little to solve that gas issue, hurting companies that need it to keep glass or metal red-hot and molten 24 hours a day to make glass, paper and metal coatings used in buildings and cars.
A second blow came as key trade partner China experiences a slowdown after several decades of strong economic growth.
These outside shocks have exposed cracks in Germany’s foundation that were ignored during years of success, including lagging use of digital technology in government and business and a lengthy process to get badly needed renewable energy projects approved.
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