View from London: Is Germany’s business model broken?

In a 30-plus-year career in corporate restructuring, consultant Andreas Rüter has seen it all: the dotcom bust, September 11, the global financial meltdown, the euro crisis, Covid-19. But what’s happening right now in corporate Germany is “unprecedented” and “of a completely different order of magnitude”, says Rüter, the country head of AlixPartners, writes ‘The Financial Times’.

The federal republic’s all-important automotive sector, chemical industry and engineering sector are all in a slump at the same time.

Over the past three years, Europe’s largest economy has slowly but steadily sunk into crisis. The country has seen no meaningful quarterly real GDP growth since late 2021, and annual GDP is poised to shrink for the second year in a row. Industrial production, excluding construction, peaked in 2017 and is down 16 per cent since then. According to the latest available data, corporate investment declined in 12 of the past 20 quarters and is now at a level last seen during the early shock of the pandemic. Foreign direct investment is also down sharply.

Light on the horizon is hard to detect. In its latest forecast, the IMF says that German GDP will expand by just 0.8 per cent next year. Of the world’s largest and richest economies, only Italy is expected to grow as slowly.

In manufacturing, where Germany is Europe’s traditional powerhouse, things look especially bleak. Volkswagen has warned of plant closures on home turf for the first time in its history. The 212-year-old Thyssenkrupp, once a symbol of German industrial might, is bogged down in a boardroom battle over the future of its steel unit, with thousands of jobs at risk. The tyremaker Continental is seeking to spin off its struggling €20bn automotive business. In September, the 225-year-old family-owned shipyard Meyer Werft narrowly avoided bankruptcy with a €400mn government bailout.

Robin Winkler, Deutsche Bank’s Germany chief economist, labels the fall in industrial production “the most pronounced downturn” in Germany’s postwar history. He is far from alone. “Germany’s business model is in grave danger — not some time in the future, but here and now,” Siegfried Russwurm, the president of the Federation of German Industries (BDI), warned in September. A fifth of Germany’s remaining industrial production could disappear by 2030, he said. “Deindustrialisation is a real risk.”

Not everyone is gloomy. “Germany is not in decline,” Bundesbank president Joachim Nagel insisted in a speech in late September, pointing to the strong labour market — the number of unemployed workers, at 2.8mn, is at the lowest level in a decade — and the strong balance sheets of German companies. “Germany as a business location is better than its current reputation,” Nagel added.

After years of condescending lectures from Berlin on reform and fiscal discipline, the rest of Europe might be forgiven for feeling a touch of schadenfreude. But if the EU’s biggest net contributor is in crisis, the entire bloc suffers. Nearly two-thirds of all Germany’s imports come from fellow EU states, and the federal republic accounts for a quarter of EU GDP. Combined with France’s political and economic woes, this risks destabilising the wider EU.

Reliant on imported hydrocarbons, the chemical industry — one of Germany’s largest manufacturing sectors — has been badly damaged by the increase in energy prices that followed Russia’s invasion of Ukraine. While gas prices appear to have peaked, this summer they were still three times as expensive as before the war. Chemical production in Germany is 18 per cent below its level in 2018.

An upended relationship with China is at the root of some of Germany’s current woes. The Asian giant’s transformation from lucrative import market to producer and exporter in its own right is stretching some of the mainstays of the German economy beyond breaking point. While China gobbled up 8 per cent of all German exports in 2020, this year the figure is likely to be 5 per cent. “Instead of importing German capital goods, Chinese manufacturers have turned into competitors,” says DWS economist Elke Speidel-Walz.

Those changes are perhaps most visible in Germany’s high-profile automotive industry, particularly among the country’s three big carmakers, VW, Mercedes-Benz and BMW. According to the VDA, Germany’s automotive industry association, vehicle production in Germany peaked in 2016 at 5.7mn cars; last year the number was 4.1mn, down by more than a quarter. Since 2018, 64,000 jobs have been lost in the industry — nearly 8 per cent of the country’s automotive workforce — and tens of thousands more are at risk. Weak demand for EVs also means that from next year many brands may have to pay heavy fines for missing the EU’s ever-tougher CO₂ targets.

German economists and business leaders have long been aware of the crisis. But for months, Chancellor Scholz appeared to deny there was a problem. Indeed, in March 2023 he promised a second economic miracle, thanks to hundreds of billions of euros of investments in green technology. “Germany will for a time be able to achieve growth rates last seen in the 1950s and 60s,” he asserted. 

In early 2024, the chancellor dismissed dire warnings from business associations about industrial decline by citing an old German adage that merchants always moan. For months, he and his ministers had clung to the hope that the economy would start to recover in the second half of this year. Some even banked on Germany’s men’s football team winning the Euro 2024 tournament, hoping for a vibe shift.

In the end, the team were knocked out in the quarterfinals and the economic data kept getting darker. Last month, ministers admitted the country was facing its first two-year recession since the early 2000s.

In a caustic speech that went viral over the summer, Deutsche Börse chief executive Theodor Weimer articulated the growing despair felt by many among Germany’s business elite, saying that their nation was at risk of becoming a “developing country”. He also claimed the government was viewed as “stupid” by international investors and was turning the country into a “junk shop”.

Business leaders are sceptical that the current administration is capable of changing things for the better, citing uncertainty caused by coalition strife and constantly changing policies. “Companies currently cannot rely on the German government to sort out the problems’ root causes,” says Rüter of AlixPartners.

After three years, 300,000 industrial jobs have been lost. That is not the legacy of former governments... that’s the result of economic policy of the past three years

This has provided an opening for Friedrich Merz, leader of the opposition Christian Democrats (CDU) — the man many in Germany expect will be the country’s next chancellor. The CDU has established a strong lead in the polls, even though large numbers of voters hold the party and its former leader, Angela Merkel, accountable for many of Germany’s current ills.

Merz, however, has sought to pin the blame directly on Scholz: “After three years, 300,000 industrial jobs have been lost,” he said in a recent speech. “That is not the legacy of former governments… that’s the result of your economic policy of the past three years.”

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