Why is the once-mighty German economy struggling in a changing world?

The rapidly evolving dynamics of global trade are profoundly affecting export-driven economies like Germany.

With Donald Trump's re-election as US president, the prospect of higher tariffs looms large, posing a substantial threat to Germany’s economic stability.

For decades, Germany has been heavily reliant on the US as a major trading partner, but this dependence is increasingly exposing vulnerabilities in Europe’s biggest economy.

The US remains the largest importer of German goods. In 2023, Germany exported goods worth €157.9 billion to the US, representing nearly ten percent of its total exports. This makes the US an indispensable market, particularly for Germany’s automotive and industrial sectors.

However, Trump’s proposed tariffs—25 percent on imports from Canada and Mexico, 10 percent on European products, and up to 60 percent on Chinese goods—could seriously undermine Germany’s position in this critical market.

If Trump goes ahead with his threats, German exports to the US could drop by as much as 15 percent.

The automotive and industrial sectors, which form the backbone of the German economy, would be the hardest hit. Germany’s automotive industry, a key pillar of its economic success, might struggle to regain its market share in the US.

Economists caution that these protectionist measures could push not just Germany but Europe as a whole toward economic stagnation.

Moritz Schularick, President of the Kiel Institute for the World Economy (IfW), has highlighted the potentially devastating effects of such tariffs on Germany’s economy.

Meanwhile, the federal Minister for Economic Affairs Robert Habeck, has called for a dialogue, urging the European Union to respond in a unified manner.

The biggest fears stems from Trump’s threat to impose tariffs of up to 60 percent on Chinese goods, which would not only impact China but also disrupt global supply chains, affecting Europe and Germany. These restrictions could raise production costs and weaken Germany’s standing in international trade.

Should Trump’s protectionist policies materialise, they could significantly damage Germany’s relationship with its most important trading partner and plunge the country into a recession.

Growing economic strains

Internally, Germany faces additional economic challenges. Inflation continues to rise, and mass layoffs by major corporations are further destabilising the economy.

By November 2024, prices for goods and services had increased by more than two percent compared to the previous year, eroding consumer purchasing power and slowing economic growth.

Meanwhile, leading German companies are announcing drastic workforce reductions.

Volkswagen plans to close three factories and lay off thousands of employees. Thyssenkrupp, a steel industry giant, aims to cut around 11,000 jobs by 2030. Deutsche Bahn reported a €1.2 billion loss in the first half of 2024 and plans to lay off approximately 30,000 workers by 2029.

Bosch has announced an additional 5,500 job cuts. In total, these layoffs exceed 120,000 positions, further weakening Germany’s economic competitiveness and increasing uncertainty.

Germany also faces a demographic challenge: an ageing population that is leading to a severe shortage of skilled labour. To sustain economic growth and stabilise its social security systems, Germany is increasingly dependent on foreign workers.

However, attracting and retaining international talent requires addressing structural barriers to ensure Germany remains competitive as a global destination for skilled professionals.

To achieve this, Germany must adopt inclusive policies that attract and integrate foreign workers.

Racism and xenophobia tarnish the country’s international image and hinder the successful integration of foreign talent.

Combatting discrimination and fostering social cohesion are essential for Germany’s economic and social stability.

Quicker integration processes would also help foreign workers contribute more effectively to the economy and education systems.

Digitalisation and innovation must play a more significant role in revitalising the labour market. Enhanced technological advancements, particularly in industrial and service sectors, would create opportunities for both domestic and foreign workers.

A technologically forward-looking labour market would strengthen Germany’s global competitiveness and make it a more attractive destination for skilled professionals worldwide.

Another crucial step is reducing bureaucratic hurdles. Lengthy and complex work permit processes deter many highly qualified individuals, who often choose to work in other countries.

Streamlining these procedures would improve Germany’s position in the global labour market and make it more competitive.

Rethinking trade dependencies

China has made remarkable strides in recent years to fortify its economy against external shocks.

In 2000, nearly 48 percent of China’s trade was with G7 countries; by 2024, this figure had dropped to 30 percent.

Similarly, trade with the US saw a notable decline. While China exported goods worth $536 billion to the US in 2022, this number fell by 20% in 2023.

To offset these losses, China focused on forging trade agreements and investing in infrastructure across emerging markets.

This strategic diversification presents a valuable lesson for Germany.

The country’s heavy reliance on trade with the US and China leaves it exposed to significant economic risks.

By cultivating stronger ties with emerging markets in Africa, Southeast Asia, and South America, Germany could mitigate its economic vulnerabilities.

However, such a shift must be underpinned by robust investments in digitalisation and sustainable energy, ensuring a modern and resilient economic framework.

By drawing inspiration from China’s approach, Germany can enhance its own standing in the global trade arena and better secure its economic future.

Potential of German-Turkish collaboration

Germany’s pursuit of economic diversification could greatly benefit from strengthening ties with Türkiye.

Boasting a strategic geographic location, a vibrant workforce, and a rapidly advancing industrial base, Türkiye represents a promising partner for Germany’s economic ambitions.

Turkish industries, particularly in the automotive, technology, and energy sectors, align well with Germany’s needs and could effectively complement its supply chains.

Additionally, the customs union between Türkiye and the EU provides Germany with significant cost reductions and logistical efficiencies, further enhancing the potential for cooperation.

Türkiye’s strong economic growth trajectory offers substantial opportunities to contribute to Germany’s trade network.

Enhanced German-Turkish collaboration would not only bolster Germany’s competitiveness in global markets but also provide critical diversification to mitigate economic risks.

Beyond the economic realm, this partnership holds the potential to foster closer political ties, paving the way for a more robust and strategic bilateral relationship.

Germany is at a critical juncture, requiring an urgent strategic transformation to tackle its economic challenges and align with the evolving dynamics of global trade.

Securing its position in global trade and resolving domestic economic issues demands long-term, forward-thinking measures.