It might have Europe’s largest economy, but Germany has a problem. Its economy is in secular decline. The German economy contracted in 2023, and economists project growth of 0.2% in 2024. Through 2029, the German economy is projected to show growth of just 8%, while gross domestic product in the United States should be more than double that rate.
If the productivity promises of the Artificial Revolution come to pass, U.S. GDP growth could be more than triple German growth. Importantly, Germany is not a leader in the global race for technological supremacy. It is only now trying to create a competitive semiconductor industry.
What went wrong?
Put simply, Germany made many policy mistakes over the course of the past few years. It relied on cheap Russian natural gas to power its energy-intensive industries. That source of energy has been shut off. In response to the green lobby, Germany shuttered its nuclear power plants prematurely. Germany pivoted to green energy, yet green energy remains too expensive relative to carbon-based fuels. Energy-intensive industries in Germany are closing plants and relocating to other geographies, including the U.S.
The German manufacturing sector is being hollowed out. Germany misread the politics of China. German leaders thought that its exports to China would grow proportionally with Chinese economic growth. But Berlin became too dependent on China as more than 3% of Germany’s GDP was derived from exports to the country. And as China’s deep structural flaws were exposed (a demographic implosion, a real estate bubble that popped, and Chinese Communist Party Chairman Xi Jinping’s focus on stability at the cost of economic dynamism), the Chinese economy stalled, and German exports to China stalled too.
Now China has decided to reduce imports of manufactured goods and reorient its economy toward manufactured exports. China will compete directly against Germany in the global manufacturing sector. Germany will lose. China has an aggregate savings rate of about 40%, about 30% higher than that of Germany. China will aggressively subsidize its manufacturing sector in order to reduce imports and increase exports. Germany will not be able to compete in the export subsidy competition.
The core of the German economy has been the automobile sector. China has targeted the global electric vehicle market as a path to economic growth.
China will be selling electric vehicles into German markets at a cost 20% below comparable German vehicles.
The red dragon will devour Germany’s crown jewel, its vehicle sector.
Germany embraced mercantilism. It ran a trade surplus equal to 7% of GDP. It sacrificed domestic consumption for export production. That was a mistake. The two major economies of the world, the U.S. and China, are embracing their own forms of mercantilism. Germany’s exporters are being shut out of markets.
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Germany is irrelevant in the artificial intelligence revolution. Germany relies on European Union regulations to compensate for its weakness in technology. That will not work. EU regulations will strangle innovation in Germany. Top line: Germany will fall farther behind the U.S. and China as the global economy goes digital.
Germany suffers from the demographic challenge of an aging population. Germany faces political paralysis. Germany’s policy elites are fractured. The far Right commands the support of almost 20% of the population. The economies of the U.S. and China are growing, but the German economy is not. Germany is sleepwalking into economic irrelevancy.
