Germany's economy is in a slow-motion crash - and nobody is landing the plane

by Luís Rijo 8 min read
Trade Markets Work
Germany's economy is in a slow-motion crash - and nobody is landing the plane
A failing plane descends over Germany's industrial heartland as factories fade into grey fog.

On May 1, 2026, German drivers started paying a little less at the pump. The government slashed fuel taxes by 17 cents per litre for two months - a temporary relief measure costing around 1.6 billion euros, financed by raising tobacco taxes. Chancellor Friedrich Merz called it "very concrete relief." His critics called it something else entirely.

Here is the problem: four years ago, Merz stood in parliament and attacked then-Chancellor Olaf Scholz for doing exactly the same thing - handing out fuel discounts and one-off payments instead of fixing the structural problems driving energy costs up. Scholz called it relief. Merz called it "Flickwerk" - patchwork. Now Merz is the one holding the glue gun.

This is the central irony at the heart of Germany's economic crisis, and it captures something larger: a wealthy country that knows what it needs to do, has heard the diagnosis for a decade, and keeps choosing the cheaper, easier, more politically comfortable option. The plane is losing altitude. The pilots are serving snacks.

The background

Germany's economy is built on a particular bargain that worked brilliantly for most of the twentieth century and into the early 2000s. Energy-intensive manufacturing - cars, chemicals, machinery, metals - produced high-wage, highly skilled jobs distributed across the country, not just in one or two capitals. Those jobs funded a generous welfare state. The welfare state funded social stability. The social stability funded predictable, long-term investment.

To make this work, Germany needed two things above all else: cheap energy and access to global export markets. For decades it had both. Cheap Russian gas kept production costs low. A weak euro - kept down by the European Central Bank's low interest rate policy during the eurozone debt crisis after 2010 - made German exports competitive worldwide. China was industrialising fast and buying German machines to do it.

Deindustrialisation is what happens when that bargain falls apart. It means the factories don't just slow down - they move. The jobs don't just disappear - they go somewhere else, somewhere with lower costs, fewer regulations, cheaper power. And unlike a recession, which is cyclical, deindustrialisation tends to be structural: once a factory relocates its supply chain to another country, it rarely comes back.

Germany's industrial production peaked in autumn 2018. Most people didn't notice at the time. The economy still looked fine. But the slide had already begun.

What is actually happening

Six years of stagnation. That is the headline figure in Germany right now. The economy contracted 0.3% in 2023 and a further 0.2% in 2024, making it two consecutive years of negative growth - the longest such streak since the post-reunification difficulties of the early 1990s. Within manufacturing, the picture is starker: gross value added in the sector fell 3% in 2024, with the automotive industry down 7.2% and machinery and equipment down 8.1%.

In his new book "Absturz" (Crash), economist Dr. Daniel Stelter - a former partner at Boston Consulting Group and one of Germany's most prominent economic commentators - uses the image of an airplane that has been losing speed and altitude for years, and is now approaching what pilots call a stall: the point at which a wing stops generating lift entirely. The metaphor is useful because it captures the non-linearity of the problem. The plane can look fine for a long time while the danger is building. And then, very quickly, it isn't fine at all.

The core driver is energy costs. According to the International Energy Agency, German consumers pay among the highest electricity prices in Europe. For energy-intensive industry - steel, chemicals, glass, paper - the average electricity price in September 2025 was 10 cents per kilowatt-hour, compared to 6.4 cents five years earlier. That is a 57% increase in the baseline cost of doing business, on top of already elevated prices relative to global competitors.

This matters enormously for an economy where industry accounts for roughly a fifth of GDP. When a German chemicals company pays nearly twice as much per unit of electricity as a Chinese competitor, and when that Chinese competitor is also closing the technology gap - in some sectors, has already closed it - the logic of staying in Germany weakens year by year. And that is precisely what is happening. Volkswagen announced factory closures. BASF is scaling back German operations. The exits are quiet, incremental, and largely irreversible.

The new Merz government's response to the Iran war-driven oil price shock - a two-month fuel tax cut starting May 1 - illustrates the political logic perfectly. It is visible. It is fast. It costs €1.6 billion. And it does absolutely nothing about the structural reasons German industrial energy costs are among the highest in the developed world.

The money trail

Follow the subsidies and a pattern emerges. According to Stelter, government subsidies in Germany have more than doubled as a share of GDP since 2015. The state is spending more and more money to offset the consequences of decisions the state itself made - Energiewende (the energy transition policy), high social levies, labyrinthine tax codes - rather than changing those decisions.

The Energiewende is the central exhibit. Germany decided to phase out nuclear power, then accelerated that decision after Japan's Fukushima disaster in 2011, and has spent hundreds of billions of euros building out renewable capacity to replace it. The problem, as Stelter and others have argued, is structural: solar and wind are intermittent. When the sun doesn't shine and the wind doesn't blow, something else has to run. That something is usually gas or coal. So Germany simultaneously has high renewable capacity and high fossil fuel dependency - and the grid fees, backup capacity costs, and surcharges required to manage this complexity get passed on to industrial customers.

The government's new industrial electricity price, which took effect on January 1, 2026, attempts to address part of this. The scheme, approved by the EU, caps electricity costs for eligible energy-intensive companies at around 5 cents per kilowatt-hour for up to 50% of their consumption, on the condition that at least half the savings be reinvested in decarbonisation projects. The German Chemicals Industry Association, one of the primary beneficiaries, called it "a small auxiliary building block" - damning with faint praise. The scheme runs only until 2028, which means it provides limited certainty for companies making decade-long investment decisions.

Meanwhile, the retirement system is accumulating what economists estimate as a sustainability gap - the difference between promised future pension payments and the contributions that will actually arrive - of 19.5 trillion euros, according to calculations Stelter cites from economist Bernd Raffelhüschen. This is not a rounding error. It is roughly five times Germany's annual GDP. The number reflects a demographic reality: Germany has one of the lowest birth rates in the industrialised world, and the baby boom generation is now entering retirement en masse. Every retiree who stops contributing and starts drawing from the system increases the burden on a shrinking pool of workers.

The people who benefit from keeping current policy intact - retirees, public sector employees, welfare recipients - are also, increasingly, the majority of voters. The people who would benefit from reform - younger workers, business owners, skilled employees considering leaving - are a minority, and a mobile one. Several tax advisers Stelter mentions in the interview now market their services specifically around helping wealthy clients emigrate from Germany without triggering its exit tax. That is a real market. It exists because enough people are seriously planning to leave.

What people are doing about it

The government's short-term response has been precisely what Stelter predicted and criticised: watering-can economics. The fuel tax cut benefits everyone who drives regardless of income, with the IEA and DIW economic institute noting that the cuts may not even reach consumers fully, given that fuel companies could absorb part of the margin. A 1,000 euro tax-free employer bonus, also announced in April 2026, sounds useful but is effectively optional - employers can offer it and employees who were already getting annual bonuses may simply see that figure mentally subtracted at year-end.

At the business level, companies are acting without waiting for political consensus. Industrial relocation - the quiet process of shifting production to lower-cost countries - has been underway since 2018. Volkswagen, BASF, and other large German firms have expanded operations in China and Eastern Europe while managing down German headcount through a combination of restructuring and attrition.

Some companies are also beginning to factor the industrial electricity price into their planning - but with caution. The scheme expires in 2028 and requires reinvestment in decarbonisation, meaning it comes with conditions that limit flexibility. Companies weighing a ten-year capital expenditure programme in Germany cannot base their business case on a three-year subsidy.

The Fraunhofer Institute for Solar Energy Systems - notably, not a nuclear research body - has published widely cited studies arguing that nuclear power is prohibitively expensive. Stelter challenges the assumptions behind those studies directly: they apply a 10% capital discount rate to nuclear and only 5% to wind, assume a 40-year lifespan for nuclear plants when modern estimates suggest 80 years is realistic, and assume nuclear plants would only operate at 30% capacity utilisation - essentially forcing wind and solar's intermittency costs onto nuclear's balance sheet. Critics of those assumptions note that the International Energy Agency has concluded there is no cheaper electricity than that from life-extended nuclear plants. Germany continues to demolish its fleet.

The bottom line

Germany's problem is not a lack of diagnosis. It is a surfeit of it, combined with a political system that generates incentives to delay. Every structural reform - of the welfare state, the tax code, energy policy - creates losers in the short term among groups that vote in large numbers. The result is a government that announces 1.6 billion euros in fuel tax cuts paid for by smokers, while the machinery factories close and the engineers leave. The airplane metaphor only works to a point. Planes, when they stall, can sometimes be recovered. Industrial capacity, once relocated, almost never comes back.

Timeline

Summary

Who: Dr. Daniel Stelter, German economist and author, in an interview with YouTube host Mario Lochner.

What: A forensic argument that Germany's six-year economic stagnation is structural rather than cyclical, driven by energy policy errors, demographic pressure, an unreformed welfare state, and a political class that opts for visible short-term relief over painful long-term change. The immediate trigger for the interview is Stelter's new book "Absturz" (Crash) and the Merz government's fuel tax cut - a measure Merz himself previously condemned when Scholz did it.

When: April 2026, as Germany enters its third year of economic contraction, with industrial production continuing to fall and the Iran war adding a fresh oil price shock to existing structural pressures.

Where: Germany, with comparison points drawn from the United States, China, Switzerland, and smaller EU states like Estonia and Denmark.

Why: Because the window for reversing deindustrialisation is narrowing. Unlike recessions, which economies recover from, industrial capacity once relocated abroad rarely returns. Stelter's argument is that the decisions taken or not taken in the next few years will determine whether Germany remains a major industrial economy or becomes a high-cost service economy managing a slow decline in relative living standards.

Luís Rijo

Luís Rijo

Luis Rijo has spent over a decade watching money move through digital markets - where it goes, who follows it, and who gets left behind when the flow changes direction. [email protected]