Fall of an Icon: Germany’s Economic Woes, Industrial Policy Failures, and Political Fallout
When Oliver Blume, Volkswagen’s CEO, addressed 20,000 employees at the company’s Wolfsburg headquarters, his arrival was met with anything but a hero’s welcome. Drowned out by boos and shouts from employees, Blume laid out Europe’s largest automakers’ increasingly uncertain future. Amid declining sales and pressure from emerging Chinese automakers, Blume announced the closure of three German plants as part of a broader 10 billion euro plan to cut costs to increase VW’s competitiveness. Touted as the flagship of German industry, the automaker has come to symbolize Germany’s wider industrial prowess. However, just like the German economy, Volkswagen has seen ever-declining fortunes amid global pressures. Volkswagen is a powerful lens through which to view the shifting tides of Germany’s economic fortunes and the political ramifications accompanying these changes.
While Volkswagen may be the most blatant example of the troubles facing Germany’s economy, it is not the only company struggling in today’s economic reality. To understand the country’s current situation, it is essential to analyze its economy first. With the third largest economy in the world, following the United States and China, Germany has long been known as the growth engine of Europe. Before the COVID-19 pandemic, Germany had every economic metric in its favour to prove this. Under the leadership of former Chancellor Angela Merkel from 2005-2021, the German economy grew by 34 per cent, higher than the 15 per cent growth experienced by the continent’s second-largest economy, France. This allowed Germany to orient itself as the de facto leader of Europe, with increasing prominence and clout on the international stage. While this growth helped fuel a robust expansion of the German welfare state and one of the largest migrant resettlement programs, it was also based on a fundamentally broken model that would rear its ugly head, as seen today.
The German economy is reliant upon heavy industry. While the service sector holds the largest grip on the nation’s economic makeup, German manufacturing is the root of the country’s success story. With roughly 27 per cent of the state economy being derived from manufacturing, heavy industry holds an outsized role in employment in the nation. The country’s manufacturing base has a higher share of Germany’s GDP in comparison to every other European nation. With some of the largest companies in the nation being in the manufacturing sector, such as Mercedes-Benz Group AG, Siemens AG, and Thyssenkrupp among others, German politicians have long sought to feed the economic beast that is heavy industry. To achieve this and preserve its competitive edge, German industrial policy has traditionally prioritized importing inexpensive Russian gas, neglecting the digital revolution that enhanced productivity in other regions. At the outset of the Russo Ukraine war, Germany imported 55% of its gas supply from Moscow. While this industrial policy thrived during times of peace, Russia’s war in Ukraine and the COVID-19 pandemic have upended the German economic consensus. Germany has been forced to import gas from more costly sources, such as Norway and other European oil producers. As a result, energy prices have skyrocketed, and the nation’s economy and its largest employers have been profoundly disrupted.
While Blume’s December Wolfsburg address may have been met with boos from understandingly upset employees, his unwanted actions in VW are a symptom of Germany’s bleak economic outlook. As a result of the factors outlined previously, Germany’s economy is in crisis. Economists have repeatedly decreased their forecasts for German economic growth in 2025, expecting further contractions after a 0.1 per cent shrink in the national economy in 2024. In addition, the IMF predicts Germany will have the weakest economic growth in the new year compared to other developed economies. Due to the slashing of Russian gas to Germany, the country has some of the highest energy costs, which has affected both the manufacturing sector and consumers at large. This poor economic outlook has affected not just the economy but has spilled into the political sphere as well.
Amid this period of economic uncertainty, the last thing Germany can afford is a lack of strong leadership—yet that is precisely what has unfolded. Regarding economic concerns, the current German government headed up by current Chancellor Olaf Sholz in the so-called “Traffic Light Coalition” has fallen over disagreements about addressing the country’s economic woes. The main disagreement that caused the German government’s collapse has been between the Social Democratic Party of Germany or SPD, Germany’s largest coalition government party, versus its junior coalition partner, the Free Democratic Party (FDP).
Both parties differ in their approach to addressing Germany’s economic slump. Olaf Sholz has expressed his desire to override Germany’s debt ceiling to reinvest into the country’s economy to boost productivity. Sholz argues that investment financed through a greater national deficit is required to jumpstart the country’s industry. Germany’s debt ceiling is a part of the nation’s constitution, which “dictates that the size of the federal government’s structural budget deficit must not exceed 0.35 per cent of the country’s annual gross domestic product.” While relatively conservative compared to other European nations that have been more aggressive in government spending, the country’s debt break is considered a barrier to growth for the progressive camp within German politics.
On the other hand, more fiscally conservative parties, such as the FDP led by Christian Lindner, see the debt ceiling as an essential guardrail against inflationary budget deficits. This ideological divide underscores a fundamental divergence in German politics: balancing fiscal responsibility with the need for economic revitalization in the face of mounting economic pressures. However, debates regarding the nation’s debt are interlinked with deeper problems within the industrial sector, whose failure to adapt to modern times has only exacerbated fiscal constraints. As the nation grapples with stagnation and shifting global dynamics, the debate over the debt ceiling has become a crucial test of Germany’s economic priorities and political willingness to adapt.
This political infighting only adds to the uncertainty of Germany’s future. With new elections scheduled in February this year, addressing the nation’s economic downturn is one of the most important issues facing German voters. No matter the result of the election, one thing is clear: Germany must critically reevaluate its industrial policies and modernize them to remain competitive in an increasingly volatile global landscape, for when Germany sneezes, Europe catches a cold.
Featured Image: Volskwagen’s Main Wolfsburg Production Facility, To be Affected by the Company’s Broader Cost Cutting Measures. “VW-Werk Wolfsburg” by Picture Botanica licensed under CC by 2.0
Edited By: Allison Dera
