Germany’s Economy Stalls Amid Falling Output and Political Bickering

Germany started the year with Berlin’s streets choked with tractors and farmers blaring horns in furious protest of proposed budget cuts. Then train engineers walked off the job to demand better pay, stranding commuters and carloads of freight and leaving the country angry and gridlocked.

The same could be said for the state of the German economy. Last year it contracted 0.3 percent, official figures showed this week, making it not only the largest economy but also the slowest growing among the 20 countries using the euro. Industrial production has fallen five months in a row.

“The economy is at a standstill in Germany,” said Siegfried Russwurm, the president of the Federation of German Industries. “We don’t see any chance of a rapid recovery in 2024.”

Since it was rebuilt after World War II, Germany has been Europe’s main driver of economic growth, becoming an industrial powerhouse known for vast factories and fine-tuned engineering.

But now its automakers must compete with relatively cheap electric cars from China, and it vies with the United States to attract tech giants. There is a growing realization that Germany has not been successful updating its industry with sufficient flexibility and digital know-how to remain competitive.

As the economy sputtered last year, the government was nearly paralyzed by bickering among members of the three parties that make up Chancellor Olaf Scholz’s ruling coalition. Then came a budget crisis in November, causing the government’s popularity to plunge in polls.

Many of those disputes were over how to fill a 17 billion-euro ($18.5 billion) gap in the budget after the country’s highest court in November threw out the previous spending plan. That decision was driven by the country’s so-called debt brake, a law enshrined in its Constitution to keep public deficits low.

But geopolitical crises and new industrial rivalries in China and the United States have weakened demand for German-made products abroad. Germany grew rich in recent decades by selling its goods to the world, racking up a trade surplus that strained ties with the United States under President Donald J. Trump.

The restrictions on borrowing are preventing the government from making badly needed investments in public infrastructure, from schools and public administration to railways and energy networks.

“Writing that into the Constitution gave it the binding effect that was intended at the time,” when debt soared after reunification with East Germany and spending rose after the financial crisis in 2008, Monika Schnitzer, a government adviser, told the podcast “Hessischer Rundfunk.” “But nobody thought it through to the end about what it could mean in a serious crisis, that there is not enough room to maneuver.”

Ms. Schnitzer, who heads the German Council of Economic Experts, is among the economists urging lawmakers to adjust the mechanism. But that would mean changing the Constitution, which requires a two-thirds majority in Parliament, implying a level of cooperation between the opposition and the government that is unthinkable in the current political environment.

That means, for this year and the next, Germans will instead find themselves faced with cuts on government spending, affecting a raft of subsidies to farmers and filmmakers alike. Travelers will face a new tax on airline tickets. Incentives for solar power and electric vehicles will be curtailed. Money to improve rail links will also be cut.

Economists have warned that taking a red pen to spending instead of raising taxes — a move vehemently opposed by the fiscally libertarian Free Democrats, the smallest party in Mr. Scholz’s coalition but the one that controls the finance ministry — will be a further drag on the economy.

The spending cuts could not come at a worse time for Germany’s stumbling economy. They have prompted the country’s three leading economic institutes to cut their economic growth forecasts for 2024 to between 0.6 and 0.9 percent, down from a range of 1.1 to 1.4 percent predicted in September.

Within the Group of 20 nations, which include developed and developing economies from around the world, Germany is expected to come in at the bottom, with only Argentina seeing weaker growth projected for the year, according to the Organization for Economic Cooperation and Development.

Slowing growth in China has also reverberated in Germany. Although China’s economy grew 5.2 percent in 2023, it is undergoing significant change as the country’s leaders try to wean it off property and construction, long pillars of growth.

Not everything is negative, economists say. Double-digit inflation fell to 3.8 percent in December, and high interest rates are expected to begin easing later this year. That, coupled with an increase in wages won after labor actions like the train engineers’ strike, could encourage German consumers to spend more, albeit at the risk of fanning further inflation.

But that will not be enough to fix Germany’s structural problems. One is a lack of domestic energy sources: The country relies on imports to sustain the industries that have formed the backbone of its economy for decades. They include car making, steel and the chemicals industry, which reported that production fell 11 percent last year.

Overall, Germany’s industrial sector is struggling to cope with not only the high price of energy but with the transition to a future that is more nimble and more digital. Plans to digitize the country’s prized but paperbound bureaucracy, which traces its roots to 19th-century Prussia, largely stalled last year, according to an official index.

The country failed to reach its goal, set in 2017, of requiring all public offices to offer digital services by the end of 2022. That infrastructure lags miles behind the rest of the European Union, where on average 56 percent of homes are connected to fiber-optic cables, compared with 19 percent of German homes.

In the private sector, companies complain that the amount of paperwork required to build or expand hampers growth.

Germany recently showed that it can move quickly when it has no choice. After Russia cut off flows of natural gas in 2022, the government approved the procurement and construction of several terminals to bring in liquefied natural gas.

Within months, Germany was able to fill natural gas storage facilities to the brim while it encouraged companies and consumers to conserve fuel.

“Germans are so risk-averse, it’s almost a psychological thing,” said Sander Tordoir, an economist at the Center for European Reform, a think tank in Berlin.

He pointed to the country’s growing green tech sector as a bright spot in the economy, those industries that develop technology for environmental protection, renewable energies and the efficient use of resources.

Semiconductor makers are another source of investment. Intel and Taiwan Semiconductor Manufacturing Company plan to build factories in eastern Germany, helped by subsidies worth €20 billion, which have survived government budget cuts.

Economists have argued over the wisdom of spending so much to attract such deep-pocketed companies, worth billions in their own right. But the idea that such firms are needed to help bring German industry into the 21st century is not in doubt.

“The Germans need to think about what kind of economy they want,” Mr. Tordoir said. “But once they make the jump to deregulate and let go of fiscal straitjackets, there is a lot of potential in the German economy. It’s just not being used.”