The steady decline of Germany

Angela Merkel’s long reign over Germany has been reevaluated and is increasingly criticized. Her 16-year chancellorship (2005–2021) established her as a pragmatic leader with a mix of navigating existential challenges, the Eurozone, refugee, and COVID-19 crises, and dependencies on Russian energy. During her leadership, the EU started to disintegrate and the UK left the organization. Merkel was for bringing a large number of immigrants, predominately Muslims, to Germany with her open-door policy welcoming over one million refugees. She also started the economic path of Energiewende (nuclear phase-out), which led to dependency on Russia until 2022 and after that astronomically expensive energy prices in Germany, leading to difficulties for industries to be competitive. Her leadership was characterized by cautious, pragmatic decision-making rather than long-term strategic vision. That shows now with the Germany economy suffering and getting worse.

On top of this, Merkel this week suggested to voters, and in particular immigrate voters, to vote against the most popular party in Germany, AfD, the far-right, in order to keep them out of the government. Merkel might just have doomed the conservatives CDU/CSU parties and the trend could be similar to the one in the UK, which basically has self-destructed the conservative party. It is no coincidence that Merkel’s era is now heavily debated, with criticism regarding her failure to modernize the German economy, the open border policy, and her lack of vision to prepare for geopolitical shifts.

At this point, Germany is experiencing a significant, prolonged economic decline, with its economy shrinking in 2023 and 2024, marking the first consecutive-year contraction since the early 2000s. As Europe’s largest economy, it is facing structural, energy, and competitive pressures, including high energy costs, intense competition from Chinese manufacturers, and a shrinking working-age population. Industrial Stagnation and Competition: Germany’s industrial output has dropped to near post-pandemic lows, with sectors like automotive (VW, Mercedes, BMW) struggling to compete with Chinese and American electric vehicle manufacturers.

Following the loss of cheap Russian gas, German industry faces high energy costs that have led to shutdowns of production lines for base materials. High labor costs (approximately €62 per hour) and heavy bureaucracy have hindered competitiveness. Germany has struggled to generate meaningful growth for four years, with GDP falling by 0.3% in Q2 2025. While Germany announced a large-scale stimulus package in 2025 for defense and infrastructure, economists question how quickly this will impact growth. The country is facing its greatest crisis in post-war history, with some analysts projecting a third consecutive year of recession in 2025.

Germany now faces stagnation, soaring labor costs, and a crushing welfare burden of one pensioner for every two workers. For decades, Germany was celebrated as Europe’s economic success story. Its postwar Soziale Marktwirtschaft, the social market economy, combined free-market dynamism with a limited welfare for those truly in need, powering West Germany’s rise from postwar devastation into one of the world’s most prosperous nations. Today, however, that model is faltering. Germany faces stagnating growth, declining competitiveness, and the heaviest welfare burden in its history. Today, Germany spends 31% percent of its GDP, roughly €1.3 trillion, on social programs, one of the highest levels among OECD countries. The pension system is the clearest example of this excess, consuming 12% of GDP, over twice the share spent in the UK (5.1%). As the population ages and the workforce shrinks, the strain on public finances has become unavoidable. It can survive only through higher taxes, mounting debt, and growing deficits.

The economic toll of Germany’s overgrown welfare state is now unmistakable. Once Europe’s growth engine, Germany has become one of its laggards. Since 2017, GDP has grown by just 1.6%, compared to 9.5% in the rest of the eurozone. By 2023, it had ranked as the world’s worst-performing major economy, shrinking by 0.3% and 0.2% in two consecutive years, and continued to slide under the new current government, with GDP falling by 0.3% in Q2 2025.

Nowhere is this decline more apparent than in the automotive sector — the backbone of Germany’s postwar prosperity. Once global pioneers, Volkswagen, Mercedes-Benz, and BMW now lag behind leaner Chinese and American rivals. Soaring labor costs (€62 per hour, compared to €29 in Spain and €20 in Portugal), combined with heavy regulation and rigid labor rules, have eroded competitiveness. A slow transition from combustion engines to EVs has enabled BYD and Tesla, with faster innovation cycles, advanced technology, and competitive pricing, to seize the lead in the industry.

Most of all though, the energy crisis has deepened their woes. The sudden loss of cheap Russian gas, combined with the government’s arguably short-sighted and bizarre decision to phase out nuclear power, has left German industries paying up to five times more for electricity than their American or Chinese competitors. Weighed down by high costs and slow adaptation to new technologies, automakers have been forced into painful cost-cutting measures, from plant closures to mass layoffs. Since 2019, the industry has already lost 46,000 jobs, and another 186,000 could follow by 2035.

At the root of Germany’s malaise lies a dangerous illusion, that generous welfare can coexist with high productivity. When redistribution outpaces wealth creation, prosperity tends to fade. Left unchecked, welfare states expand faster than the economies that fund them, eroding productivity and burdening future generations. In addition, Germany has continued to bring in uneducated immigrants and given them generous allowences, but with little or nothing in return, fueling political tension and the raise of the far-right AfD, the most popular party in Germany and by far the dominant force in eastern Germany. Germany also has a weak leadership in Friedrich Merz, with limited executive experience, he has not held major government executive roles and he has occasionally made controversial or unclear statements. It is clear that Merz lacks vision and he has chosen the same path as his predecessors that is leading Germany in the wrong direction.