The great German stagnation

The German economy has broadly stagnated since 2020, lagging its euro area peers and raising many questions about its economic model. 

A succession of supply shocks over the last four years has worsened Germany’s already declining competitiveness. Energy costs, dependency on the car industry, the shift in trade dynamics with China, rising protectionism, the lack of public investment and poor demographics are among the many challenges that the German economy is facing.

Restoring German competitiveness as a business location will require stepping up public and private investments. For that, a change in mindset will be needed.

Mario Draghi’s call for more investment to boost European competitiveness has been greeted with scepticism by politicians in Germany, who have preferred to focus Draghi’s call for more joint EU-issued debt rather than on the real challenges that Draghi says need to be tackled. The debt brake, written into the German constitution, is limiting government fiscal space. Divergent priorities among the three coalition parties continue to block the way to any compromise on this issue.