Europe's leading economy 'won't collapse overnight'... it's much scarier

Germany, Europe's largest economy , is approaching a point of no return as negative economic trends continue, according to a Bloomberg Economics report.

The German economy is on the brink of an irreversible recession, just as the political scene is in turmoil. In this photo: German Chancellor Olaf Scholz speaks after failing to survive a no-confidence vote in the Bundestag , December 16. (Source: AFP)

Accordingly, the "leading" economy of the 27 member countries of the European Union (EU) is on the path of slow recession, but there is a risk that this worrying trend cannot be reversed.

Germany's economic challenges are mounting, with sluggish global demand, a shortage of skilled workers and intensifying competition. The German economy is now forecast to shrink for a second consecutive year by 2024, making it the weakest performing economy in the Group of Seven ( G7 ).

Germany is the industrial base of Europe. There are also concerns that if the economic engine weakens, the entire "Old Continent" will suffer the consequences. In the second quarter, the growth of the Eurozone and Europe as a whole was only 0.2% compared to the first quarter, weaker than the previous estimate of the European Statistical Office (Eurostat).

Calculations show that after five years of stagnation, the German economy has now lost more than five percentage points of what it would have gained if the growth trend achieved before the Covid-19 pandemic had been maintained.

The central European country is facing a series of structural shocks, such as the loss of cheap Russian energy, and the struggles of the giants that once made the German industry famous - Volkswagen AG and Mercedes-Benz Group AG - struggling to catch up and compete with the names from China.

The decline in national competitiveness costs each German household about 2,500 euros (about 2,600 USD) per year.

Amy Webb, founder and CEO of the Future Today Institute, which advises German companies on strategy, stressed that “the German economy is not going to collapse overnight. That’s what makes this prospect so terrifying.”

The expert predicted a gradual and prolonged recession that would affect not just one business or one city, but all of Germany and possibly Europe as well.

This scenario could see Germany lose more of its large energy-intensive manufacturing sectors, and exports decline as domestic companies cut back on investment. As living standards decline, voters start looking for someone to blame, leading to social tensions that limit the pool of foreign workers Germany desperately needs.

According to the German Federal Statistical Office (Destatis), except for June 2024, the number of insolvent companies has increased by double digits every month compared to the same period last year since June 2023. The number of bankruptcies in Germany in October 2024 increased by 22.9% compared to the same period last year, due to the continued difficulties of Europe's largest economy.

Germany's long-awaited economic recovery appears increasingly distant, as major economic institutes have downgraded their forecasts for Europe's No. 1 economy in the coming years. Germany's Kiel Institute for the World Economy said the German economy could stagnate by 2025, after shrinking by 0.3% in 2023 and 0.2% in 2024.

The German economy is unlikely to escape stagnation, the Kiel Institute said in a report, adding that "there are currently few signs of a strong economic recovery." Growth in 2026 was also revised down to 0.9% from the previous forecast of 1.1%.

"Europe's leading economy is facing a challenging combination of cyclical weakness and structural problems," said Geraldine Dany-Knedlik, head of economic forecasting at the German Institute for Economic Research (DIW Berlin). Rising energy and material costs, competition and potential US trade tariffs are major obstacles to the country's manufacturing and exports, she said.

Expert Timo Wollmershaeuser, head of forecasting at the Ifo Institute for Economic Research (Germany), pointed out that tight monetary policies in Europe and Germany's key export markets have reduced industrial orders, continuing to put pressure on the economy.

Meanwhile, Germany's stance of not increasing public debt to stimulate the economy is considered by some experts to be a mistake and to drag the whole of Europe down. Economist Isabella Weber at the University of Massachusetts said that Germany's fiscal stance is a "historic mistake", causing Europe's leading economy to recover poorly after the pandemic.

In the last 8 quarters, the German economy has had negative growth for 3 quarters, with the sharpest decline being 0.3% in the third quarter of 2023, and the most positive growth being 1.7% in the third quarter of 2022. Since the fourth quarter of 2019, Germany's growth has been only 0.3%, far behind France (3.8%) and the US (9.4%). However, Germany's budget deficit is expected to be only 1.9% and public debt to be 63% of GDP this year. This is a favorable condition for increasing public spending to stimulate the economy.

According to Le Monde , the German economy is stagnant, with a structurally weakened model but healthy public finances. The lack of an economic stimulus plan is all the more damaging because Germany's economic crisis is not temporary, with a series of factors: poor productivity growth, declining population and insufficient investment in both the private and public sectors...

Meanwhile, a brighter future for the German economy is still not on the horizon. In the latest development in German politics, Chancellor Olaf Scholz has just lost his seat after failing to survive a no-confidence vote in the German parliament. Early elections could open up an opportunity to change the direction of Europe's largest economy. However, the German government still lacks ambitious policies to address core challenges.

The developments have thrown German politics into turmoil, as the country's economy struggles with high energy prices and strong competition from abroad. Geopolitically, Germany is not only confronting Russia over the war in Ukraine, but the return of US President-elect Donald Trump with his "unfriendly" economic policies has raised uncertainty about bilateral trade relations and the future of NATO.

Early elections in Germany are expected to take place in February 2025, and the latest information does not yet show any possibility of early stability.

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