High energy prices, lack of skilled workers: Understanding Germany's ongoing economic slump ahead of elections

Germany is considered to be Europe’s biggest economy.

However, the nation that became known for the quality of its product has not seen real economic growth for five years.

The old business model, fuelled by cheap natural gas from Russia and lucrative exports to China, has left Germany mired in stagnation and angst about the future.

Multiple factors are at play. Let’s take a closer look.

High energy prices due to Russia’s war in Ukraine

In the wake of Russia’s invasion of Ukraine, Moscow struck Germany a serious blow by deciding to shut off natural gas supplies.

For a long time, Germany’s economy relied on the manufacture of industrial goods for export using cheap energy.

As Germany shifted from coal generation to renewable energy, then-Chancellor Angela Merkel made the decision in 2011 to accelerate the country’s transition away from nuclear power while relying on Russian gas to fill the gap.

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At that time, Russia was viewed as a trustworthy energy partner, and the United States and Poland’s concerns were disregarded.

When Russia cut off the supply, gas and gas-derived electricity prices in Germany soared. These are essential expenses for energy-intensive businesses like steel, glass, fertiliser, and chemicals.

Germany was forced to use LNG, or liquefied natural gas, which is supercooled and sent in from the United States and Qatar. Pipeline gas is less expensive than LNG.

According to a study conducted for the Bavarian Industry Association by the research firm Prognos AG, industrial customers in Germany currently pay an average of 20.3 euro cents per kilowatt-hour for electricity.

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The price is similar to 8.4 euro cents in China and the US, where many German companies’ competitors are based.

Renewable sources of energy haven’t scaled up fast enough to fill the gap. Homeowner and regional resistance to turbines slowed wind energy growth. Infrastructure to transport hydrogen as a replacement fuel for steel furnaces remains mostly on the drawing board.

Also read: Germany elections: Meet the four candidates in the race to become the next chancellor

Rising competition from China

China’s introduction into the world economy benefited Germany for years, even though other industrialised nations lost jobs to Beijing.

German businesses found a significant new market for automobiles, chemicals, and industrial machines. Mercedes-Benz, Volkswagen, and BMW made substantial profits from sales in what grew to be the largest automobile market in the world during the early and mid-2010s.

At the time, Chinese businesses created electronic goods and furniture that were not competitive with Germany’s key strengths.

Then, Chinese manufacturers began producing identical goods to those made by Germans.

Germany’s solar panel manufacturers were wiped out by state-subsidised Chinese ones.

In 2010, Chinese panel manufacturers relied on imported German machinery; today, Chinese machinery is used in the production of solar panels worldwide.

The Xi Jinping-led government has intensified its efforts to support and encourage export-oriented industry.

On export markets, the resultant products—steel, machinery, solar panels, electric vehicles, and EV batteries—now compete with German goods.

China’s industrial policy focused on exports had the most negative impact on Germany, the most auto-centric economy in the European Union.

By 2024, China was exporting five million vehicles annually, whereas in 2020, it was not a net exporter.

At 1.2 million cars, Germany’s net exports decreased by half over that time.

An estimated 50 million vehicles, or almost half of the world’s demand, are produced annually in Chinese factories.

Delay in making investments

During the prosperous periods, Germany became comfortable and delayed making investments in long-term projects like high-speed internet and rail lines.

The government used tax revenue from a thriving economy to manage its budget and occasionally run surpluses.

Commuters in Germany now scoff at delayed trains and frequent service interruptions while worn-out rails are repaired.

Some rural areas still lack high-speed internet. The construction of a transmission line to provide manufacturers in the south with electricity from Germany’s windy north has been years behind schedule and will not be completed until 2028.

A key bridge on the highway that links southern Germany with the industrial Ruhr region had to be closed in 2021, a decade after concerns about its durability first surfaced. It will not have a replacement until 2027.

A 2009 constitutional amendment handcuffed the government by limiting deficit spending.

Whether to loosen the so-called debt brake will be a thorny issue for the German government installed after the country’s February 23 election.

Also read: Elections in Germany: What rise of right means for Europe’s largest economy

Shortage of skilled workers

From highly skilled IT workers to childcare providers, senior care workers, and hotel employees, German businesses are struggling to find qualified personnel.

Nearly 43 per cent of businesses reported they were unable to fill vacant positions in a study of 23,000 firms conducted by the German Chamber of Commerce and Industry.

For businesses with more than 1,000 employees, the response rate increased to 58 per cent.

Fewer German students are interested in STEM fields, meaning science, technology, engineering and mathematics.

An ageing population compounds the problem, as does a shortage of affordable child care that keeps many women working part-time or not at all.

Bureaucratic hurdles pose an obstacle to employing high-skill immigrants, though a law passed in 2020 and strengthened in 2023 aims to ease the process.

Too much bureaucracy

Economists and businesses in Germany claim that excessive paperwork and lengthy approval processes hurt the economy.

It may take years to obtain a wind turbine construction permit.

A few other examples, among dozens raised by German business groups: Companies that install solar panels must register with both their local utility and government regulators, even if the utility may forward the information to the government.

Restaurants have to log refrigerator temperatures by hand and keep hard copies of the records for a month even if the data has been stored digitally.

A law requiring companies to certify that their suppliers are obeying environmental and labour standards went beyond EU requirements, putting a heavier burden on German companies than their European competitors.

With inputs from The Associated Press