Germany is in big trouble

VW intends to close at least three plants in Germany. Germany has a huge problem. Germany is under pressure and Volkswagen workers are striking hard. Europe's largest economy has stagnated with no real growth in five years. Since 2019, they lost 272,000 jobs in its industrial sector, which accounts for nearly 5% of all jobs. The car industry is hardest hit, losing 10,000 jobs per month. And this fits into a broader picture of stagnating economic growth. But these last couple of years were particularly troubling. During three out of the last six years, their economy contracted, giving Germany the slowest economic growth of all G7 countries. But why? Porsche's profits have plunged by 95%. German industries are top of the line. For decades, Germany fueled growth across Europe. So why is Europe's strongest economy now struggling to keep up? This is Germany's economic nightmare with hindsight. Germany, once the beacon of European fiscal stability, is struggling. So across Europe and Western countries, we're seeing that same trend where rent, food, and energy prices have all surged, while wages have struggled to keep up. But in Germany, these last couple of years, they were particularly hard hit. Real wages have barely grown over the past decade. In the past five years, they have actually fallen. They are now roughly back to their 2021 level. Germany's economic model delivered decades of prosperity. But it was built for a different world. After Russia's invasion of Ukraine, the war in Iran, and rising tensions with China, that model is now under pressure. And they may need to change. That economic structure was built much more recently than you might expect. When East and West Germany reunited in 1990, it brought together two vastly different economies. West Germany's productivity was over $25,000 per person, which is more than twice that of East Germany, who had one of the least productive economies in Europe. Their economy was dominated by the public sector. Private companies accounted for just under 3% of all economic activity, compared to 85% in the West. The two regions differed greatly in every imaginable way, from unemployment to exports. And after reunification, one of the first gaps they sought to bridge were wages. Wages in East Germany were around 70% lower than in the West. And that kind of income inequality had to be evened out. They increased the wages of East German workers. But there was a trade-off. Germany was trying to integrate its economy into global markets. Suddenly having much higher labor costs meant that East German exports became less competitive. The 1990s were painful. Growth stalled, unemployment rose, and Germany was once again labeled the sick man of Europe. But beneath the surface, they were laying the foundations for a remarkable comeback. The Asian giant has now grown into one of the most important export markets for manufacturers from all over the world. China's industrial boom suddenly created huge demand. Germany started producing more cars, machinery, and chemicals for export. After German reunification, trade accounted for 40% of their GDP and this reached a peak of 89% in the early 2020s. And usually what happens when a country gets richer is that its industrial sector shrinks as factories make way for services. And this is in part because the cost of labor increases as a country gets richer. But Germany had another advantage to keep their production affordable. Before reunification, Germany had made a deal with Russia that became known as Pipes for Gas. West German companies supplied steel pipes and financing to build pipelines that would carry natural gas from Russian producer zones into Central Europe. And Germany became a key transit and consumption hub. This legacy gave united Germany cheap access to energy. It is much cheaper to import gas through a pipeline than by boat. Germany had the infrastructure and Russia was a steady and reliable supplier. They built even more pipelines in the early 2000s and they doubled down on this approach even when relations with Russia became more difficult. The German philosophy to foreign policy was to strengthen economic ties with potential adversaries like Russia and China. Hoping that integration would encourage stability and cooperation. The German economy was now a key driver of growth in Europe. This was built on increasing demand from China, cheap energy from Russia, and predictable global trade. And can you already see where this went wrong? So just quickly before I continue with the video, I want to thank today's sponsor. Do you ever receive emails like these? Sketchy offers? Newsletters you didn't subscribe to? And wait, I won a thousand dollars? You receive this kind of junk mail as well as robot calls. 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Their strength comes from world-class manufacturing, especially in cars and machinery, disciplined wages, and a deep integration into global trade. But this rests on three pillars that around 2019 all started to crack, beginning with the pandemic. COVID-19 has strained Europe's largest economy and experts say that Germany will see its economic output shrink dramatically. A unique characteristic of the German economy is that the industrial sector remained a large part of its economy when the country grew richer. In 2020, this made up 20% of Germany's economy and that's roughly double that of the UK or France. But the pandemic exposed how dependent the sector had become on international supply chains. Global demand initially collapsed and the industrial sector lost momentum. COVID pandemic has snarled global supply chains, causing massive backlogs and shortages that have some companies stockpiling goods in trailers and chartering private container ships. That's when Russia invaded Ukraine. In the past, Germany had responded to conflict with Russia by deepening economic ties. After Russia's annexation of Crimea, they doubled down on this approach and they substantially increased Russian imports of natural gas. At this time, Germany was already phasing out its own nuclear power plants and they were reducing its use of coal. Russian gas was still the cheapest and most reliable source of energy and this was hugely beneficial for Germany's industrial base. But after Russia's full-scale invasion of Ukraine, they shifted gears and they completely stopped importing Russian gas through these pipelines. And this had a tremendous ripple effect across the economy. Prices have been rising in Germany and across Europe. The latest data puts inflation in Europe's biggest economy at 5% year-on-year, the highest in 30 years. The demand for German cars and machines from abroad has dropped. Cheap Russian energy imports was one of the main structural advantages of the German economy and it had suddenly become one of its main structural weaknesses. But around the same time, another pillar of the foundation of Germany's economy started cracking. China's economic growth started to slow. This had been a key driver of growth during Germany's golden years in the early 2000s. But Germany lost nearly $10 billion worth of trade This was a wake-up call. The world was changing. Global demand was shifting and political alliances were being tested. Germany needed global markets to be stable and predictable. And the last thing that they could use at this moment was something or someone to test alliances further. The European Union charges us more than 10% tariffs and they have 20% VATs, much, much higher. And for these reasons, starting tomorrow, the United States will implement reciprocal tariffs on other nations. China is the fourth largest buyer of German exports, but the single largest is the United States. Trump's tariffs in his second term hit all German industries, but particularly metals and motor vehicles. But Trump's trade war with China affected Germany in some other surprising ways. U.S. tariffs on China are now in effect. We're putting a 50% tariff on above the tariffs that we put on. China began speeding up its transition to reduce dependence on countries that align with the United States. They strategically began scaling down imports from Germany and they absolutely killed it with their own car production. Their global market share of car production increased from 3.5% to 34% over the same time that Germany's market share dropped from 10% to 4%. This was a huge deal for Germany, who didn't just see that one of its biggest industries was losing demand, but it was now facing more competition. In Germany, the automotive industry is more than just an economic sector. It's part of their national identity. The same is true for advanced manufacturing. These industries represent engineering precision, export strength, and a longstanding belief in German excellence. As they come under pressure, it's not just an economic shift, it becomes a psychological one. At a time when debates over immigration, demographic decline, and the future are intensifying, this erosion adds to a growing sense of uncertainty. Germany once saw itself as the economic engine of Europe, but today that confidence is giving way to a more uneasy question. Where is the country heading? Ford Motor Company has plans to cut 4,000 jobs. About 3,000 of the layoffs will happen in Germany. The VW Group has reported a third quarter loss of more than a billion euros. Despite all these negative developments and the fact that Germany is currently going through a difficult economic phase, they still have huge industries. Take BASF, the world's largest chemical producer. It is headquartered in Germany and they employ over 100,000 people. Their annual revenue is in the tens of billions of euros. And even still, this only makes them the 10th largest company in Germany where sectors like industrial, energy, and particularly automotive dominate. Their largest company, Volkswagen, accounts by itself for more than 7% of Germany's total economic output. It is all relative, and Germany's economy is by no means on the verge of collapse, but they have been particularly hard hit by crises such as the pandemic and the war in Ukraine. And the reason for this is because of how their economy is structured. They hate Germany where it hurt them the most. And the result is that consumer prices have increased faster than any time since recording began in 1956. And that is huge. But crises like these don't just expose weakness, they force change. Germany has been here before. In the 1990s, they were written off as the sick man of Europe. Yet within a decade, they rebuilt their competitiveness and they became one of the world's strongest export economies. The challenge today is that cheap energy is gone and global demand has become less reliable. Trade has become politicized and competition is no longer about quality, but about scale, speed, and technological leadership. Germany faces a choice. It can try to preserve the model that made it successful in previous decades, or they can adapt to a world that looks very different from the one that it was built in. Power dynamics are shifting. Alliances redefining. They need to rethink their energy policy, perhaps by going nuclear again. They can invest more aggressively in new industries. They must redefine what German economic strength looks like in the 21st century. The success of Germany over the next couple of years will depend on how fast it can reinvent itself to keep up. How they respond to this shift will not just define its economy, but its role in Europe and the world.