The Journal. - Germany's Economy Is Broken. There's No Plan B.

Episode Date: February 21, 2025

For decades, Germany has relied on manufacturing and exports – a model that made it the world’s third largest economy. But that model is breaking down, and the country’s leaders are offering few alternatives in the upcoming election. WSJ’s Tom Fairless and Bertrand Benoit discuss Germany’s downturn and what can be done about it. Further Reading:  - Germany’s Economic Model Is Broken, and No One Has a Plan B  - Why Germany’s Confidence Is Shattered and Its Economy Is Kaput  Further Listening:  - Trump 2.0: Shaking Up Europe  - Germany’s Difficult Breakup with Russian Energy  Learn more about your ad choices. Visit megaphone.fm/adchoices

For decades, Germany has been known as the king of luxury cars. These luxury cars are at the heart of Germany's economy, which is the third largest in the world. Over decades, Germany developed an economic model based on manufacturing and exporting products like these, and it turned the country into a global powerhouse. But that model, which has been so effective for years, is on the verge of falling apart. Our colleague Tom Fairless covers the German economy. which has been so effective for years, is on the verge of falling apart. Our colleague Tom Ferlis covers the German economy.

The business model that Germany has used to get rich since World War II, it was based on exporting to the world, and that model has broken down. Since 2018, there's really been a steady downward trend in manufacturing, and the economy now, on the back of that, has contracted for two years in a row. And no one really seems to know what to do next. Unless there's a turnaround, the fallout will reach far beyond the country's borders. It's central to Europe's economy and especially

to Europe's big manufacturing sector. And it's deeply intertwined with other countries like Italy and Eastern European countries like the Czech Republic. So if Germany sneezes, Europe catches a cold. Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Friday, February 21st. Coming up on the show, Germany's economic model is cracking

and there's no plan B. You hear that? Ugh, paid. And done. That's the sound of bills being paid on time. But with the BMO Eclipse Rise Visa Card, paying your bills could sound like this. Earn rewards for paying your bill in full and on time each month. Rise to rewards with the BMO Eclipse Rise Visa Card. Terms and conditions apply.

Last December, Tom took a reporting trip to a city in the south of Germany called Ingolstadt. It's got this beautiful old town at this pristine white castle. When I was there, there was an ice rink, a seasonal ice rink in front of the castle. There were Christmas markets all around town. It's a prosperous town. Like many other cities in Germany, Ingolstadt relies on just one company. In this case, it's the luxury car manufacturer, Audi. So Audi has about 40,000 employees in town,

and a lot of the rest are car suppliers or providing services that cater to the Audi workers, hotels, restaurants, that kind of thing. So it's really centered on this one company. So it's kind of a company town. It's kind of a company town. It's kind of a company town. Ingolstadt's fortunes have been tied to Audi for 75 years. In the 60s, the company was acquired by Volkswagen, and since then, most of Audi's cars have been exported.

Nearly 90% of Audis are sold outside of Germany, and its biggest foreign market for many years has been China. How reliant was Audi, how reliant were they on exports to China? It was a big chunk of their profits. It was the fast growing market. But over time, China has stopped turning to Germany for as many products.

China has become a much more problematic trading partner. It's moved from being this enormous source of demand that was bikes snapping up German cars and German machinery for its factories. Now it doesn't need it. It doesn't really need German goods as much. It can produce all that itself. Not only is China producing its own cars,

it's exporting them, making it a direct competitor to Germany. In 2022, China's auto exports soared past Germany's. Now, with its dominance in electric vehicles, China seems positioned to stay ahead. So China has figured out how to produce cars at high quality and very cheaply. And it's essentially flooding global markets with these cars and other products too. You know, the German manufacturers all around the world are facing low cost Chinese competition. Germany's also facing other issues that are squeezing the auto industry, in particular, high energy costs.

With the war in Ukraine, the gas has been cut off from Russia. So it's really just causing problems and distorting the European market. And this Texas based chemicals manufacturer who has operations in Germany, told me he can pay 10 times or more as much for energy in Germany as he pays in Texas. So that's a real, that's a real problem for the industry. Right. So energy costs are high, which is being passed on to the manufacturers? Yeah, exactly. I think the basic industries like chemicals and metals and things, they take up a large amount of energy and then all that goes into the final cost of the car. So it's making them seriously less competitive because of these high energy costs.

Audi has been a casualty of these shifts. The company reported a 91% decline in operating profits for its third quarter of 2024. It's been cutting thousands of jobs across Germany. This downturn at Audi has had a ripple effect on Ingolstadt. Audi, through its parent company, has historically been an important source of tax revenue and business for the town. Now, that's changed. I spoke to, for instance, a hotel owner whose revenues are down about 10% since 2019. She used to get a stream of business guests coming to Audi and that's dried up. And there aren't the big conventions in town, the auto conventions they used to have.

And I spoke to a carpenter, many of his clients are working at Audi and he sees that the work is starting to dry up, especially for sort of less experienced carpenters. What does that mean for the town itself? So I spoke to the mayor and he is in a bit of a bind because Audi used to provide quite a big chunk of his budget. That has dried up completely, I understand,

in the last, for over a year. So he suddenly has a big hole in his budget and he's having to start making cuts, having to, at the moment they're quite small, but he's increasing prices start making cuts. At the moment they're quite small but he's you know increasing prices for museums and car parking spaces and thinking about deeper cuts and seems like that money has now gone for the foreseeable future and now they're facing tough decisions. It was a boom town for a long time, and suddenly it's running to a wall and it's not sure

what the next move is going to be. And when you talk to the residents and the businesses, they're all talking about Detroit. That's the sort of fear in their minds that it's going to become the next Detroit. At the moment, it couldn't really be more different. It's this sort of still prosperous town, but you get a sense that things are starting to crack. — Audi declined to comment. There are more challenges for Germany's manufacturers on the horizon.

At a press conference this week, President Trump talked about potential tariffs on auto imports into the U.S. — Mr. President, have you decided specifically what the auto tariff rate should be? Yeah, I probably will tell you that on April 2nd, but it'll be in the neighborhood of 25%. 25% would be a massive increase from the status quo. At the moment, the tariff rate on cars is 2.5%. The U.S. is incredibly important to German manufacturers. And so any tariffs that President Trump

would impose on Germany would be a problem. And that's another concern that you hear among local businesses, that President Trump's tariffs could bring a new wave of crisis into these regions. And further exacerbate what's already going on. Yeah, exactly. So yeah, you see the unemployment rate creeping up. Trump's tariffs could bring a new wave of crisis into these regions. And further exacerbate what's already going on. Yeah, exactly. So yeah, you see the unemployment rate creeping up.

You see business insolvencies arising. The retail sales are poor. The Christmas season, I think, was quite poor. And Germans are saving more and more of their income. I think they're nervous about what's ahead. They're fearful about the future. they're fearful about losing their jobs. That fear may come into play this weekend when the country heads towards a big national election.

Germany stands at a defining moment. German Chancellor Olaf Scholz is on the verge of a historic electoral collapse. Europe's largest economy stands at a turning point. Could a new leader keep Germany's problems from getting worse? That's next. There's so many things I want to do and see. Like redoing the basement without having to do it all myself. Or doing absolutely nothing. With a spectacular waterfall view, of course. So I'm starting here, investing

with RBC. When it comes to reaching your goals, personalized advice and performance matter. And now you can get $300 when you invest with RBC. Offer ends March 3rd, 2025. Terms and conditions apply. Invest with RBC. Offer ends March 3rd, 2025. Terms and conditions apply. Invest with RBC today. This is Carry the Fire. I'm your host, Lisa LaFlamme. Carry the Fire, a podcast by the Princess Margaret Cancer Foundation featuring inspiring personal stories

about what happens when world-leading doctors, nurses, researchers, and their patients come together to ignite breakthroughs. Carry the Fire launches Monday, January 27th, wherever you get your podcasts. Germans head to the polls this weekend to cast their votes for parliament. ——————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————— These two years of recession in a row, it's not really something that German voters have any experience of. It's not something that they've lived through in the past. And the economy has been gaining in significance for voters for the past year. It's really been the dominant topic. Voters are unhappy with the current government under Chancellor Olaf Scholz. His efforts to turn around the economy haven't worked.

Scholz has been making only incremental tweaks, when many economists say what the country needs are big changes. So the thinking among most economists is that there are some real structural challenges that the country is facing. there are some real structural challenges that the country is facing. Germany is used to selling its goods to the entire world,

but the entire world is not as interested in buying Germany's goods as it used to be. With less demand for German exports, one solution, some economists say, is more government investment. What does Germany need to be investing in? In everything. It really is across the board. It's corporate investment. It's research and development. It's investment in factories and so on.

But it's also state investment. It's also infrastructure investment. Infrastructure is very decrepit in Germany. Transport infrastructure, the trains famously no longer run on time. The power grid is outdated. It's struggling to transport power from A to B, you know, from where it's produced to where it's consumed. The education system is not performing. The government is largely analog and needs to be digitized. It's very inefficient. So a lot of this, there's a lot of catching up to do.

But these kinds of investments are not what the candidates are talking about. Instead, when it comes to Germany's economic model, even the upstart anti-establishment parties are sticking to traditional economic policies. One of the contenders is Alice Weidel. She represents AfD, a populist right-wing party that's been associated with neo-Nazis. And her proposals about how to fix the economy are focused on smaller modifications, meant to revitalize Germany's export model. So she wants a smaller state, lower taxes, deregulation.

She wants lower costs for companies. And but she has also other ideas that are more controversial and that are more unique to the FDA. She wants Germany to leave the EU, the European Union, and give it the euro, return to its own currency. According to polls, the AfD is expected to gain a bunch of parliament seats in this weekend's election, though not enough for Vidal to end up running the government. That person is likely to be Friedrich Merz, the head of the CDU, a conservative center-right party. It was the party of Angela Merkel.

Bertrand recently interviewed Merz. Based on your conversation, what was your impression of his views on the economy? He is thinking, if you want to sum it up, it's that the German economic model is not entirely broken and doesn't need to be reinvented from scratch. It can be fixed through making it more competitive, in decreasing the costs that are piling on business,

decreasing taxes, red tape, and so on. How hard would it be to make a big change? Like, if the economy is so dependent on manufacturing and exports, and that's starting to not really make sense anymore. Why wouldn't the candidates want to do something else completely? So the main challenge, the way I see it, is that you need to do two things that are a little bit in conflict with one another. On the one hand, most economists think you need to apply some of the recipes that Mertz

is calling for. You need to remove some of the recipes that Maertz is calling for. You need to remove some of the shackles on business. And for that, you need to make the state smaller. The state needs to retreat in terms of taxes. At the same time, and that's the contradiction, you need probably to make the state also bigger. And the reason is because there is a lack of investment in Germany. And if Germany is going to generate more of its growth internally, that is not just through

exports, it will need to spend more of its money at home. And that's something that's going to be very difficult for the parties that will be in the next government or that are likely to be in the next government to agree on. So what does that mean for Germany? Sounds like the economy is already struggling. You know, the voters are starting to see signs of that in their day-to-day lives. What happens?

you know, the voters are starting to see signs of that in their day-to-day lives. What happens? So, there's something tragic to the situation of Germany because it is a country that has been selling its products around the world that is quite unique in that way. If in the future Germany has to rely more on its own growth, on consumption and investment at home. Many of these businesses think that the market is just going to be too small for them to survive. There is some concern here that at the end of the day, even if Germany has a more balanced economic model,

relies a little bit less on exports and a little bit less on manufacturing, a bit more on consumption and services and domestic growth. It's just not going to be as wealthy as it has been so far. And if that is what happens, what could that mean for Europe, for the EU and for the rest of the world? Well, it could mean a loss of economic might and influence for Europe. If Germany is not doing well, you know, German companies have manufacturing all across the EU, not just in Germany.

And if jobs start getting lost, that's also going to affect neighboring countries. So what's bad for Germany is not going to be good for Europe. That's all for today, Friday, February 21st. The Journal is a co-production of Spotify and The Wall Street Journal. The show is made by Catherine Brewer, Pia Gadkari, Rachel Humphreys, Sophie Coddner, Ryan Knutson, Matt Kwong, Kate Linebaugh, Colin McNulty,

Annie Minoff, Laura Morris, Enrique Perez de la Rosa, Sarah Platt, Alessandra Rizzo, Alan Rodriguez-Espinosa, Heather Rogers, Piers Singie, Jeevika Verma, Lisa Wang, Katherine Whalen, Tatiana Zamis, and me, Jessica Mendoza. With help from Trina Menino. Our engineers are Griffin Tanner, Nathan Singapok, and Peter Leonard. Our theme music is by So Wiley. Additional music this week by Katherine Anderson, Peter Leonard, Bobby Lord, Nathan Singapok, and Blue Dot Sessions. Fact-checking this week by Mary Mathis and Kate Gallagher.

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