Is the German economy in crisis?

Monday 12 January 2026

Germany has long been regarded as the economic anchor of Europe: a manufacturing powerhouse, a disciplined fiscal actor and the principal guarantor of stability within the European Union. The question of whether her economy is now in crisis is therefore not merely a domestic concern but one with continental and global ramifications. The answer depends upon how one defines crisis. Germany is not facing imminent collapse, nor is she on the brink of social breakdown. Yet she is experiencing a structural malaise that marks a decisive break with the assumptions underpinning her post-Cold War prosperity, and the consequences of that shift are profound.

For three decades after reunification, Germany’s economic model rested upon a stable triangle. The first leg was export-led manufacturing, particularly in high-quality industrial goods such as automobiles, machinery and chemicals. The second was access to abundant and inexpensive energy, increasingly sourced from Russia. The third was a global trading environment characterised by relative openness, with China emerging as both a vast market and a critical node in German supply chains. All three legs have weakened simultaneously.

The most visible symptom of economic distress is stagnation. Germany has flirted with recession repeatedly since 2023, recording weak or negative growth while many of her European peers have performed modestly better. Industrial output has declined, investment has softened and productivity growth has disappointed. This is not a cyclical downturn that can be cured with a temporary stimulus; it reflects deeper structural problems that have accumulated over years.

Energy lies at the heart of the matter. The abrupt severance of cheap Russian gas following Moscow’s full-scale invasion of Ukraine shattered a central assumption of German industrial competitiveness. While the energy shock has been mitigated through diversification, liquefied natural gas imports and conservation, prices remain structurally higher than during the era of pipelines from Siberia. Energy-intensive industries such as chemicals and metallurgy have either reduced production or quietly explored relocation abroad. This has fed anxieties about deindustrialisation, particularly in regions already sensitive to economic decline.

At the same time, Germany’s flagship industries face mounting competitive pressure. The automobile sector, long the jewel in the crown, has been slow to adapt to the global shift towards electric vehicles. Chinese manufacturers now offer cheaper and increasingly sophisticated alternatives, while American firms benefit from generous state subsidies and a more permissive industrial policy. German firms are caught between rising costs at home and fierce competition abroad, with limited room for manoeuvre.

Demography compounds these pressures. Germany is ageing rapidly, and the retirement of the baby-boomer generation is beginning to shrink the labour force. Immigration has partially offset this trend, but skills mismatches remain acute, particularly in engineering, digital services and healthcare. Without substantial gains in productivity or a sustained inflow of skilled workers, growth potential will continue to erode.

Fiscal policy has further constrained the response. The constitutional ‘debt brake’, long a symbol of German prudence, has limited the government’s ability to invest aggressively in infrastructure, digitalisation and defence. While this restraint once inspired confidence across Europe, it now appears increasingly anachronistic in a world defined by geopolitical rivalry and large-scale state intervention. Legal disputes and political wrangling over budgetary flexibility have created an impression of drift at precisely the moment when strategic clarity is required.

Domestically, the consequences are already visible. Economic uncertainty has fed political fragmentation, strengthening parties at both ends of the spectrum. The social contract that underpinned Germany’s post-war success, promising stability, gradual improvement and social cohesion, feels less secure. Regional disparities, particularly between former East and West, have sharpened again, with perceptions that the costs of transformation fall unevenly. While Germany remains a wealthy society with strong institutions, the sense of inexorable progress has faded.

Geopolitically, Germany’s economic malaise has implications far beyond her borders. Within the European Union, her reduced fiscal and political confidence weakens collective leadership. Germany has traditionally acted as the indispensable broker, reconciling northern and southern interests and underwriting compromise with economic credibility. A Germany preoccupied with domestic stagnation is less able to play that role, complicating efforts to deepen European integration or to mount ambitious common projects.

Relations with the United States are also affected. Washington increasingly expects its European allies to shoulder greater economic and military responsibility. Germany’s struggles to meet defence spending commitments and to revitalise her industrial base undermine her credibility as a strategic partner, even as American policy becomes more explicitly transactional.

Towards China, economic dependence has become a strategic liability. German firms remain deeply exposed to the Chinese market, yet political relations are cooling and the risks of coercion or sudden disruption are more widely acknowledged. Decoupling is neither feasible nor desirable, but selective derisking carries economic costs that Germany is ill-prepared to absorb in a period of stagnation.

For Ukraine, Germany’s economic health is of particular significance. Berlin’s ability to provide sustained military, financial and reconstruction assistance depends upon fiscal space and political consensus. A Germany mired in economic anxiety may become more cautious, even if her rhetorical commitment to Ukraine’s defence remains firm. Conversely a successful reorientation of the German economy towards resilience and strategic autonomy would strengthen Europe’s capacity to support Kyiv over the long term.

Is Germany therefore in crisis? If crisis is understood as an acute breakdown, the answer is no. If it denotes a moment when an old model has failed and a new one has yet to take shape, then the answer is unequivocally yes. Germany stands at a crossroads. She can cling to habits formed in a vanished era of cheap energy, globalisation without friction and geopolitical complacency, or she can undertake the painful adjustments required by a harsher world.

The stakes are high. Germany’s choices will shape not only her own prosperity but the future balance of power in Europe. In a continent confronted by war, strategic rivalry and economic fragmentation, a stagnant Germany is a vulnerability. A reformed and confident Germany, by contrast, remains one of Europe’s greatest assets. Whether she can complete that transformation in time is one of the central questions of the decade ahead.