By Hilary Schmidt, International Banker
According to the head of the Siemens tax service, Christian Kezer (Kaeser), investing in Germany is becoming pointless. “In fact, there is nothing that would speak in favour of investing in Germany. Therefore, our last investments were mainly made abroad,” Kezer admitted whilst participating in an open meeting of the finance committee of the Bundestag, as quoted in local tabloid news outlet Bild. And truth be told, the tech conglomerate—one of the country’s largest, with annual revenue for 2024 of some $82.4 billion—joins a growing wave of firms struggling to prosper within Germany. As such, the exodus by companies from Europe’s biggest economy is ushering in an era of deindustrialisation that many fear will take years to resolve.
Gitta Connemann agreed with Kezer’s position during the meeting. “Unfortunately, the analysis is correct. Germany still has a unique foundation—3.3 million enterprises, of which 99 percent are small and medium-sized companies,” the German politician and chairman of the Christian Democratic Union of Germany’s (CDU’s) Committee on Small and Medium-Sized Enterprises said. “They used to go on the overtaking lane, but today they got stuck on the side of the road. They are hampered by huge energy prices, too-high taxes and contributions, paralysing bureaucracy and hostility to innovation.”
Such views are now commonplace within Germany. For one, its manufacturing output has been shrinking since 2017, with this decline only gathering pace in the face of waning competitiveness. Among the key issues contributing to this dire situation, exorbitant energy costs faced by manufacturers across the country have been the most impactful, as highly questionable domestic energy policies and unfavourable changes in the global energy-trading infrastructure have left companies facing massive energy bills that have seriously hamstrung their capacity to remain profitable.
“The confidence of the German economy in energy policy has been severely damaged,” DIHK’s (the German Chamber of Commerce and Industry’s) deputy general manager, Achim Dercks, stated in the 2024 Energy Transition Barometer survey of some 3,284 companies based in Germany, published by DIHK in August 2024. Dercks also confirmed that the country is commencing a major process of deindustrialisation. Indeed, the report noted that 51 percent of companies based in Germany with at least 500 employees, as well as 45 percent of companies bearing high power costs, are either considering moving their operations out of the country and reducing domestic production or have already begun doing so.
Such figures are also, respectively, 8 percent and 7 percent higher than those in the same report published in 2023, thus reflecting the acuteness of the problems faced by German industry more recently. The companies cited the uncertain policy future in Germany as a key reason for their changing positions on domestic production, as they are increasingly uncompetitive in international markets and have less capital to invest in research and development (R&D) to improve their market positioning.
The deindustrialisation problem is not solely confined to Germany, moreover. A separate survey carried out by the European Investment Bank (EIB) showed that the surge in energy costs in 2023 was the biggest factor preventing firms in the wider eurozone from making long-term investment decisions—a dramatic change from 2019, when it was placed in fifth position. “We are facing a very worrying situation,” a senior European trade union official told EU-focused news outlet Euractiv. “The lack of investment we are seeing today is already having dramatic implications for working communities,” he added, noting the sizable drop in investment in buildings and equipment. “Factories are closing, and jobs are being cut in the very sectors that lifted Europe to where it is today.”
With the last few years experiencing rising energy prices, rising interest rates and Germany cutting itself off from Russia—its main supplier of oil and gas—the country has been forced to turn to costlier energy sources, such as Norway, the Netherlands and Belgium. Indeed, Germany was Europe’s chief importer of Russian gas for decades prior to the outbreak of the war in Ukraine in February 2022. But a slew of economic sanctions levied by the US- and EU-led West against Moscow, along with the September 2022 sabotage of the Nord Stream pipelines that transported natural gas from Russia to Germany across the Baltic Sea, has crippled this pivotal source of cheap, reliable energy for the foreseeable future.
“The ‘mysterious explosions’ that put the Nordstream pipelines out of commission…ensured that Germany would never again be dependent economically on Russia,” Leandros Fischer, assistant professor for international studies at Aalborg University in Denmark and former member of German left-wing party Die Linke, explained in a November 24 article for political media outlet Counterfire. “Yet the skyrocketing of the stock of Rheinmetall—the maker of the Leopard battle tank—cannot offset the detrimental effect of sanctions against Russia, which have seen the collapse of mid-sized industries in the past two years, especially in eastern Germany. The recent announcement by Volkswagen compounds an already desperate situation.”
Indeed, Volkswagen represents perhaps the highest-profile casualty of this downtrend in domestic production. In late October, the renowned German automobile manufacturer announced plans to shut at least three factories in Germany, reduce its headcount by tens of thousands and dramatically cut capacity at many of its remaining plants operating in the country. “Management is absolutely serious about all this. This is not sabre-rattling in the collective bargaining round,” the company’s Works Council head, Daniela Cavallo, confirmed. “This is the plan of Germany’s largest industrial group to start the selloff in its home country of Germany.”
Volkswagen’s travails are emblematic of the broader German automotive industry, which finds itself in deep trouble amid shifting market preferences in favour of electric vehicles (EVs). While Tesla’s EVs, such as the Model Y, are flying off the shelves across major global markets, including China, Europe and the United States, Germany’s EVs continue to trail far behind the competition. “After years of ignoring overcapacity and slumping competitiveness, the German auto giant’s moves are likely to kick off a broader reckoning in the industry,” Bloomberg reported in September 2024 in reference to Volkswagen. “The reasons are clear: Europe’s efforts to compete with Chinese rivals and Tesla Inc. in electric cars are faltering,”
“Despite the motivation of our employees, we have arrived at a point where we can’t export truck tires from Germany at competitive prices,” Maria Röttger, head of Europe North for Michelin, explained to Bloomberg in February 2024, not long after the French tiremaker announced the closures of two of its German factories and the downsizing of a third plant by the end of 2025, which will impact 1,500 jobs. “If Germany can’t export competitively in the international context, the country loses one of its biggest strengths.”
According to German state media outlet DW (Deutsche Welle), German automakers have shed about 46,000 jobs since 2019, while the president of the German Association of the Automotive Industry (VDA), Hildegard Müller, is expecting that the shift to EVs will cost the German automotive industry an additional 140,000 jobs over the next decade. “Transforming our industry is a monumental task,” Müller told Reuters in late October. “It is crucial that a political framework supports and accompanies this transformation.”
Indeed, many consider the failed policies of the German government as being responsible for the quagmire in which the manufacturing sector finds itself. The German Association of the Automotive Industry has blamed policymakers in part, citing the surprise termination of EV subsidies in December 2023 by the Federal Chancellor Olaf Scholz-led government, alongside inadequate investments in charging infrastructure throughout the country, as “dampening sales figures and contributing to the overall situation”.
The implementation of more supportive policies as soon as possible is increasingly regarded as the most feasible solution for reversing Germany’s deindustrialisation woes. As Dercks also noted in the 2024 Energy Transition Barometer survey, “We are still at the beginning of this process, and politicians can take countermeasures. But the clock is ticking.”
Investment in German manufacturing is also sorely needed. A recent study published by the Federation of German Industries (BDI), which represents 37 German industry associations, 100,000 businesses and eight million employees, found that Germany needs additional private and public investment of some €1.4 trillion by 2030 to remain globally competitive. Around 20 percent of industrial value creation in Germany is at risk, the report also noted, citing higher energy prices, labour shortages, excessive bureaucracy, deteriorating infrastructure, lack of investment, slow digitalisation and sluggish expansion of the energy grid as core long-term challenges facing the country’s industrial performance.
“Without decisive countermeasures, Germany faces a scenario of creeping deindustrialisation, with energy-intensive industrial sectors gradually moving their production elsewhere, the automotive industry losing a significant share of the global electric vehicle market, and German companies lagging in the development of future technologies,” BDI’s president, Siegfried Russwurm, asserted when issuing the report. Russwurm has thus urged Germany’s politicians to take a “big leap forward” to restore Germany’s once-celebrated status as a global industrial powerhouse.
As we commence 2025, however, Germany remains stuck in recession, having registered negative annual gross domestic product (GDP) growth for five consecutive quarters. According to official figures from the Federal Statistical Office of Germany (Destatis), Germany’s GDP fell by 0.2 percent in 2024, extending 2023’s 0.3-percent decline into further negative territory. The Kiel Institute for the World Economy (IfW Kiel) has also lowered its GDP-growth forecast for 2025 to 0.8 percent from its previous 1.4 percent.
Such a lacklustre outlook suggests that Germany’s economy will continue to underperform over the coming years, with Maria Röttger observing that the fading industrial competitiveness threatens to send the country into a downward spiral. “There’s not a lot of hope, if I’m honest,” Stefan Klebert, chief executive officer of GEA Group AG (a supplier of manufacturing machinery since the 19th century), told Bloomberg. “I am really uncertain that we can halt this trend. Many things would have to change very quickly.”