Four years have passed, Germany has somewhat reduced its dependence on Russian oil and gas. But with the current unemployment rate of nearly 3 million people and large losses in key industries such as automobile manufacturing due to the trade war devastating the manufacturing industry, Europe's largest economy is facing an identity crisis.
In a letter to alliance partners at the Bundestag last week, German Chancellor Friedrich Merz outlined immediate challenges, warning that this is a critical time for many industries.
The situation of the German industry is very critical in some places. Huge industrial corporations as well as a significant number of small and medium-sized enterprises are facing major challenges, in many companies, jobs are being lost" - Prime Minister Friedrich Merz said.
Mr. Merz warned that Germany's productivity growth "is no longer good enough".
The German Chancellor pointed out that "changes in global economic conditions", as well as high labor costs and cumbersome administrative procedures, are hindering growth.
Recent data shows that this weakness will continue in the near future.
Although Berlin has spent heavily on defense and infrastructure, the country's central bank lowered Germany's growth forecast for 2026 to only 0.6%. The Ifo Research Institute predicts a similar growth rate, only 0.8%.
There are also more optimistic forecasts, with signs that Germany's 500 billion euro economic stimulus package is beginning to bring results.
Holger Schmieding - chief economist at Berenberg Bank - noted that orders in Germany are starting to increase although exports are still weak. Berenberg also forecasts that the German economy will grow modestly by 0.7% this year, with government spending accounting for more than half of this increase.
Mr. Schmieding believes that growth will be stronger, reaching 1.3% in 2027 when the stimulus package reaches its maximum effect and consumers as well as businesses begin to spend more.
However, he said that Germany's constitutional amendment, allowing unlimited borrowing to spend on defense exceeding 1% of GDP, will not create a significant boost for growth.
Some companies will struggle to meet all new orders, from tanks, unmanned aerial vehicles to upgrading as many railway lines as possible, as the number of overdue orders increases," he said.
Germany is also dealing with another problem. The country's labor force is aging rapidly. The International Monetary Fund (IMF) recently warned that in the next 5 years, Germany's working-age population is on a downward trend more than any other economy in the G7 group, with nearly 30% of the current labor force expected to retire in 2036.
This not only creates challenges in balancing the budget but also exacerbates Germany's shortage of highly skilled workers.
