How Russia, China, And The 'debt Brake' Are Keeping Germany's Economy Stuck In The Slow Lane As Voters Go To The Polls

Germany's weak economy is a big issue for voters in Sunday's elections.

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• The ailing German economy is a key concern for voters in Sunday's elections.
• Germany's reliance on Russian gas, rising Chinese competition, and lack of spending have hit growth.
• The government easing its "debt brake" and boosting spending could revive its economy, analysts say.

Germany's federal election this Sunday will be the latest European political race to pit establishment parties against populist upstarts, most notably the Christian Democratic Union (CDU) and its coalition partners against the Alternative für Deutschland (AFD), which counts Elon Musk among its fans.

The beleaguered German economy is bound to be a central issue. Friedrich Merz, the CDU leader expected to become chancellor, has campaigned on cutting taxes, red tape, and energy costs to deliver an economic renaissance.

Here's how Germany got to this point, the problems plaguing its economy — and how they could be solved.

Rise and decline

Germany rebuilt its economy after World War II to become a manufacturing powerhouse, building and exporting goods such as industrial machinery and high-end cars.

It has just under 84 million people and ranks as the world's third-largest economy, with a GDP of $4.7 trillion. That's behind the US at $29.2 trillion and China at $18.3 trillion, according to International Monetary Fund estimates for 2024. Germany's economy is bigger than of Japan at $4.1 trillion, the United Kingdom at $3.6 trillion, and France at $3.2 trillion.

However, the German economy contracted in 2023 and 2024 while all those peers grew, with the exception of Japan last year, and is set to lag behind its peers once again in 2025. The IMF forecasts 0.3% growth in real GDP this year, compared to 2.7% for the US, 4.6% for China, 1.1% for Japan, 1.6% for the UK, and 0.8% for France.

A key driver of Germany's slowdown is weakness in its core economic activities. Industrial output has tanked more than 10% since 2019, and about 350,000 manufacturing jobs have been lost over the same period, government data shows.

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Auto giant Volkswagen, chemicals behemoth BASF, and steel and industrial goods titan Thyssenkrupp have shed more than $50 billion or about a third of their market value in the past five years, as investors have soured on German industry.

Myriad signs of economic decline are "fueling the sense that Germany's best days are behind it," Stefan Koopman, a senior macro strategist at Rabobank, said in a report this week.

The far-right AfD "capitalizes on this anxiety, blending restorationist rhetoric with extremist elements" and "channels economic and migration concerns into a broader narrative of national decline," he added.

In December Elon Musk said on X that "only the AfD can save Germany" — and has since posted about the party dozens of times, as well as interviewing its leader, Alice Weidel, on his social media platform.

Eggs in Russia's basket

Germany's past energy policies are key to explaining its economic pains.

For decades, Europe's biggest economy relied on cheap Russian gas to manufacture everything from steel to chemicals for export. However, Russia's invasion of Ukraine in early 2022 caused energy prices to soar.

German officials also moved to punish Russia by reducing imports of its oil and depending on more expensive liquefied natural gas (LNG) and renewable sources instead, which eroded their country's appeal to some foreign businesses.

Moreover, authorities began shuttering the country's nuclear power plants in 2011 after the Fukushima disaster in Japan, closing the final three in 2023. That decision made Germany even more reliant on Russian energy, making the weaning process even more painful.

From customer to competitor

Until about 10 years ago, German manufacturers saw China as a huge export market.

But since then, China has become much more of a competitor to Germany as it has ramped up exports of rival products including steel, machinery, solar panels, and electric vehicles.

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Cheaper production costs and looser regulations in China have also led numerous German businesses to shift at least part of their operations there.

Germany has topped the UN's ranking of industrial competitiveness for 20 consecutive years, but China has jumped from 33rd to second place in the rankings over the same period, underscoring the threat it poses.

Frugal to a fault

German authorities have underinvested in areas such as energy, education, security, and infrastructure for years, which has weighed on national productivity and competitiveness.

A key reason is a constitutional "debt brake," imposed after the 2008 financial crisis, which limits the federal government's deficit to 0.35% of GDP. For comparison, the US deficit exceeded 6% last year.

"This policy is a handbrake on Germany's ability to support its economy and incongruous with policy in the rest of the world," Alison Savas, the investment director of Antipodes Partners, said in an emailed note.

Relaxing its spending constraints would allow Germany to stimulate its economy, meet the "pressing need" to invest in its public infrastructure, and satisfy likely demands for greater defense spending from the Trump administration, she added.

Nobel-winning economist Paul Krugman wrote on Substack that Germany's "obsession" with controlling its debt has meant it's gone from "role model to cautionary tale — a warning about the costs of rigid thinking."

Diagnosing the problem

Germany faces other challenges, including a shrinking workforce and aging population, a shortage of skilled workers, a lack of affordable childcare, and frustrating levels of bureaucracy.

Its myriad issues are "symptoms of a deeper malaise: chronically weak domestic demand," Koopman said in his report. The German economy "parasitized on foreign demand to sustain its own existence," he continued, adding that it's been shored up for decades by other countries' consumption, investment, and spending on security and stability.

The remedy might be large-scale government spending on everything from energy and defense to education, infrastructure, and technology, Koopman added.

"Cutting taxes, cutting red tape and/or or cutting costs won't be enough to cut it," he said, warning that if Germany fails to ramp up its spending, it "risks becoming a 'has been' in the global economy."