The German Economy Is at a Crossroads

These days in Germany, complaints are again beginning to mount that the country, once “export world champion”, is losing its international competitiveness. As was the case in the early 2000s, there is talk of the “sick man of Europe”, of looming deindustrialization, and of necessary reforms to improve “domestic conditions”.

As a matter of fact, the German economy has been in recession since the third quarter of 2022, and Germany is the only major industrialized country that the International Monetary Fund predicted would have its GDP shrink in 2023. The issue here is thus not one of cyclical crises that periodically affect the global market, but a structural crisis within the export-driven mode of capitalist development in Germany. And yet, the approaches that various factions within the German establishment have chosen to deal with this crisis entirely neglect social issues and risk exacerbating the situation.

The Export-Driven Model in Trouble

The proportion of goods produced in Germany that are exported has steadily grown in recent decades, surpassing 50 percent of GDP for the first time in 2022.[1] This is an unusually high export ratio for a relatively large industrialized country with a developed domestic market.

Germany has also consistently recorded high current account surpluses over the past 20 years. This means that Germany consistently produces more than it consumes, exports more than it imports, and saves more than it invests. The current account surplus peaked at 8.6 percent of the GDP in 2015–16 and maintained a level of 4.2 percent in 2022, despite the drastic increase in costs for fossil fuel imports.

Germany’s high export ratio and current account surpluses are normally seen as strengths in domestic public discourse. Indeed, German capitalism does maintain some competitive advantages on the global stage. Production is still relatively diversified, with numerous interconnected sectors. The percentage of people employed in the industrial sector is higher than average, and one of its particular strengths lies in machinery and plant engineering.

Whoever controls the production of the means of production of the means of production also sets the pace for the enhancement of labour productivity — a critical factor in determining a country’s position within the hierarchical international division of labour. Traditionally, only a few capitalist centres have had such a sophisticated mechanical engineering sector.

The expertise of workers, technicians, and engineers also ensures that German products are of high quality and that incremental innovations contributing to competitiveness will be made. Institutions such as dual vocational training, co-determination at the plant and company levels, and routine collective bargaining are pivotal for keeping employees engaged. These factors determine the incomes of various social classes and the extent to which wealth is redistributed. As such, it forms the basis for reformist politics.

German wage earners have been subjected to considerable pressure in recent decades by production relocating abroad (or the threat thereof).

However, two aspects should not be overlooked: First, the export-driven mode of development no longer functions as it did in the past, and, second, there is a downside to the disproportionate growth in foreign trade and the current account surpluses. Let’s examine the connections more closely.

Exports are not the only area to undergo significant growth relative to domestic production — imports have, too. In part, the growth in foreign trade results from the outsourcing of production to locations with low wages, which promises higher profit margins. German companies have expanded their production internationally in tandem with the growth of international trade.

Part of this is due to intra-industry trade and intra-group trade. Intermediate products, for example, are manufactured in Eastern Europe and then processed in Germany or vice-versa. The growth of foreign trade has consequently led to a degree of attrition of German production infrastructure. Numerous products that were once produced in Germany now have to be imported — with potentially problematic consequences, such as shortages in the supply of essential medicines.

German wage earners have been subjected to considerable pressure in recent decades by production relocating abroad (or the threat thereof). Companies have withdrawn from collective bargaining agreements. Trade unions have been forced to concede to lower wages and deteriorating working conditions. Opening clauses in collective agreements have made it acceptable to undercut standards at the company and site levels.

While the institutions for workers’ participation still formally exist, their essence has undergone drastic changes. Today, employee engagement plays a significantly diminished role in the competitiveness of companies compared to the Fordist era. Management no longer focuses on investments that enhance productivity but rather exerts direct pressure on wages and working conditions. Thus, achieving growth in exports today follows a distinctly different trajectory than it did in the past.

The Flipside: Low Wages and Investments

The problems posed by current account surpluses can be seen from a variety of perspectives.

German companies are dependent on solvent foreign demand to sell their surplus goods. Ultimately, Germany has to create this demand on its own by exporting capital and granting international loans. Trading partners with current account deficits are not in a position to generate enough income from their own exports to Germany to pay for their imports.

The interest resulting from international debt servicing is an additional source of income for the owners of capital, but the majority of wage earners in Germany do not benefit from this. For them, German export surpluses and the related capital exports imply nothing more than relinquishing part of the wealth they have produced. Part of the foreign exchange generated through exports cannot be utilized for domestic consumption — instead, it circulates back abroad in the form of loans, allowing more German goods to be bought and consumed in foreign countries

Current account surpluses signify that consumption is (too) low in Germany. They can be seen as the outcome of inadequate wage hikes. In fact, wage share has tended to decline: it was still above 71 percent of GDP in the 1990s, but is currently below 70 percent. In 2022, wage earners suffered an overall real wage loss of 4 percent, meaning that nominal wage increases could not adequately compensate for high inflation rates. The loss of purchasing power disproportionally affects the lower strata of the working class, as they are primarily forced to allocate their low wages to rent, energy, and food.

The bilateral relationship with the US initially seemed to ease under Joe Biden’s presidency, but conflicts were reignited by the Inflation Reduction Act, which subsidizes domestic production in the US.

Current account surpluses also indicate insufficient domestic investment, both in the private and public sectors. The share of gross fixed capital formation in GDP has exhibited a tendency to decline, from 24.9 percent in 1991 to 22.5 percent in 2022. During the same period, the share of investments in machinery and equipment has decreased from 7.7 to 4.6 percent. This also partly explains the sluggish development of labour productivity in Germany despite discussions about digitalization and “Industry 4.0”.

Additionally, falling domestic investment rates reflect the outsourcing of production to other nations. On top of this, state investments operate at a low level due to neoliberal fiscal policies. They fell from 3.1 percent of GDP in 1991 to 2.7 percent in 2022. The absence of adequate public and social infrastructure are thus the flipside of high export ratios and surpluses. In effect, one must speak of an excess of exports that directly stems from the gradual erosion of Germany’s once robust manufacturing base.

The high dependence on exports ultimately signifies a high vulnerability to crises, international upheavals, and unfavourable policy changes from key trading partners. This explains why Germany’s exports and GDP experienced above-average declines during the global financial crisis in 2008 and 2009, and during the COVID-19 pandemic in 2020. The current escalation of the export-driven mode of development’s structural crisis is fuelled by the heightened internal contradictions and the worsening state of international relations.

High Inflation, Rising Energy Prices, and Geopolitical Shifts

Germany’s current economic predicament can be primarily ascribed to the disruptions caused by the COVID-19 pandemic and the war in Ukraine. Exports to Russia, which accounted for 1.9 percent of total exports in 2021, have declined sharply. German companies previously benefited from relatively cheap oil and gas imports from Russia, and have been severely affected by their discontinuation. Imports of mineral fuels have become significantly more expensive, rising by 62 percent in 2021 and 81 percent in 2022 compared to the previous year.

Rising energy costs lead to lower profit margins, thereby slowing down the accumulation of capital. These costs are also a substantial factor contributing to the rise in inflation rates since 2021 alongside the disruptions in global supply chains caused by the COVID-19 pandemic. Over the past two years, inflation rates in Germany have occasionally surpassed those of major competitors like the US, France, or Italy. As a result, domestic producers’ prices are less competitive than those offered in countries with lower inflation rates. Additionally, manufacturers in Germany, who have long benefited from cheap supplies from Eastern Europe, are now affected by the above-average inflation rates in those regions.

Another burden on the German economy is the increasing tension between China and the US, coupled with changes in US foreign trade policy and China’s economic difficulties. The German economy is heavily dependent on both countries, not only as markets but also as investment locations. Although trade with the US has grown more slowly in recent decades, it remains ahead of China as the most important non-European destination for exports.

Germany has a high export surplus vis-à-vis the US. For a long time, American administrations absorbed Germany’s trade surpluses, but the Trump administration explicitly aimed to reduce the current account deficits with China and Germany. The introduction or threat of punitive tariffs under Trump directly violated the interests of German capital.

The bilateral relationship initially seemed to ease under Joe Biden’s presidency, but conflicts were reignited by the Inflation Reduction Act, which subsidizes domestic production in the US. At the same time, deep and asymmetric capital ties persist in the Atlantic region that highlight the dominance of US capital over German capital. US-based wealth management firms and investment companies, for example, are the largest shareholders in many major German companies. This specific form of dependency is also evident in the political-military sphere, which often leads to Germany’s subordination even when the countries’ interests diverge, as demonstrated, for example, by the US resuming sanctions against Iran, the Ukraine war, and the altered relationship with China.

It remains rather unlikely that Germany will experience another export boom like the one it did in the previous decade.

In China, the massive investment boom of recent decades is now reaching its limits. The expansion of the production apparatus and state infrastructure, which long contributed to high growth rates in the country, is gradually coming to an end. Many sectors have already reached overcapacity, and the creeping crisis in the real estate sector also indicates an overaccumulation of capital. Currently, China is facing deflation. The decline in Chinese growth rates is also a looming problem for German companies, which benefited greatly from the Chinese economy’s long boom.

Furthermore, the relationship between Western companies and China has started to deteriorate after the Chinese government restricted market access in some strategic areas, and Chinese companies have become major competitors on the global market. Ultimately, the German export industry has also been adversely affected by the US government’s attempt to hinder China’s further ascent by imposing export restrictions on semiconductors and other strategically crucial goods.

The German government is increasingly aligning itself with the US administration’s aggressive stance towards China, despite the fact that China remains a crucial market and investment destination for German companies. Considerations around foreign and security policy are gaining more traction in comparison to purely economic ones.

Although the ruling class is not aiming to detach itself from China, it would like to reduce the risks associated with potential political or even military confrontation. Chinese investments in strategically relevant sectors of the German economy are being impeded, diversification of crucial raw materials and intermediate goods has been mandated, and certain key products such as semiconductors or batteries are to be produced domestically to reduce dependence on imports.

The evolving stance towards China can already be seen in the structure of foreign trade. While German exports to China grew in absolute numbers until recently, and imports likewise, China’s share of German exports has fallen for the first time since 2020. This figure stood at 7.9 percent in 2020, but by July 2023, it was only 6.6 percent. In contrast, the US share of German exports rose from 8.6 percent in 2020 to 10.8 percent in July 2023.

The German government and German trade associations are trying to square the circle, seeking to deepen relations with the US while simultaneously furthering the EU’s “strategic autonomy” and maintaining market access in China.[2] At the same time, they are making increased efforts to expand into other countries and regions to seek alternatives should relations with China deteriorate further.

The German government supports the EU’s efforts to negotiate trade and investment protection agreements and economic partnership agreements with a variety of countries. That said, most of the countries that are targeted as destinations for the exports of goods and capital cannot assume the role that China has played in recent decades, mainly due to their smaller size. Additionally, countries like India do not have the state capacities to initiate a comparable process of accumulation. Thus, it remains rather unlikely that Germany will experience another export boom like the one it did in the previous decade.

Self-Imposed Problems and Blocked Solutions

Germany’s export-driven mode of development is currently undermining its own foundations.

Deficiencies in infrastructure have now reached a level that calls the competitiveness of domestic production into question. The increasing number of renovations that are closing roads, bridges, and railroad lines is resulting, for example, in detours and longer transportation times, with the result that private companies are incurring significant additional costs. This reduces the turnover rate of capital.

In addition, there is a shortage of skilled workers resulting from deficiencies in the education system, a restrictive migration policy, as well as racist and sexist discrimination — thus, one could say that this problem is self-inflicted. The development of productive forces is hindered just as much by the lack of qualified workers as by the declining share of investments in machinery and equipment.

For years, German business associations have identified the insufficient investments in infrastructure and education as problems. Factions in the establishment are once again thoroughly willing to grant the state a greater role in infrastructure and industrial policy, but state priorities have shifted towards rearmament due to the war in Ukraine, and funds that are being channelled into the military are lacking elsewhere. As a result, resources for the “green” transformation and the energy transition not only fall short of what is needed for an adequate climate policy, but are also insufficient to bring a new economic dynamic into motion.

In any case, the “green” transformation of the economy is not viewed as an alternative to the export-driven mode of development by the leading faction of the establishment, but rather as a means to maintain it: German capital aims to become a world leader in “green” technologies and export them worldwide. Doing so, however, only reproduces the self-destructive dynamic in another field.

The working class is in danger of losing even more power due to the unfolding crisis and capitalist transformation.

The main reason why sufficient funds for investment in infrastructure, education, and a “green” transformation are lacking is that the various factions of the establishment still cling to neoliberal fiscal policies. Naturally, capitalists want to cut taxes rather than raise them — this is the common denominator that binds them together despite all their conflicting interests. The debt brake is also being adhered to — except when debts are outsourced to subsidiary budgets and are renamed as “special funds”.

But if restructuring programmes cannot be financed through increased tax revenue or more extensive borrowing, the only option is to redistribute funds at the expense of other government spending — to the detriment of social benefits, for instance. Moreover, tax revenues fall when the economy shrinks. Thus, calls for an “Agenda 2030” are likely to become louder as the crisis intensifies.

If state funds stagnate or shrink and are simultaneously redistributed within the state — for armaments and new subsidy programmes for large companies, as is currently taking place in the semiconductor industry — then conflicts over distribution will rise significantly. Disputes over the new basic social welfare system for children have given us a taste of what’s to come: 100 billion euro are being mobilized for the armed forces, 10 billion euro to lure the US company Intel to Magdeburg, and yet, there is no money to pay for children’s social welfare.

Beyond Social Democracy and Authoritarian Temptations

Unfortunately, neither the German working class, the trade unions, nor the Left are currently in a position to fend off the coming attacks from capital, let alone push an eco-socialist transformation forward. The working class is in danger of losing even more power due to the unfolding crisis and capitalist transformation.

This can be seen, for instance, in the automotive industry, which is of central importance to the German economy. According to data from the German Association of the Automotive Industry, domestic production has already fallen from 5.7 million cars in 2016 to less than 3.5 million in 2022. Ongoing production shifts abroad and the transition to electric motors are reducing the volume of work in the local industry.

A loss of market share to Chinese producers could further exacerbate this situation. Many automotive plants are already underutilized. However, this reality also puts pressure on one of the main powerbases of IG Metall, the German metalworkers’ union. The union has lost more than 100,000 members since 2019. If IG Metall and other trade unions continue to decline, this will have a serious impact on labour relations and general social development in Germany.

But who knows, perhaps the crisis will also intensify the pressure to move away from the “social partnership”, the fetishization of exports, and the “competitiveness” of the “German business centre”, prompting consideration of more radical courses of action. What is needed is a general reduction in working hours and the socialization of the means of production. The latter is necessary to socially and ecologically transform these means, and to align production with socio-ecological needs and not with profit.

As the export-driven mode of development reaches its limits and the space for reformist politics shrinks, the danger of authoritarian temptations grows. But this merely serves to highlight the need for radical socialist politics that go beyond social democracy and so-called “left” conservatism.

This article first appeared in LuXemburg. Translated by Shane Anderson and Samuel Langer for Gegensatz Translation Collective.