How Germany Became The World’s Worst-performing Economy

“The use authorities arsenic we cognize it coming tin nary longer beryllium financed by our economy.”

With that single sentence, Chancellor Friedrich Merz collapsed 1 of Germany’s and Western Europe’s top governmental taboos, daring to mobility nan use state’s ineffable position astatine a clip erstwhile its economical costs tin nary longer beryllium ignored.

For decades, Germany was celebrated arsenic Europe’s economical occurrence story. Its postwar Soziale Marktwirtschaft — nan social marketplace economy — mixed free-market dynamism pinch a constricted use for those genuinely successful need, powering West Germany’s emergence from postwar devastation into 1 of nan world’s astir prosperous nations. 

Today, however, that exemplary is faltering. Germany faces stagnating growth, declining competitiveness, and nan heaviest use load successful its history — signs that Europe’s economical motor is seizing up nether nan weight of its ain system.

From Economic Miracle to Welfare Trap

Germany’s emergence from postwar ruin was built connected Ludwig Erhard’s economical imagination — a strategy that balanced free endeavor pinch a humble societal information nett wrong a competitory framework. By liberalizing prices and trade, stabilizing nan currency, and cutting taxes, Erhard unleashed competition, ended inflation, and sparked nan alleged Wirtschaftswunder — nan “economic miracle” that brought accelerated growth, afloat employment, and rising surviving standards.

Yet Erhard’s imagination of a humble information nett gradually gave measurement to extended use description — proving why nan authorities should ne'er beryllium trusted pinch nan powerfulness to technologist societal equilibrium done taxpayers’ money. Once governments summation legitimacy to intervene successful nan system “for fairness,” involution seldom stops; it only grows. 

Starting pinch nan 1957 pension reform and continuing done nan 1960s and 1970s, successive governments expanded wellness insurance, education support, family benefits, housing subsidies, and unemployment protection — laying nan foundations of 1 of Europe’s astir generous use systems. Today, Germany spends 31 percent of its GDP — astir €1.3 trillion — connected societal programs, 1 of nan highest levels among OECD countries.

The pension strategy is nan clearest illustration of this excess, consuming 12 percent of GDP — over twice nan stock spent successful nan UK (5.1 percent). As nan organization ages and nan workforce shrinks, nan strain connected nationalist finances has go unavoidable. In 1962, six workers supported each retiree; today, hardly two do, and that number is expected to proceed falling successful nan years ahead. A strategy built connected specified demographics cannot past — it tin past only done higher taxes, mounting debt, and increasing deficits.

To prolong this model, German employers are paying nan price. Under German law, they must cover half of their workers’ security contributions, truthful each use description straight raises labour costs. Since nan pandemic, non-wage labour costs person risen faster than full wages, eating into profits and leaving small room for salary increases. Social information contributions — agelong unchangeable below 40 percent of salaries — person now climbed to 42.5 percent and are projected to scope 50 percent wrong a decade. The consequence is predictable: squeezed employers, less hires, smaller raises, and declining competitiveness.

How Welfare Expansion Undermined Germany’s Prosperity 

The economical toll of Germany’s overgrown use authorities is now unmistakable. Once Europe’s maturation engine, Germany has go 1 of its laggards. Since 2017, GDP has grown by just 1.6 percent, compared to 9.5 percent successful nan remainder of nan eurozone. By 2023, it had classed arsenic nan world’s worst-performing awesome economy, shrinking by 0.3 percent and 0.2 percent successful 2 consecutive years — nan first contraction since nan early 2000s — and continued to descent nether nan caller existent government, pinch GDP falling by 0.3 percent successful Q2 2025. 

Nowhere is this diminution much evident than successful nan automotive assemblage — nan backbone of Germany’s postwar prosperity. Once world pioneers, Volkswagen, Mercedes-Benz, and BMW now lag behind leaner Chinese and American rivals. Soaring labour costs (€62 per hour, compared to €29 successful Spain and €20 successful Portugal), mixed pinch dense regularisation and rigid labour rules, person eroded competitiveness. A slow modulation from combustion engines to EVs has enabled BYD and Tesla, pinch faster invention cycles, precocious technology, and competitory pricing, to seize nan lead successful nan industry.

The power situation has deepened their woes: the abrupt loss of inexpensive Russian gas, mixed pinch nan government’s arguably short-sighted determination to phase out atomic power, has near German industries paying up to 5 times much for energy than their American aliases Chinese competitors. Weighed down by precocious costs and slow adjustment to caller technologies, automakers person been forced into achy cost-cutting measures, from works closures to wide layoffs. Since 2019, nan manufacture has already mislaid 46,000 jobs, and different 186,000 could travel by 2035.

Meanwhile, use and indebtedness proceed to grow. Germany’s famed fiscal subject — erstwhile anchored successful its constitutional “debt brake” — has each but collapsed. Repeatedly suspended since nan pandemic, nan norm has been bypassed done off-budget costs and “emergency” spending to finance use spending and power subsidies. Now, Berlin plans to get €174 cardinal successful 2026, three times nan level of 2 years agone and the second-highest in postwar history — threatening not only its ain stableness but besides nan credibility of Europe’s fiscal rules.

At nan guidelines of Germany’s malaise lies a vulnerable illusion: that generous use tin coexist pinch precocious productivity. When redistribution outpaces wealthiness creation, prosperity tends to fade. Left unchecked, use states grow faster than nan economies that money them, eroding productivity and burdening early generations. Yet betterment remains untouchable — aging voters defy cuts, politicians fearfulness backlash, and nan young carnivore nan costs of a strategy that whitethorn not survive.Europe is watching closely. If Germany — nan continent’s anchor of fiscal subject and business spot — exposes nan limits of its oversized use state, nan European religion successful expansive use systems could yet collapse. The first measurement is to extremity nan denial; nan adjacent is to rediscover nan realism that erstwhile fueled nan Wirtschaftswunder. Germany erstwhile taught Europe really to rebuild prosperity from ruins. Now it must thatch Europe really to face nan truth astir use states — earlier they illness nether their ain weight.