Germany’s economy is the largest in Europe and the third largest in the world, behind the United States and China.
You would not guess that from the coverage. For the past few years the reporting out of here has read like an obituary.
We’ve heard it before.
This country gets written off about once a generation, and the notice has always come early. So it’s worth knowing what the thing actually is before deciding whether this time is different.
Where the Model Came From
Three years after the war ended, two things happened within days of each other. In June 1948 everybody living in the three western zones was handed 40 Deutsche Mark in exchange for their old money. In the same week Ludwig Erhard (economics director for the western zones, later our first economics minister) ended rationing and lifted most price controls.
Shop windows filled almost overnight and the black market went away. It also hurt. Prices jumped, savings were largely wiped out, and by the end of that year a million people were out of work. There was a general strike in November.
The economist Alfred Müller-Armack had already given the idea its name, soziale Marktwirtschaft or social market economy. Free prices and open competition, with a state that catches people rather than running the factories.
Nearly everything on the business pages of this site is downstream of that one decision. The chambers, the wage bargaining between unions and employer associations, the three separate banking systems. All of it dates to 1948.
Growth then ran near nine percent a year through the first half of the 1950s. We still call that decade the Wirtschaftswunder, the economic miracle, and the name has never worn off.
The Deutsche Mark itself lasted until 2002. Handing it in for euro notes was harder on us than the economics warranted. A sound currency had been the one thing that worked when very little else did, and people were attached to it.
What This Economy Sells, and Who Buys It
Four industries do most of the exporting. Cars, machinery, chemicals, and electrical equipment. Services are the larger share of what gets produced, the way they are in every wealthy country. They just aren’t what the world buys from us.
Close to half of what German industry earns comes from customers outside the country. That one figure explains more about this place than any other.
The balance has pointed the same way for a very long time. Germany has sold more goods abroad than it bought in every year since 1952. Exports usually run something like fifteen percent ahead of imports.
Most of those customers sit in Europe, and the names at the top barely move from year to year. The biggest buyers are the United States, France, the Netherlands, Poland, and Italy. The Americans have held the top spot since 2015.
Coming the other way, China has supplied more German imports than anyone else over that same stretch. Behind it sit the Netherlands, the United States, and Poland.
One wrinkle before you take the Dutch numbers at face value. Rotterdam is Europe’s largest port, and a great deal of what lands there clears customs and carries on up the Rhine by barge. Statisticians call it the Rotterdam effect. So the Netherlands looks like a bigger partner than it really is.
The real shift is China. It’s still the biggest supplier by a wide margin, and it has slid a long way down the list of customers. For twenty years China bought German machines. Now it builds them and sells them to everyone else. (Pattern, anyone?)
Written Off, Repeatedly
In 1999 the Economist called Germany the sick man of Europe. The complaint was fair enough at the time. Unemployment sat in double digits, the bill for German reunification had come in far above anybody’s estimate, and growth averaged around one percent a year.
It got worse before it got better. Unemployment peaked at 12.1 percent in March 2005, close to five million people, the worst in the history of the Federal Republic. Then it fell by more than half inside a decade, and the same magazine was writing about an economic superstar.
Go back further and the pattern holds. The Berlin Wall went up in 1961 and cut off the flow of workers from the east, so the country recruited abroad instead. The first real postwar recession arrived in 1966. The oil shocks did their damage through the 1970s.
In 2023 the same magazine ran the same headline again. Make of that what you will.
What Is Actually Hard Right Now
None of which makes the current stretch imaginary. It’s the weakest run since the early 2000s, and the causes are structural rather than a bad quarter or two.
Energy comes first. Russian pipeline gas stopped in 2022, and costs never settled back to where they had been. For chemicals and steel, energy isn’t a line on the budget. It is the business.
Demography is the slow one, and the harder of the two. The baby boom cohort is retiring and the one behind it is smaller. No policy fixes that arithmetic inside a decade.
Then there’s China again, turning up as a competitor in precisely the industries where we are strongest. And carmaking, which feeds an enormous supply chain of small firms, sits in the middle of a technology switch nobody here picked the timing of.
Those are real challenges. They’re also the kind this economy has fixed before, late and after a great deal of public complaining. :-)
If you keep one figure from this page, keep this one. Industry still accounts for roughly a quarter of everything Germany produces, where France, Britain, and the United States sit closer to a sixth. Whatever happens next happens in factories, not in a financial district.
For who those companies actually are and how they get financed, start with German business. The tradition behind the export figures sits on German engineering.