Umair
Germany’s economic growth shrank for a second straight year in 2024, data released Wednesday showed. How to revive it this year has become a central issue as voters prepare to go to the polls next month to elect a new government.
Manufacturing of automobiles and machinery fell sharply last year, as increased competition, especially from China, and flagging demand in Europe led to a 3 percent drop in output compared with the previous year. Construction, hurt by high interest rates and rising costs, fared even worse, falling 3.8 percent compared with 2023.
The German economy, which is Europe’s largest, has been weighed down by high interest rates and energy costs, along with persistent political uncertainty culminated in the collapse of Chancellor Olaf Scholz’s government in November.
The country is expected to post slow growth in 2025, and economists are stressing the importance of the next government to focus on economic reform. More than a third of voters named the economy as Germany’s most important problem, the latest polling showed.
“Even if the risk of too much complacency even after two years of stagnation remains, the hope is that any new German government would decide on a longer-term plan for economic reforms and investments,” Carsten Brzeski, an economist with ING Bank, wrote in a note.
Plans about how to return to growth dominate the agenda of every political party as the campaign for the Feb. 23 election heats up.
Reviving industry
For years, Germany held the top spot in the United Nations’ ranking of the world’s leading manufacturers. But competition from China has grown, especially in industries such as automobiles and chemicals that have formed the backbone of the German economy for decades.
Economists have increasingly warned of deindustrialization, and Germany’s leaders are concerned that unless changes are made, the country could slip down the global rankings.
“We need a major effort in this country to get things moving again,” Friedrich Merz, the chancellor candidate for the conservative Christian Democratic Union said over the weekend, as his party announced “Agenda 2030,” which pledges to return German growth to 2 percent over the next five years through changes to the welfare and tax systems.
The Christian Democrats, together with their sister party, the Christian Social Union, have been leading the polls, especially among business leaders, who see the conservatives as offering the strongest ideas for stimulating the economy.
Investing in infrastructure
Germany’s public infrastructure has been neglected for decades, leading to collapsing bridges, an outdated power grid and significant delays on a third of all passenger trains. Without significant investment, economists warn that the country will lose competitiveness.
Each of the parties has proposed solutions for improving public structures, facilities and networks. Two center-left parties, the Social Democrats and the Greens, want to loosen the country’s law restricting annual borrowing to fund investment in infrastructure, services and education.
In addition, the Greens want to allocate money to establish a separate fund to pay for projects such as updating schools, expanding public transport networks and financing research into climate-friendly technologies.
Lowering energy prices
The price of electricity in Germany is among the highest in Europe, driving many of the country’s energy-intensive industries, such as cars and chemicals, to move their operations to China or the United States.
The Greens are focused on more funding to expand renewable energy sources, but the Social Democrats are seeking to cut grid fees, an idea also supported by the conservatives, who have floated revisiting the decision to shut down Germany’s nuclear reactors.
The Alternative for Germany, a far-right party known as AfD, is promising a return to Russian gas, which accounted for a third of all German energy until Russia invaded Ukraine in 2022.
AfD is also proposing to halt all funding for renewable energy projects. At a party conference on Saturday, Alice Weidel, a candidate for chancellor, said she would “tear down all wind turbines” if elected, echoing President-elect Donald J. Trump, who vowed last week that “no new windmills” would be built in the United States when he takes office.
Cutting taxes
Germans have some of the highest taxes in the industrialized world: Workers pay nearly 48 percent of their income, compared with an average of about 35 percent in other developed nations. The conservatives are focused on reducing the tax burden on businesses and people with the lowest incomes.
But cutting taxes will be a challenge when the country is facing a hole in its budget for next year of some 15 billion euros, or $15.5 billion, and demands for more money for the military and continued support for Ukraine.
Mr. Scholz, who is again running for the chancellorship for the Social Democrats, is proposing to raise taxes on the wealthy, while providing targeted cuts for companies on investments.
“This is calculated in such a way that it generates growth and remains affordable at the same time,” Mr. Scholz said told German public television on Saturday.
