Shortly before the end of the year, the economic situation in Germany presented three annoying surprises. First, there is a fairly wide range of economic growth estimates in the coming year. The German Chamber of Commerce and Industry predicted 0.7 percent, the Economy Ministry predicted 1.3 percent and optimistic groups such as the German Institute for Economic Research in Berlin (DIW) even predicted 1.8 percent.
This wide range suggests uncertainty about economic developments that is hardly different from the years when the traffic light coalition was at odds. In this regard, the new Union government and the SPD do not provide any guarantees.
However, all economic observers assume that the economy next year will grow much faster than this year. It is generally estimated that by 2025, Germany will be able to emerge from stagnation after two years of recession.
The state is the driving force
The second irritation is that most economists agree on one thing: the driving force of the economy in the coming years will not be private companies or households, but the state. With billions of euros planned for defense and infrastructure, the government is likely to trigger a short-term surge in demand that will be impossible to avoid. This has become a debate among economic researchers, who currently study political science more than economics.
There is debate over how quickly the government can distribute billions of dollars in debt to the public and what kind of stimulus it would trigger. This determines how much new money will be used to build new rails and tanks, or simply lead to higher prices. The free capacity available in civil engineering and perhaps also in weapons is much less than is often assumed.
What is particularly annoying about the focus on the government sector is how little faith economists have in the growth power of the private sector in Germany. If we subtract fiscal stimulus from growth estimates and calculate that around 0.3 percent of growth in 2026 will come from more working days alone, then there is not much left as private sector growth stimulus.
Germany relies on fiscal stimulus
This is a surprising finding for a country committed to a market economy. The reliance on fiscal stimulus – alongside government quotas of around 50 percent – is more reminiscent of a state-run economy than a dynamic free market.
This causes a third irritation. Although Chancellor Friedrich Merz (CDU) announced an economic turnaround before the election to unleash market forces in the spirit of freedom, few of them are still in coalition with the SPD.
Agricultural diesel fuel for farmers, industrial electricity prices for certain companies, trade barriers to protect auto or steel companies – in terms of subsidies and preferences for individual sectors, the government is almost no different from a traffic light coalition and shows no regulatory boundaries.
Merz and his friends see themselves as saviors of threatened companies and jobs, but only threaten the welfare of others. Because benefits provided by the state to one party always come at the expense of another, either through higher tax burdens or through state-subsidized competition in an empty labor market. Subsidies and special allowances run counter to the rise of private sector growth forces.
The location lacks competitiveness
The government has achieved the greatest economic change by implementing trade barriers to shut out local companies from foreign competition. For Germany, which lives on exports, this is an indictment of a disregard for cause and effect. Exports have shrunk in the past two years, and German companies had been losing market share long before the global turmoil and upheaval sparked by American President Donald Trump with his protective tariffs.
Germany’s problem is not Trump’s tariffs or Chinese goods, but the lack of competitiveness of companies here. The government cannot repair these losses with billions of dollars in debt, not with subsidies, and not with isolation. What is needed is not more things, but less government, fewer taxes, and fewer regulations. Then growth will start again.
