Observations on Germany’s Development Dilemmas and Political Deadlock

A shift in security policy has been implemented, with fiscal constraints becoming increasingly pronounced. Following the outbreak of the Russia-Ukraine conflict in 2022, Germany designated Russia as Europe’s primary security threat—marking a comprehensive departure from its long-standing cooperative European security outlook toward a confrontational security paradigm centered on defense and deterrence. Its strategic approach prioritizes strengthening NATO’s ‘European pillar,’ advancing European autonomous defense capabilities while preserving transatlantic alliance ties. To this end, Germany has rolled out multiple complementary security policy adjustments: delivering heavy weaponry to Ukraine; deploying permanent troops to Lithuania; revising its ‘debt brake’ mechanism to establish a dedicated defense fund—and exempting defense spending exceeding 1% of GDP from the debt brake’s constraints; and, in April this year, publishing its first national military strategy since the end of World War II, pledging to build the Bundeswehr into Europe’s most powerful conventional military force. Yet as the conflict’s ripple effects persist, its multifaceted adverse economic repercussions are gradually surfacing. For instance, Germany’s economy—dominated by small and medium-sized enterprises (SMEs)—is particularly vulnerable to the sharp expansion of defense expenditures, which crowd out urgently needed funding for social welfare and industrial development. Germany’s longstanding low-debt fiscal advantage has evaporated, straining the sustainability of public finances; some rating agencies have already issued warnings that Germany’s sovereign credit rating may be downgraded. Over the coming period, balancing defense investment, social welfare provision, and innovation funding will pose a severe and unavoidable challenge for Germany. Rising protectionism is causing Germany to waver between openness and closure. In the wake of the Russia-Ukraine conflict, Germany has increasingly perceived the historically symbiotic international relationships that underpinned its economic prosperity as one-sided strategic dependencies. Accordingly, it formulated a national security strategy aligned with the EU’s Economic Security Strategy, intensifying its comprehensive ‘de-risking’ policy. As an export-oriented nation, Germany continues to advocate open markets and free trade—for example, opposing tariff hikes in the EU-China electric vehicle dispute and supporting negotiated minimum-price solutions; and criticizing the European Commission’s proposed ‘Made in EU’ minimum local-content threshold under the EU’s Industrial Accelerator Act, arguing that protectionism would hinder European firms’ access to cutting-edge global technologies and trigger foreign capital flight from the EU. Yet amid persistent economic stagnation and mounting competitive pressures on manufacturing, domestic voices calling for a tougher external stance have grown louder, shifting toward support for the EU’s adoption of additional trade-protection instruments—using heightened bargaining leverage to achieve protectionist goals and to ‘treat domestic ailments by targeting external causes.’ Germany is proactively engaging in great-power competition—but its actual capabilities fall markedly short of its ambitions. Germany perceives today’s world as having entered an era of great-power politics, wherein Europe must adeptly apply realpolitik logic. To avoid becoming a pawn in great-power rivalry, Germany seeks to position itself as a leadership-oriented middle power—deepening operational coordination with like-minded middle powers and expanding cooperation with Global South countries across trade, critical minerals, and supply chains. Examples include actively promoting the EU’s free trade agreements with Mercosur and India. Yet diplomatic outcomes have fallen short of expectations—the most emblematic case being Germany’s failure to secure election to the UN Security Council as a non-permanent member in the June 2026 vote. These developments collectively signal that Germany no longer accepts its traditional role as a passive participant within the existing international order, aspiring instead to reshape global governance in line with its national interests and values.

Germany’s Current Economic Situation and Future Outlook

The energy-cost issue remains a persistent, deep-cutting problem. After phasing out nuclear power, Germany has yet to fully fill the resulting gap in its energy mix with renewables; grid infrastructure lags behind, and industrial electricity prices remain among the highest in OECD countries. For highly energy-intensive industries such as chemicals, this constitutes an existential issue. BASF has every reason to locate new production capacity in Zhanjiang, Guangdong—where, in March 2026, it officially inaugurated its integrated Zhanjiang base, representing a total investment of approximately €8.7 billion, with most products serving Chinese customers directly. This move sends a clear signal: production costs in Germany have become so high that even a world-class chemical enterprise has opted to vote with its feet. Geopolitical entrapment between China and the U.S. If the above represent internal challenges, the following reflects an external constraint: Germany is forced to adopt a posture between two massive gravitational fields—the United States and China—and this very act of choosing is itself a trap. On the U.S. side: Germany exported around 3.17 million vehicles to the U.S. in 2025, accounting for nearly 410,000 units—making the U.S. one of Germany’s largest single export markets. Upon imposition of tariffs, the Kiel Institute for the World Economy estimated that Germany’s automotive sector would suffer short-term output losses of €15 billion, with long-term losses potentially reaching €30 billion. Moreover, this is not merely an economic matter: concurrently, the U.S. confirmed the withdrawal of 5,000 troops stationed in Germany—an occurrence that, when paired with the tariff announcement, is difficult to interpret as anything other than a political signal. On the China side, conditions are also quietly shifting. In the first half of 2026, China’s exports to Germany rose by 14.8%, while Germany’s imports from China declined by 1.7%, and German exports to China fell by over 12% year-on-year. The balance of trade is visibly tilting away from Germany. Although the German government promotes ‘de-risking,’ businesses pursue their own calculations—given China’s enormous market size, complete decoupling is neither feasible nor realistic. When Friedrich Merz visited China in early 2026, he advocated reducing mutual dependency while simultaneously expressing willingness to cooperate—a dual-message formulation that transparently reflects Germany’s genuine dilemma. Squeezed from both sides, Germany’s room for maneuver is extremely limited. Can Germany rebound over the next decade? My own assessment is: no swift recovery is likely, but outright collapse is equally improbable. In one word, the trajectory is ‘managed stagnation’—the economy will not collapse, but will continue crawling along at low speed, with annual growth likely capped at 0.5%–1%. This stands in stark contrast to Germany’s former status as the ‘engine of Europe.’ On the optimistic side, fiscal expansion has only just begun: the €500 billion infrastructure fund is scheduled to be spent over 12 years, and the money has barely started flowing; the ripple effects of defense-industry orders are likewise only beginning to transmit through the economy. The German Institute for Economic Research (DIW) estimates that this €500 billion investment fund could lift GDP growth by more than two percentage points over the next decade. On the pessimistic side, fiscal stimulus can buy time—but not structural reform. Germany’s demographic labor shortage will not resolve itself simply because money is spent; the cost curve of its energy transition cannot be flattened in the short term; and the steady rise in Chinese manufacturing competitiveness is an enduring trend—not a temporary episode. What Germany truly needs is to use this window of opportunity—propped up by fiscal expansion—to accomplish two critical tasks: First, advance labor-market reforms—including extending the statutory retirement age, streamlining technical immigration procedures, and significantly reducing exorbitant bureaucratic and compliance costs. Second, clarify its energy-transition roadmap—abandoning ideological dogma that categorically rules out nuclear power, and bringing electricity prices down, without which industrial reshoring remains mere rhetoric.

Bilfinger CEO Urges Faster Reforms to Spur Genuine German Upturn

4 days ago

Bilfinger SE’s CEO cited delayed investments in chemical sites and refineries due to weak German growth, prompting a full-year outlook cut and a near-50% share decline. He urged faster government reforms to spur an upturn in industrial services demand.

bloomberg

2026-09-18

Bilfinger CEO Urges Faster Reforms to Spur Genuine German Upturn

Bilfinger CEO Urges Faster Reforms to Spur Genuine German Upturn

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