A recession means that the economy is shrinking. Germany is the only country in the European Union where this has been observed for two years. In 2024, more companies closed than in 2011, when there was a major financial and economic crisis. Energy-intensive industrial sectors were and continue to be particularly hard hit by high electricity prices. And the shortage of labor and qualified personnel in the aging German society, as well as the heavy bureaucracy, are negatively affecting companies.
The new German government has set itself the goal of improving the situation quickly and sustainably. However, a quick recovery cannot be expected, assures the authoritative Council of Economic Experts to the German government. In its spring report, the expert council speaks of a "clearly expressed phase of weakness" and practically rules out a rapid recovery.
The German economy is no longer competitive
For the current year 2025, the five economics professors who are members of the Council predict stagnation, i.e. zero growth. According to them, the economy can only recover to some extent in 2026, but with growth of about one percent. However, the experts do not venture to say whether Germany will be able to return to its previous economic successes in the medium and long term.
The German economy is becoming less and less competitive on a global scale. Russia's invasion of Ukraine in 2022 and the suspension of Russian gas supplies had a decisive impact. The successful German business model of using cheap energy and high engineering skills to produce products in demand all over the world has meanwhile become history.
Donald Trump and the problem with German exports
There are also domestic problems. "Bureaucratic requirements and lengthy permit procedures are slowing down overall economic growth," the report by the so-called "economic pundits" states. The policies of US President Donald Trump are also negatively affecting the German economy - the tariffs he has introduced threaten economic growth worldwide, but they are particularly detrimental to the export-oriented German economy.
German Economy Minister Katharina Reiche wants to ease the burden on businesses with new measures that should be in place by mid-July. These include lower electricity taxes, corporate tax cuts, labor market reforms, etc. All of this, according to Reiche, will boost growth.
Economic experts are calling on the federal government to look more realistically at the future. In their opinion, attempts should not be made to preserve jobs that are not viable in the long term. “An economic policy that focuses on stopping structural changes with subsidies cannot be successful in the long term“, says Monika Schnitzer, president of the German Council of Economic Experts. Instead, the transition to new business models and professions should be purposefully encouraged.
The multi-billion-euro financial package that the ruling CDU/CSU and SPD parties adopted with the support of the Greens also gives hope. Over the next 12 years, 500 billion euros will be invested in the outdated infrastructure.
Money creates desires
The financial package significantly expands the room for maneuver, says economist Achim Trüger. However, he believes that this will only have an effect if the money is spent correctly - that is, only for investments. Experts, however, doubt this. In this regard, economist Ulrike Malmendir recalls that a number of "gifts" are planned for certain social groups that do not lead in the right direction. She gives as examples the increase in maternity pensions, subsidies for diesel fuel in agriculture and lower taxes for gastronomy. Economists are calling for a law to ensure that the funds from the financial package are only used for real investments.
Since the 500 billion euros will be invested over a period of 12 years, experts do not expect a quick positive effect. One of the main problems is that the 500 billion euros must be financed through loans - just like the significantly increased defense spending. This would mean that Germany would no longer be able to meet EU debt requirements, experts warn. Only if the country succeeds in structural modernization will the costs be justified, they point out.
Many Germans work part-time
The new Federal Chancellor Friedrich Merz has repeatedly stressed that people in Germany need to work more. "We cannot maintain prosperity with a four-day working week and constant concern about whether there is a good work-life balance", he said recently at a meeting of the CDU's economic council. As concrete measures, he mentioned more flexible working hours and incentives for people to continue working voluntarily after they reach retirement age.
Another problem is the aging society, in which fewer and fewer people are working and paying social security contributions for every more pensioners. "That is why it is important to become more productive with fewer workers. And this can be achieved through digitalization and reducing bureaucracy“, says economics professor Veronika Grimm.
Reducing bureaucracy is slow
The government's expert economic council criticizes the fact that the burden of bureaucratic costs for businesses has not yet decreased significantly. The council proposes that a number of measures be taken quickly: to speed up permit procedures, to reduce information obligations of businesses to the state, to digitize public administration and to create a single national e-government portal. At the same time, the experts appeal for the new regulations to be practically oriented - otherwise only additional and ineffective bureaucracy will be created.
“Between hope and fear“ - this is how the government's expert council describes the situation. The reactions of business are also mixed. “There is no real spirit of optimism. Time is running out. Now it's up to the politicians," says the German Chamber of Commerce and Industry.
Author: Sabine Kinkarz