The Tumbling Giant - Will Germany be revived?

Germany is undergoing a significant structural shift that has sparked intense debate across political and economic circles. For the first time since the Marshall Plan, the country is planning to make substantial investments in infrastructure and potentially ramp up its military capabilities. While much discussion has focused on whether it is a wise decision to incur massive debt prior to implementing these reforms, we aim to maintain a neutral stance and focus on analyzing the facts. What do we know about this ambitious expansion of debt, and what can reasonably be expected from these measures? We try to put the plan into the perspective of a company that is operating financially sustainable.

 Record Earnings with a Fading Market Share

Despite Germany’s record tax revenues surpassing €2 trillion in 2024, the country faces significant structural challenges. While the tax-to-GDP ratio has steadily increased to over 39% in recent years, this growth masks underlying vulnerabilities. A declining and aging population, coupled with the emigration of approximately 200,000 high-skilled workers annually while more than 300,000 low-skilled workers migrate annually, threatens the long-term sustainability of these earnings. This demographic shift reduces the labor force and erodes the tax base, creating a precarious fiscal outlook in the long term.

Additionally, Germany’s reliance on traditional industries such as automotive manufacturing and heavy machinery is being tested by global competition and shifts toward greener technologies. Many of these industries are either shrinking or relocating to jurisdictions with more favorable tax regimes or lower operational and energy costs. This trend exacerbates the risk of losing corporate tax revenue, further straining public finances. In 2024 alone, German industry leaders alone have announced to cut more than 130,000 jobs and estimates expect another more than 300,000 jobs are at risk due to insolvencies (Expected Job cuts: VW 35.000, DB 30.000, ZF 14.000, ThyssenKrupp 11.000, SAP 8.000, DHL 8.000, Audi 7.500, Bosch 5.000, Siemens 2.000, Continental 7.150, Schaeffler 4.700).

At the same time, social expenditures are set to rise sharply. The retirement of the baby boomer generation will place immense pressure on pension systems and healthcare providers, while social security obligations are expected to balloon. These factors contribute to a scenario where Germany’s “market share” in terms of economic competitiveness and fiscal stability is shrinking.

From a corporate analogy, Germany resembles a company at a crossroads. To remain solvent and competitive, it must pivot or adapt operationally. This involves streamlining overhead by reducing bureaucratic inefficiencies and simplifying administrative processes. A promise that the German government regularly makes, but which companies have been waiting decades to fulfill. Reforming social spending is also crucial, as addressing inefficiencies in pensions and healthcare systems would help manage costs sustainably. Furthermore, diversifying revenue streams by encouraging innovation and investment in emerging sectors like AI, and biotechnology is essential. Implementing targeted tax incentives to retain talent and attract foreign investment could also be beneficial.

Without such measures, Germany risks falling into a cycle of rising debt and diminishing returns on its record revenues. The current trajectory underscores the urgent need for structural reforms that align fiscal policy with long-term economic realities.

 Rising Interest Rates and Their Implications

Germany’s fiscal challenges are further compounded by the global trend of higher interest rates and a weakening Euro against major commodities – and we are not even in a high-growth environment globally. If you want to get a glimpse of commodity prices in a high-growth environment, one should look at Gold priced in Euros currently. For Germany, this shift has significant implications, as higher interest rates directly increase the cost of servicing public debt. While Germany’s debt-to-GDP ratio remains relatively low compared to other major economies, the sheer size of its debt means that even modest rate increases translate into billions of euros in additional interest payments each year.

The impact of rising interest rates is not merely theoretical. In countries like France, where public debt has exceeded 110 percent of GDP, interest payments now surpass education spending—a sobering precedent for Germany as it navigates its own fiscal pressures. Similarly, in the United States, federal interest payments have grown so large that they now outstrip even military expenditures. Although Germany is not yet in such dire straits, the warning signs are clear: without careful fiscal management, rising interest payments could crowd out essential public investments in infrastructure, education, and innovation.

The economic trade-offs posed by higher borrowing costs are particularly stark when considering the types of investments Germany must prioritize. Infrastructure projects—such as modernizing transportation networks or expanding renewable energy capacity—typically yield high economic returns over the long term. With a cost-benefit threshold that remains favorable even at higher interest rates, such projects are essential for sustaining growth and competitiveness. However, other forms of spending, such as defense investments, present a more complex picture. While necessary for national security, defense expenditures often yield lower economic multipliers and can approach unprofitability as borrowing costs rise.

For Germany, this creates a delicate balancing act. The government must weigh the immediate need to address pressing issues—such as modernizing its military considering geopolitical realities—against the long-term imperative to invest in areas that drive economic growth. Rising interest rates narrow the fiscal space available for such decisions, increasing the urgency for efficient allocation of resources and disciplined budgetary planning.

Ultimately, the era of cheap money has been over at least since 2022, and with it comes a new set of constraints on fiscal policy. Germany’s ability to adapt to this environment will depend on its willingness to make difficult choices about spending priorities and its capacity to implement reforms that enhance productivity and economic resilience. Failure to do so risks creating a scenario where rising debt service costs erode the country’s ability to invest in its future—a trajectory that could undermine even its record-breaking revenues.

 Economic Outlook: Growth Amid Inflation

Germany’s economic outlook presents a paradox of simultaneous growth and instability. On paper, the country’s economy is expected to achieve a GDP growth rate exceeding 2 percent, a figure that would typically signal robust performance. However, this growth is overshadowed by persistent and almost certainly rising inflation, which continues to erode purchasing power and distort perceptions of economic progress. Nowhere is this inflation more acutely felt than in the housing market, where rising costs have placed significant strain on households and businesses alike. For many Germans, the nominal gains in economic output are rendered meaningless by the escalating cost of living, creating a disconnect between macroeconomic indicators and everyday realities.

Inflation also complicates the effectiveness of fiscal policy. As prices rise, government expenditures must increase simply to maintain existing levels of service, reducing the scope for new initiatives or investments. At the same time, inflation diminishes the real returns on public investments. While infrastructure projects remain economically viable due to their high long-term multipliers—estimated at around 2—they are increasingly burdened by rising input costs and delays caused by bureaucratic inefficiencies. The result is a slower realization of benefits and a reduced capacity to address urgent needs in transportation, energy, and digital connectivity.

The situation is even more challenging when it comes to defense spending. Unlike infrastructure investments, defense expenditures typically generate lower economic multipliers, ranging from 0.5 to 1. While such spending may be necessary for geopolitical stability and national security, its limited productivity means that it offers little in terms of boosting long-term economic output. In an environment of inflation and rising interest rates, this type of expenditure becomes increasingly difficult to justify purely on economic grounds, even as strategic pressures demand greater investment in military capabilities.

Germany’s ability to navigate these challenges will depend on its capacity to foster innovation and productivity growth across key sectors. The country’s traditional industries—such as automotive manufacturing—are facing mounting pressure from global competitors and shifting consumer preferences toward sustainable technologies. To sustain economic momentum, Germany must accelerate its transition into emerging fields such as artificial intelligence or biotechnology. These sectors not only offer higher growth potential, but also align with global trends.

However, achieving this transition requires overcoming structural barriers that have long hindered Germany’s competitiveness. Bureaucratic inefficiencies, rigid labor markets, and underinvestment in research and development while regulating everything possible, continue to weigh heavily on the country’s ability to innovate. Without targeted reforms that address these issues head-on, Germany risks falling behind in the global race for technological leadership—a scenario that would further exacerbate its vulnerability to inflationary pressures and economic stagnation.

In sum, Germany’s economic outlook is one of cautious optimism tempered by significant risks. While growth remains achievable in the short term, sustaining it over the long term will require bold action to tackle inflation, prioritize high-impact investments, and foster innovation across all sectors of the economy. Failure to do so could leave Germany trapped in a cycle of diminishing returns on its record revenues—a fate that would undermine its position as Europe’s economic powerhouse.

Infrastructure and Technology: The Foundations of Future Growth

Germany’s economic resilience and long-term growth potential hinge on its ability to modernize infrastructure and embrace cutting-edge technologies. While the country has historically been a leader in industrial innovation, recent years have revealed growing inefficiencies and stagnation in critical areas like AI. Addressing these issues is not merely a matter of maintaining competitiveness—it is a prerequisite for ensuring sustainable growth in an increasingly interconnected and technology-driven world.

One of the most pressing challenges lies in Germany’s digital infrastructure. Despite its reputation as an industrial powerhouse, Germany has struggled to provide reliable high-speed internet access across all regions. Investments in traditional network technologies have often been plagued by inefficiencies, delays, and cost overruns. Meanwhile, innovative solutions such as SpaceX’s Starlink satellite internet system are rapidly outpacing traditional approaches in terms of speed, scalability, and cost-effectiveness. This raises important questions about whether Germany’s current investment strategies are aligned with the realities of modern technology. Continuing to pour resources into outdated systems risks wasting valuable public funds while leaving the country further behind in the global digital race.

Similarly, transportation infrastructure requires urgent attention. Germany’s rail systems, once symbols of efficiency and engineering excellence, are increasingly showing signs of wear. Congestion, delays, and maintenance backlogs have become commonplace, undermining economic productivity and public confidence. Modernizing these systems is essential not only for improving domestic connectivity but also for maintaining Germany’s position as a central hub for European trade and logistics. However, achieving this will require streamlined project management processes and a commitment to overcoming bureaucratic hurdles that have long-delayed progress in this sector.

The potential economic returns from well-executed infrastructure projects are substantial. Investments in transportation, energy, and digital connectivity typically yield high multipliers—often doubling their initial costs through increased productivity and economic output over time. However, realizing these benefits depends on efficient implementation. Mismanagement or poorly conceived projects can quickly turn promising investments into financial liabilities, wasting public resources and eroding trust in government initiatives.

Germany’s approach to infrastructure must also account for the rapid pace of technological advancement. Traditional investment cycles often fail to keep up with the speed at which technologies evolve, leading to projects that are outdated before they are even completed. To avoid this trap, Germany must adopt a more agile approach to planning and execution—one that prioritizes flexibility, scalability, and future-proofing over rigid adherence to legacy systems or processes.

Infrastructure and technology represent the twin pillars upon which Germany’s future prosperity will be built. By modernizing its physical and digital foundations while embracing innovative solutions that align with global trends, Germany can position itself as a leader in the 21st-century economy. However, success will depend on the government’s ability to overcome inefficiencies, streamline implementation processes, and ensure that public investments deliver maximum value for both current and future generations.

 Defense Spending: A Necessary Commitment with Limited Returns

Germany’s defense spending has become a focal point of public and political debate, driven by shifting geopolitical realities and increasing pressure from international allies. As one of the largest economies in the world, Germany is expected to shoulder a greater share of the collective security burden, particularly within NATO. The war in Ukraine has underscored the need for a capable and modern military. However, while the strategic necessity of increased defense spending is clear, its economic implications are far more complex and less favorable when compared to other forms of public investment.

The Bundeswehr, Germany’s armed forces, has long been criticized for inefficiencies, outdated equipment, and a cumbersome procurement system. Despite significant budget increases in recent years, these structural issues persist, limiting the effectiveness of defense spending. Much of the allocated funding flows into administrative overhead or is directed toward consultants, foreign suppliers, particularly U.S.-based defense contractors. This reliance on external providers not only reduces the economic benefits that could be realized domestically, but also increases Germany’s dependency on other nations for critical military capabilities. Addressing these inefficiencies will require comprehensive reform of procurement processes and a focus on fostering domestic innovation in defense technologies.

From an economic perspective, defense spending offers limited returns compared to investments in infrastructure or technology. While necessary for ensuring national security, military expenditures typically yield low economic multipliers—ranging from 0.5 to 1—meaning that each euro spent generates relatively little additional economic activity. In contrast, infrastructure projects or investments in emerging technologies often produce multipliers of 2 or higher, delivering substantial long-term benefits in terms of productivity and growth. This disparity highlights the opportunity cost associated with increased defense budgets: every euro directed toward military spending is a euro that cannot be invested in areas with higher economic returns.

The challenge for Germany lies in balancing its strategic obligations with its economic priorities. As part of NATO’s collective defense framework, Germany has committed to increasing its defense budget to meet the alliance’s target of 2 percent of GDP. While this commitment is essential for maintaining credibility among allies and addressing evolving security threats, it places additional strain on public finances already stretched by rising social expenditures and infrastructure needs. The government must therefore ensure that defense spending is as efficient and effective as possible, minimizing waste and maximizing the strategic value of every euro invested.

Amendment to the constitution - climate neutrality by 2045

There are also exciting conflicts of interest between the economic growth required to refinance the debt, the reactivation of industry - particularly in the area of production - and the stated goal of climate neutrality, which is to be enshrined in the German constitution.

In an open letter, the well-known German constitutional law expert Prof. Dietrich Murswiek warns in detail about the planned wording of the law and its impact on future interpretations by German courts and the application of the law in practice. According to him, if the wording “by 2045” is not deleted, there is a risk of unforeseeable constitutional consequences. Successful climate lawsuits must then be expected, leading to CO2 reduction obligations that could drastically restrict the Bundestag's economic and budgetary policy-making options for at least the next three legislative periods and stifle German industry.

Germany vs. France: A Tale of Two Fiscal Strategies

Let’s compare another European Nation to maybe get a glimpse into the future. Germany and France, as two of Europe’s largest economies, share striking similarities in their fiscal trajectories but differ markedly in their approaches to managing economic challenges. Both nations have experienced rising public debt and a relaxation of traditional fiscal constraints, in response to economic pressures. However, the outcomes of these strategies reveal important contrasts that highlight Germany’s relative strengths and vulnerabilities.

France’s debt-to-GDP ratio has soared past 110 percent, driven by high social expenditures and a reliance on deficit spending to sustain public services. Germany, by comparison, maintains a more modest debt level of 66 percent of GDP, providing it with greater fiscal flexibility. Additionally, Germany benefits from lower borrowing costs, with average interest rates on public debt at 2.75 percent compared to France’s higher rates. These factors give Germany a stronger starting position, but they also mask underlying risks that could erode its fiscal advantage over time.

One key difference lies in the allocation of public funds. While France has prioritized social spending to maintain domestic stability, Germany intends to focus on infrastructure projects with higher economic multipliers. This strategic emphasis on growth-oriented investments positions Germany for long-term gains but also exposes it to the pitfalls of inefficient implementation and rising costs.

Despite these advantages, Germany faces challenges that could bring its fiscal trajectory closer to France’s precarious path if left unaddressed. High energy costs, structural inefficiencies in public spending, and a slow pace of reform in key sectors such as defense and digital infrastructure weigh heavily on its economic outlook. Without decisive action to address these issues, Germany risks losing the competitive edge that has historically set it apart from its neighbors.

 Conclusion

Germany’s current economic predicament is like watching a seasoned athlete who has won countless championships but now finds themselves outpaced by younger competitors—not because they lack talent, but because they’ve been running the same playbook for too long. The country’s record revenues are impressive, but increasingly resemble a sprinter celebrating their lead halfway through a marathon, cheered on by a coach who lost touch with the new right way of training. Meanwhile, structural inefficiencies and demographic headwinds loom like mile markers yet to be crossed.

Doing what worked yesterday might feel comforting, but it’s also unwise when the game changes. Germany needs to pull its proverbial goalie—take calculated risks by embracing bold reforms that prioritize innovation and efficiency. Whether it’s streamlining defense procurement or ditching outdated digital infrastructure plans for cutting-edge solutions like satellite internet, massive tax cuts and a tight belt on its finances. The country must act decisively before its fiscal flexibility evaporates.

The lesson here isn’t just about survival—it’s about thriving in an environment where standing still is akin to moving backward. In the end, Germany doesn’t need to reinvent itself entirely; it just needs to stop pretending that yesterday’s strategies will win tomorrow’s game. After all, even the best players know when it’s time to change tactics—or risk being benched by history itself.

Disclaimer:

The content provided in the articles on The Haptic Investor is for informational and entertainment purposes only. The articles do not constitute financial advice, and the information presented should not be considered as a recommendation or endorsement for any investment, financial, or business decisions.

Readers are encouraged to seek professional financial advice and conduct their own research and due diligence before making any financial or investment decisions. The Haptic Investor and its authors do not assume any responsibility for the accuracy, completeness, or timeliness of the information provided.

Any actions or decisions made based on the information found on The Haptic Investor are the sole responsibility of the reader. The Haptic Investor and its authors will not be held liable for any losses or damages resulting from the use of the information provided in the articles.

It is crucial to understand that the financial landscape is dynamic, and what may be true or relevant at the time of publication may change. Readers should consider the information as a starting point for their own research and not as a substitute for professional financial advice or consultation.

By accessing and using the content on The Haptic Investor, readers acknowledge and agree to this disclaimer.

Embark on a journey through the glasses of a #lawyer, #privateequity #executive and fifth generation #familyentrepreneur as #thehapticinvestor" takes you deep into the heart of #industry #insights. Drawing on a rich tapestry of the author's experiences in big #law, private equity, #consulting, #assetmanagement and #entrepreneurship, this publication is your entertaining compass in the complex world of #investments and #business.

In short: The Haptic Investor is a Is a #financialmagazine with a focus on #quantitative, #macroeconomic and #operational #economic #analyses of various #markets across different #assetclasses.

#germany #merz #elections #wahlen #deutschland #bundestag #klimaneutralität #climateneutral #klimaneutral #climateneutrality #co2 #verfassung #constitution