Is Germany’s Economic Model Truly Kaputt?

More than two decades after Germany was famously called “the sick man of the euro” by The Economist magazine, investors must wonder if the country’s industrial heart is once again critically weak. This week brought more dismal German economic data: Industrial production fell 1.5% in June from the previous month, worse than analysts expected. Though figures released on Friday showed a rise in exports, the volume of goods Germany sends abroad is still close to lows plumbed in the 2009 global financial crisis.

German gross domestic product has clocked three quarters of negative or zero growth , making the country the worst performer among major eurozone nations since 2019. Previously it was the top performer. How long this “slowcession” lasts is a crucial question for picking stocks in Europe. Despite the recent economic reversal, the DAX has been by far the best equity index in the eurozone over 20 years, returning almost 360%.

By comparison, investing in long-stagnant Italy yielded a paltry 140% return. German industrial output has been in decline since 2018, when global vehicle sales fell for the first time in almost a decade. A postpandemic rebalancing of spending toward services has made the situation worse. Growth in China, the fourth-largest market for German exporters, has slowed.

On Thursday, shares in Siemens —the largest industrial firm in Europe—fell 5% after it cited these two factors as the cause of a fall in orders during the second quarter. Some of the grit that has gotten into the German economic machine might be hard to dislodge . Chinese carmakers have turned from partners into fierce competitors as Volkswagen , BMW and Mercedes-Benz play catch-up in electric-vehicle technology.

It isn’t just China that is seeking to substitute imports for domestic products; the Biden administration is copying Beijing’s playbook. There is also energy. At the same time as German industry has lost Russia as its main source of cheap gas, Berlin has closed the country’s last three nuclear power plants. Angst has gripped German officials and executives in an echo of worries voiced at the start of the millennium, when unemployment surged and globalisation ravaged factories.

Back then, the response was a policy package that prioritised international competitiveness, incentivising the creation of low-pay “minijobs.” The government embraced fiscal austerity and nudged unions to push for wage restraint. The result was a 20-year decline in unemployment and a current-account surplus that reached an eye-watering 8% of GDP even as the U.S. ran huge deficits. Many economists praised German labor flexibility and fiscal austerity.

Conversely, critics pointed out that surpluses made most households worse off, and that Germany’s factory-job losses were just as large as America’s. Politics aside, it was largely a fortuitous jump in foreign demand that drove growth, allowing the nation to solidify gains in industries where it already had an advantage.

“Over the last 20 years, Germany always had an external sugar daddy: China, the eurozone and then the U.S.,” said Carsten Brzeski , chief economist at ING.

The flaw in this model was that it outsourced economic policy, leading to problematic dependencies on geopolitical rivals. It also fostered an excessive focus on old winners at the expense of new digital technologies and renewable energy. Bearish investors are right that it will take years to rectify these problems, particularly given the complexity of consensus-based German politics. Yet the German export-led model also got a lot right. As in China or South Korea, it channeled demand toward higher-productivity, higher-wage firms.

Unlike in the U.S., German manufacturing became more complex. That allowed the country’s industrial base to survive better than in other Western countries. In a world where nations are scrambling to reshore industries, Germany already has them. The readiest answer to its growth challenge isn’t to turn away from manufacturing but to double down by taking a page from Chinese and now U.S. industrial policy.

The German government is already doing this with semiconductors as part of the European Chips Act. Back in June, it signed off on 10 billion euros (around $11 billion) in subsidies for American chip maker Intel to build two plants, and earlier this week it committed €5 billion to help Taiwan’s TSMC set up a factory with local partners like Infineon.

A similar approach is needed to upgrade the country’s power generation and transmission and accelerate the transformation of carmakers and other industrial incumbents. Long-term energy guarantees could stem cost swings in the meantime. Given its political influence over the European Union, it seems hard to imagine that the bloc’s green-economy push could somehow leave Germany in a less dominant position . Historically, this is one patient that always leaves the hospital.

Former New Hampshire Gov. Chris Sununu delivered a warning to Treasury Secretary Scott Bessent during a recent visit to Washington: Already-high airfares will surge if the war in Iran doesn’t end soon.

Sununu, a Republican who represents some of the biggest airlines as president of the industry group Airlines for America, has for weeks sounded the alarm to Trump administration officials about the economic fallout from high jet fuel prices. The war, Sununu has argued, must come to a close soon, or things will get worse.

Administration officials have gotten the message.

Privately, President Trump’s advisers are increasingly worried that Republicans will pay a political price for the rising fuel costs, according to people familiar with the matter. Many of those advisers are eager to end the war, hoping prices will begin to moderate before November’s midterm elections.

The fallout from the U.S.-Israeli attack in late February has slowed traffic through the Strait of Hormuz, a vital shipping lane, triggering a sharp increase in oil, gasoline and jet-fuel prices.

That means consumers are grappling with high costs ahead of the summer travel season, as they consider vacation plans.

Sixty-three per cent of Americans said they put a great deal or a good amount of blame on Trump for the increase in gas prices, according to a new poll conducted by NPR, PBS and Marist.

More than 8 in 10 Americans said struggles at the gas pump are putting strain on their finances.

Jet-fuel prices roughly doubled in a matter of weeks after the war began, and they have remained high. Airlines have said that will add billions of dollars of additional expenses this year, squeezing profit margins.

U.S. airlines spent more than $5 billion on fuel in March—up 30% from a year earlier, according to government data.

Carriers have been raising ticket prices, hoping to pass the cost along to consumers, and they are culling flights that will no longer make money at higher price levels.

In March, the price of a U.S. domestic round-trip economy ticket rose 21% from a year earlier to $570, according to Airlines Reporting Corp., which tracks travel-agency sales.

So far, airlines have said the higher fares haven’t deterred bookings and they are hoping to recoup more of the fuel-cost increases as the year goes on.

Earlier this week, Trump said the current price of oil is “a very small price to pay for getting rid of a nuclear weapon from people that are really mentally deranged.”

Secretary of State Marco Rubio told reporters that if Iran got a nuclear weapon, the country would have more leverage to keep the strait closed and “make our gas prices like $9 a gallon or $8 a gallon.”

Trump has taken steps in recent days to bring the war to an end. Late Tuesday, the president paused a plan to help guide trapped commercial ships out of the Strait of Hormuz, expressing optimism that a deal could be reached with Iran to end the conflict.

Crude oil prices fell below $100 a barrel on Wednesday, after reports that Iran and the U.S. are working with mediators on a one-page framework to restart negotiations aimed at ending the conflict and opening the strait.

Sununu said Trump administration officials are conscious of the economic fallout from the war: “They get it…and I think that’s why they’re trying to get through the war as fast as they can.”

But he cautioned that it could take months for prices to return to prewar levels.

“Ticket prices won’t go down immediately” after the strait is fully reopened, Sununu said. “You’re looking at elevated ticket prices through the summer and fall because it takes a while for the prices to go down.”

Since the initial U.S.-Israeli attack in late February, Sununu has met in Washington with National Economic Council Director Kevin Hassett, representatives from the Transportation Department and senior White House officials.

A White House official confirmed that Hassett and Sununu have discussed the effect of increased fuel prices on the airline industry. The official said the conversation touched on how the industry can mitigate the impact of high jet fuel prices on consumers.

“The president and his entire energy team anticipated these short-term disruptions to the global energy markets from Operation Epic Fury and had a plan prepared to mitigate these disruptions,” White House spokeswoman Taylor Rogers said, pointing to the administration’s decision to waive a century-old shipping law in a bid to lower the cost of moving oil.

Rogers said the administration is working with industry representatives to “address their concerns, explore potential actions, and inform the president’s policy decisions.”

A Treasury Department spokesman pointed to Bessent’s recent comments on Fox News that the U.S. economy remains strong despite price increases. The spokesman said Treasury officials have met with airline executives, who have reaffirmed strong ticket bookings.

“We’re cognizant that this short-term move up in prices is affecting the American people, but I am also confident, on the other side of this, prices will come down very quickly,” Bessent told Fox News on Monday.

The war has already contributed to one casualty in the industry: Spirit Airlines. Company representatives have said they were forced to close the airline because the sustained surge in jet-fuel prices derailed the company’s plan to emerge from chapter 11 bankruptcy.

The Trump administration and Spirit failed to come to an agreement for the company to receive a financial lifeline of as much as $500 million from the federal government.

Transportation Secretary Sean Duffy has argued that the Iran war wasn’t the cause of Spirit’s demise, pointing to the company’s past financial struggles, as well as the Biden administration’s decision to challenge a merger with JetBlue.

Other budget airlines have also turned to the federal government for help since the U.S.-Israeli attack. A group of budget airlines last month sought $2.5 billion in financial assistance to offset higher fuel costs, and they separately wrote to lawmakers asking for relief from certain ticket taxes.

Is Germany’s Economic Model Truly Kaputt?

Administration officials have spoken to the airline industry, which has voiced concerns about the rising costs.