MULFINGEN, Germany — The time has come for Germany to reinvent its economic framework. The previous model, reliant on inexpensive natural gas from Russia and profitable exports to China, has faltered, resulting in stagnation and concerns regarding the country’s future prospects. Formulating a new growth strategy will be the primary challenge for the incoming government following the national election scheduled for February 23, which is taking place seven months earlier than anticipated. The economic landscape in Germany, once celebrated for its product quality, has not witnessed significant growth over the past five years.
A combination of factors has contributed to Germany’s fall from being an industrial leader to a laggard in the post-pandemic era. Key issues include an overabundance of bureaucracy, a lack of skilled labor, slow technological advancement, and ambiguous leadership from the outgoing coalition government. Further compounding the situation are rising competition from China and soaring energy costs resulting from Russia’s conflict in Ukraine.
Klaus Geissdoerfer, the CEO of industrial fan manufacturing company EBM-Papst, voiced a common sentiment, emphasizing the need for a more business-friendly political environment. EBM-Papst, which generates annual revenues of 2.5 billion euros ($2.6 billion) and operates on three continents, has notably struggled in the German market, reporting a 4.1% drop in revenue. Geissdoerfer explained that his company’s heating technology sector faced an 18.7% decline in sales due to the poorly managed transition away from gas furnaces towards environmentally friendly electric heat pumps.
The challenges arose from confusing regulations under the Building Energy Act proposed by Chancellor Olaf Scholz’s coalition, leading many consumers to delay necessary heating system upgrades or hastily purchase new gas devices before the law became effective. This hesitation adversely impacted the demand for the energy-efficient heat pump fans produced by EBM-Papst. “Consumers were left questioning which technology best suited their homes,” Geissdoerfer highlighted, which contributed to their reluctance to invest in new systems.
Reflecting a broader industry frustration, he criticized the excessive bureaucracy in Germany. A new 2023 law requiring both public and private sectors to combat climate change through energy use reductions has placed additional burdens on companies. This has forced EBM-Papst to allocate resources toward compliance reporting rather than focusing on implementing energy-saving measures.
Despite these setbacks, EBM-Papst is making strides in the direction where many economists argue Germany should focus its industrial efforts: green and digital technology. The Mulfingen-based company is currently providing efficient cooling systems for energy-intensive artificial intelligence data centers. Additionally, they are developing AI capabilities to assist tech firms in optimizing energy consumption and predicting equipment replacement needs.
To mitigate the negative impact of the domestic economy, EBM-Papst is redirecting its investments toward Asian and U.S. markets. Their U.S. customers receive supplies from operations in Farmington, Connecticut, and Telford, Tennessee. The decision to localize production abroad, which began before the COVID-19 pandemic, serves as a protective measure against potential import tariffs that could arise from the U.S. administration.
Germany’s reliance on Russian and Chinese markets has led to significant economic challenges. The cessation of most Russian gas supplies due to Germany’s backing of Ukraine has caused electricity costs for the industry to soar to levels approximately 2.5 times higher than those faced by counterparts in the U.S. and China. The Mecanindus-Vogelsang Group, which specializes in producing precision parts for the automotive sector, reported that energy expenses at its German facilities are double those at its U.S. sites, resulting in annual costs exceeding 100,000 euros and creating severe competitive disadvantages.
The decline in German exports has been exacerbated by competition from China, where local manufacturers began producing machinery and automotive products, often with government support. Consequently, the German economy has contracted for two consecutive years, and its recovery has barely outpaced pre-pandemic levels. In comparison, the U.S. economy has expanded by 11.4% during this period, while China’s growth has reached 25.8%.
Marcel Fratzscher, president of the German Institute for Economic Research, attributes this stagnation to a sense of complacency that developed during the booming export years. German companies have lagged in adapting to technological changes, notably the shift towards electric vehicles. He observed, “Success during the 2010s led to a slower response to the need for change and adaptation.” As continuous economic struggles persist, a “mental depression” has set in, contributing to a pervasive pessimism among both businesses and citizens, further stifling investment.
Many business leaders and economists are urging the upcoming government to consider lifting constitutional limits on debt to enable higher public investment in infrastructure and education. Fratzscher raises concerns about whether political leaders can embrace necessary transformation, highlighting the challenges posed by Germany’s historical reliance on consensus-driven governance and a stable political framework. “We need a shift in mindset, an understanding that economic transformation needs to occur more rapidly,” he concluded, emphasizing the urgency of strategic change.
