Stagnation and an exhausted export model push Germany to rethink its welfare state, with EU-wide repercussions.
The Crisis of the German Model
German Chancellor Friedrich Merz recently acknowledged that the current model of the welfare state is no longer financially sustainable. This sounded like a watershed marker of an era. After all, the social model that for decades formed the foundation of German prosperity is now ceasing to fulfil its function. Symbolically, this September marks one year since the ‘Draghi Report’, which frankly identified Europe’s set of problems. The diagnosis was made, but the therapy never began — and now politics is forced to catch up with the economy.
In economic terms, Germany’s social policy no longer works owing to economic stagnation. This stagnation is linked to the exhaustion of a development model built on the export of industrial products of the traditional technological order — automobile manufacturing, heavy machinery and other heavy industries. In other words, the old model has run its course. Germany’s economy is no longer capable of sustaining its customary level of social expenditure.
The Reichstag, Berlin — ‘Germany’s social policy no longer works due to economic stagnation,’ says Alona Lebedieva.
The figures confirm this trend. In 2020, the country’s GDP fell by 4.1%. In 2021, it grew by 3.7%; in 2022 — by only 0.4%; in 2023, it recorded a decline of 0.3%; and in 2024, another 0.2% contraction. The Bundesbank president has warned of a high probability of recession this year: the first quarter showed growth of 0.4%, but the second quarter produced a 0.2% drop. Industrial output, the backbone of the German economy, continues to show a consistent negative trend. Taking January 2021 as a baseline, by January 2025 the industrial production index stood at 89.1. That means a four-year decline of 10.9%.
Economic problems are also reflected in politics, particularly in protest voting. Among those aged 18–24, the ultra-left came first in the elections, while in the 25–44 group it was the ultra-right. This year, the elections were effectively ‘saved’ by the 60+ generation, which ensured support for traditional parties. But this situation only underscores how polarised society has become.
Causes of Stagnation
Several key reasons for economic slowdown can be singled out. Germany has high savings and low investment: both the state and households tend to restrain investment and consumption. Yet investment and consumption are the two main components of GDP. Population ageing also plays a major role: with age, people rely less on economic activity and more on income from savings. As a result, Germany is increasingly turning into a ‘pension economy’, where dynamism is lost.
Another factor is weak innovation in advanced technologies. In the US, most R&D spending goes into high-tech sectors, whereas in Germany it is still directed towards medium-tech industries, primarily the auto sector and classical heavy industry. The US, South Korea and Taiwan are creating fundamentally new products, while Germany continues to generate only industrial innovations within the old technological paradigm. This is not in itself bad, but the effect is smaller than that of high-tech breakthroughs. Moreover, in traditional industries Germany faces fierce competition from Asian countries. A telling fact: the last successful major German start-up was SAP, founded back in 1972. The country’s industry turned out to be unprepared for technological shocks such as the invention and spread of the electric car.
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Thus, Germany missed the moment to transform its export-oriented development model. It failed to take into account the challenges of the 21st century — technological change and innovation in the most promising sectors that have been rapidly developing over the past 10–15 years. Meanwhile, the world has entered an era of fragmentation and trade wars — especially dangerous for an economy dependent on foreign trade.
In March, the Bundestag approved an easing of the ‘debt brake’ introduced back in 2009. This restriction had kept annual government borrowing at no more than 0.35% of GDP. It now no longer applies to military spending above 1% of GDP. In addition, an infrastructure fund of €500 billion has been created. Perhaps the main hope lies in the sharp militarisation of German industry and its reorientation towards the production of military equipment and ammunition, as well as in large-scale infrastructure renovation. This could relaunch the German economy. Of course, turning around such an inert ‘machine’ as the German economy will be extremely difficult, but there are hopes for success.
The future of the entire EU economy, and of the Union itself, depends on how successful this relaunch proves to be. Otherwise, Europe may face dramatic consequences.
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The European Dimension
At the same time, another scenario is possible. Europe’s welfare states, above all Germany, may soon lose the ability to ensure the current level of income for all citizens. This would mean deepening social fractures. Civil peace in Germany would be shaken, and the gap between West and East would widen. And if today this difference remains more or less manageable, in the future it could become critical. In West Germany, people are dissatisfied with massive social benefits for those unwilling to work. In the East, such programmes are seen as a vital necessity. If they begin to be cut, the East will increasingly support the far-right ‘Alternative for Germany’ and may gradually emancipate itself from the West.
If Germany starts to fracture, the whole of Europe may follow suit. The development paradigm could shift from national to global, within which competitive sectoral clusters would form. The United States provides an example with its ‘regions of strength’ — California, Seattle, Boston, New York. This means that the ‘United Europe’ project itself is in question. Criticism of the EU today comes from two platforms. The first is traditional, which does not recognise major changes in economic life and notes that almost nothing has been done since the ‘Draghi Report’. The second is new, which speaks of a radical transformation of the very essence of economic life, and therefore of inevitable political transformations, regardless of whether elites desire them or not.
The modern transport, industrial and information paradigm allows strong regions to live more independently. That is why we see Catalonia’s scepticism towards Madrid, Flanders towards Brussels, and Northern Italy towards Rome. In the US, a similar debate unfolds between California (whose GDP in 2024 reached $4.1 trillion, placing it alongside Germany or Japan) and less developed states. The post-industrial mode of production is beginning to determine the mode of political organisation. In this context, the national affiliation of leading global companies no longer matters.
Thus, if within individual European countries there are tendencies towards fragmentation, questions about the feasibility of maintaining the EU in its current format will be raised even louder. The most powerful EU members may no longer wish to subsidise weaker ones — especially since the strong countries themselves are now facing serious problems. Economic pragmatism could move to the forefront. In that case, either the EU may shrink to a ‘club of the strong’ (Germany, France, Italy, the Netherlands, Austria, Belgium, Luxembourg, Sweden, Finland), or it may split into two or three ‘leagues’. The weakest would comprise Bulgaria, Romania, Slovakia, Croatia, Hungary, the Baltic states, and eventually also current candidates, including Ukraine.
If this happens, it would signify the cementing of an insurmountable divide in the cultural, socio-political and economic thinking of the elites and masses of different groups of European countries. It may turn out that the architects of a United Europe have driven themselves into a dead end: they mixed economics with social humanism, proceeded from optimistic intentions, but life is often merciless towards good ideas. This is already being felt in Germany, as evidenced by Merz’s statement. And it is precisely on whether Germany can transform its socio-economic model that the future of all Europe depends.
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