The German Question Returns
As Germans head to the polls, taking stock of an economic system coming apart, and its consequences.
By Michael Lind, former economics editor at Commonplace
Is the German model kaput? On the eve of Germany’s elections, the question no longer seems outlandish.
Until the last few years, Germany spared the deindustrialization, rising inequality, and collapsing union power that characterized the U.S. and other English-speaking countries, seemed to offer an alternate model of modern capitalism.
Until the last few years, Germany spared the deindustrialization, rising inequality, and collapsing union power that characterized the U.S. and other English-speaking countries, seemed to offer an alternate model of modern capitalism.
Its manufacturing trade surpluses were viewed in Germany and elsewhere as signs of virtue, while its political system seemed to be immune against anti-system populists like Berlusconi, Farage, and Trump.
But Germany today is facing crises on many fronts. As Constanze Stelzenmuller, a Brookings senior fellow, has observed, Germany “outsourced its security to the United States, its energy needs to Russia and its export-led growth to China.”
All three of the plates that Germany juggled successfully for a while have fallen and shattered. The Trump administration is insisting that Germany and America’s other NATO partners spend at least 5% of their GDP on defense. Earlier, the disruption of Russian natural gas imports forced Germany to turn for natural gas to Norway, the Netherlands, and Belgium, as well as to liquefied natural gas from the U.S.—even as the ambitious Energiewende (renewable energy transition), begun in 2010 under former Chancellor Angela Merkel, has raised energy costs for industry and consumers in Germany, which now has the second-highest electricity costs in the world. After a decade of running trade surpluses with China, Germany suffered a trade deficit in 2022 and only a small trade surplus in 2023.
Until recently, almost 40% of Volkswagen’s revenue came from China. But in 2023 a Chinese company, BYD, ended Volkswagen’s 15 year run as the top-selling automobile brand in China.
Rising sales of Chinese electric vehicles (EVs) in Europe led the EU to impose tariffs, over the opposition of the German government, which fears alienating its Chinese customers and business partners. Ominously, BASF, a major German chemical company, shut down factories in its hometown of Ludwigshafen in 2023 and announced a $10 billion investment in chemical production in China.
In 2023, German industrial production overall was 5% below its level in 2014.
While struggling to defend its position in the analog automotive economy, Germany is missing out on the digital economy. Except for the software company SAP, Germany’s tech sector is negligible. The country that invented or perfected much of the science and technology of the second industrial era—the automobile, the jet engine, nuclear physics—has fallen behind in innovation in the 21st century. Of the 100 most-cited scientific papers on AI, 68 were American, 27 Chinese, and only four were German.
Germany’s decades-long export boom allowed it to ignore its deficit of private investment between 1999 and 2012—a shortfall which at 3% of GDP was the largest in Europe.
But now the Teutonic chickens are coming home to roost—and finding the henhouse in disrepair. Europe’s largest country suffers from crumbling rail lines, roads, and bridges.
Even the vaunted stability of German politics is becoming a thing of the past. The sugar high of trade surpluses can no longer immunize Germany against the diseases that have afflicted other Western nations, including deindustrialization, farmers’ revolts, and voter backlash against mass immigration, which is driving the rise in the polls of the right-wing populist Alternative für Deutschland (AfD).
Battered on all sides, Germany has grown more slowly than other European economies since 2021. German GDP actually contracted by 0.3% in 2023 and by 0.2% in 2024. In 2024 its economy was only 0.3% larger than it was before the COVID pandemic in 2019. The government predicts GDP growth of only 0.3% in 2025.
Modell Deutschland is finished, and it is not clear what new model will succeed it. What happens to Europe’s largest nation matters for the world and for the United States, Germany’s biggest export market and Germany’s military protector. The German Question is back on the agenda.
Modell Deutschland is finished, and it is not clear what new model will succeed it. What happens to Europe’s largest nation matters for the world and for the United States, Germany’s biggest export market and Germany’s military protector. The German Question is back on the agenda.
The fate of Germany was central to the 75 Years’ War of 1914-1989. In the two world wars, attempts by Berlin to turn continental Europe into a German imperial bloc by force were defeated by the great powers on the periphery of Europe: the British Empire, Russia and then the Soviet Union, and the United States.
During the Cold War between the Soviet bloc and the Western powers that followed, any chance of German revanchism was eliminated by the partition of Germany into a communist East and a liberal democratic West, with its former capital, Berlin, partitioned and occupied by the victors of World War II. The Federal Republic of Germany, known colloquially as West Germany, was deprived of military autonomy as a protectorate of the U.S., which controlled NATO, and it was deprived of complete economic autonomy by means of increasingly more intrusive European integration, from the European Coal and Steel Community (1952) to the European Economic Community (1957), and, after German reunification in 1990, to the European Union (1993), and the common-currency Eurozone (1999). Embedded in NATO and European institutions, West Germany during the Cold War was a semi-sovereign state and a civilian manufacturing power. Like postwar Japan, America’s other major defeated and debellicized protectorate, Germany was encouraged to make cars, not wars.
With the end of the Cold War and the disintegration of the Soviet Union, the German Question returned. When formerly communist East Germany was absorbed into the Federal Republic, many in Washington and other Western capitals feared the re-emergence of Germany as an independent military power. The alleged need to avert a German Mitteleuropa was an argument used in Western foreign policy circles for NATO intervention in the Balkan Wars and the expansion of NATO to Germany’s east. At the time General William Odom, former head of the National Security Agency (NSA), told me, “we need four hundred thousand troops stationed in the Balkans to keep an eye on Germany.” He was echoing NATO’s first Secretary General, Lord Hastings Ismay, who is alleged to have remarked that the purpose of NATO was to keep the Americans in, the Russians out, and the Germans down.
Following the Cold War, the new, reunited Germany did run amok—but in the realm of commerce, not conquest. Instead of becoming a dangerous military great power again, Germany mutated from an export great power to an export superpower.
After annexing former East Germany in 1990, the enlarged Federal Republic suffered for the rest of the decade from indigestion, like an anaconda that had swallowed a porcupine. The phrase “the sick man of Europe,” once applied to the declining Ottoman Empire in the Balkans, was sometimes used for Germany. But in the early 21st century Germany boomed.
Between 2000 and 2007, Germany’s current account surplus, driven by its merchandise trade surplus—the gap between exports and imports—exploded from 1.5% to 7.5% of GDP.
Its current account surplus with its European trading partners tripled, while the PIIGS (Portugal, Italy, Ireland, and Spain) developed corresponding trade deficits, even though their trade and Germany’s had been relatively balanced earlier.
Germany also had a growing trade surplus with the U.S., which today is Germany’s largest trading partner and the destination of 11% of German exports—but the source of only 7% of German imports.
German exports to the U.S. in 2023 accounted for 2.1% of German GDP and 7% of value added in German manufacturing, while only 0.8% of manufacturing value added is exported by the U.S. to Germany.
Germany’s trade surplus with the U.S. hit a record high of $72 billion in 2024, breaking the previous record in 2023 of $63.3 billion.
Market share matters because manufacturing is characterized by increasing returns to scale. For the winners in these winner-take-all industries, larger markets make possible longer production runs at lower costs, in a kind of snowball effect.
According to the World Bank, exports as a share of German GDP in 2023 were 43.4%, compared to 34.3% in France and 31.7% in the UK—and only 11% in the U.S.
By running these chronic trade surpluses, Germany in effect has been robbing consumer demand from other countries to provide a perpetual stimulus to the German economy, subsidizing overproduction by an overbuilt manufacturing sector.
By running these chronic trade surpluses, Germany in effect has been robbing consumer demand from other countries to provide a perpetual stimulus to the German economy, subsidizing overproduction by an overbuilt manufacturing sector.
Remarkably, between 2000-2007, the growth of German domestic demand contributed only 1.5% to Germany’s cumulative GDP growth of around 9.5%, four-fifths of which came from net exports. The sugar high of export surpluses hid the weakness of domestic spending.
Flash forward to 2023, when exports, which rose only 0.6% that year, were the sole contribution to German GDP growth, which shrank by 0.1% and would have shrunk more without exports—underlying the absence of growth in domestic consumer spending or investment.
To make matters worse, in the last generation German officialdom insisted that Germany’s European trading partners needed to become more competitive by means of wage suppression and government austerity, depriving their own workers and consumers so they could run their own trade surpluses with the rest of the world to compensate for their trade deficits with Germany. In effect, Germany sought to turn the Eurozone into a German-led mercantilist bloc, built not on economic strength but by manipulating the rules of trade. The result is gains in market share in manufacturing at the expense of trading partners, which experience an unwelcome made-in-Germany industrial policy that shrinks their own manufacturing sectors and forces labor and investment into less productive and often less remunerative national service sectors, impoverishing them in the process.
The perception that Germany’s chronic current account surpluses are bad for the U.S. and the world economy did not originate with the Trump administration. In a report to Congress in 2013, the Obama administration criticized Germany’s surpluses: “The net result has been a deflationary bias for the euro area, as well as for the world economy.”
Two years later, in 2015, former Fed Chair Ben Bernanke, in an essay entitled “Germany’s Trade Surplus is a Problem,” called for Germany to increase domestic demand in order to rebalance its export-heavy economy, by investing in infrastructure, raising German wages so German workers could spend more, and adopting targeted reforms like tax incentives for increased domestic investment.
The German establishment has often attributed the widening gap between surplus and deficit nations in the Eurozone to superior German craftsmanship and hard work, combined with the alleged flaws of its trading partners, like overly generous welfare systems and, implicitly, the laziness of their people. At a meeting I attended in Brussels in the 2000s, the Greek representative introduced himself by saying, “I am from Greece. I sleep until ten in the morning, then I make love, then I take a sun bath on the beach, and then I drink some wine.” Everyone laughed, except for the Germans in attendance, who were not amused.
German craftsmanship and hard work are real, but they do not explain the sudden conversion of Germany from the sick man of Europe in the 1990s, following unification, into the export powerhouse of the 2000s. As Thomas Fazi has pointed out, German productivity growth lagged that of Greece from 2000-2008.
The truth is that Germany is an export behemoth because of rigged monetary and labor markets, not because of free markets.
The truth is that Germany is an export behemoth because of rigged monetary and labor markets, not because of free markets.
The first factor was the replacement of the Deutsche Mark by the euro. The gradual adoption of the euro as a common currency, begun in 1999 and completed in 2002, blocked one method of adjustment of trade imbalances—the devaluation of the currencies of the deficit nations and a rise in an independent German currency that would reduce German exports. The IMF in 2014 estimated that Germany’s inflation-adjusted exchange rate was undervalued by 5-15%.
Meanwhile, Germany’s policy of suppressing wage growth to make itself more competitive also added rocket fuel to the German export economy. In 2003-4, the Social Democrats of Chancellor Gerhardt Schroeder—an employer-friendly neoliberal like Bill Clinton and Tony Blair–imposed the Hartz IV labor reforms, which reduced the bargaining power of German workers by reducing unemployment and welfare benefits.
In contemporary Germany, as in the English-speaking world, large-scale unemployment has been averted, and underemployment disguised, by the creation of a new “precariat” of underpaid workers in “mini-jobs” in the service sector, who serve as a “reserve army of labor” that further undercuts the ability of German workers to demand higher wages.
After a period of no net immigration from 1995 to 2010, Germany’s reserve army of cheap labor has been dramatically expanded by two waves of mass migration—one largely from Eastern Europe between 2010 and 2015, and a second consisting of migrants from Syria, Afghanistan, and other Middle Eastern and Central Asian countries, many of them economic migrants who were admitted as refugees or asylum seekers. The Ukraine war produced a third wave. The result is that the foreign-born population in Germany rose from 7.5% in 1990 to 15.7% in 2019.
The migrant flow has reduced the decline of both the German population and the working-age population, at the price of cultural conflicts and a populist backlash similar to those elsewhere in Western Europe and the U.S. According to a Deutsche Bank study, the influx of workers from other EU countries “had a significant dampening effect on the growth rate of mean wages among German full-time employees.”
A study of recent mass migration from the Middle East and other areas outside of Europe to Germany finds in contrast that “a sudden influx of asylum seekers may possibly lead to a substantial fall in the employment rates, because asylum seekers are not immediately allowed to work in the country.”
As German wages in the last generation failed to keep up with the European Central Bank’s inflation target, German exports became more competitive thanks to declining labor cost growth. In 2017 the German economist Heiner Flassbeck observed: “In a nutshell, Germany has operated on a policy of ‘beggar-thy-neighbor,’ but only after ‘beggaring its own people’ by essentially freezing wages. This has been the secret to Germany’s success during the last fifteen years.”
In 2017 the German economist Heiner Flassbeck observed: “In a nutshell, Germany has operated on a policy of ‘beggar-thy-neighbor,’ but only after ‘beggaring its own people’ by essentially freezing wages. This has been the secret to Germany’s success during the last fifteen years.”
The flip side of the suppression of wage growth in Germany has been the suppression of domestic demand as a source of German GDP growth, as workers are punished by the consequences of the economic rigging. Another possible source of GDP growth in Germany, in the form of government-sponsored domestic investment in infrastructure and public goods, was ruled out because of strict limits on German borrowing imposed by the “debt brake”—a misguided limit on borrowing that Chancellor Angela Merkel and her coalition partners wrote into the Basic Law, Germany’s constitution, in 2009.
Americans who think of Europeans in general as left-wing fans of big government may be surprised to learn that many Germans are as hostile to government borrowing as any American deficit hawk, preferring that the public sector imitate the thrift of the proverbial “Schwabian housewife” while rejecting post-Keynesian macroeconomics as heresy.
***
In his new book Kaput: The End of the German Miracle, Wolfgang Munchau, a former Financial Times columnist now at the New Statesman, describes the German model as “neo-mercantilism”: “The goal of neo-mercantilism is to create large export surpluses. It is the 21st-century pursuit of 18th-century French trade policies, with 19th-century companies, using the technologies of the 20th century.” Indeed, the policy of Germany, along with other export mercantilist nations like China, is similar to the strategy advocated by the British mercantilist theorist Thomas Mun in 1664: “The ordinary means…to increase our wealth and treasure is by [foreign trade], wherein [we] must ever observe this rule; to sell more to strangers yearly than [we] consume of theirs in value.”
Ironically, free market globalization since the end of the Cold War has led to the deindustrialization of liberal economies like the U.S. and other English-speaking countries, while allowing nations which pursue one or another model of state-backed neomercantilism like Germany and China to capture increasing shares of global manufacturing. But surplus countries can follow this model only as long as their trading partners accept chronic trade deficits. In cases of trade conflict, the deficit countries may pay less of a price than the export superpowers.
From a macroeconomic perspective, the great global division is not between democracies and autocracies or the West and the Rest, but between countries with chronic trade surpluses and their trading partners who run corresponding trade deficits. As Michael Pettis points out:
While manufacturing comprises 18% of its GDP (compared to 16% globally and 11% in the US) it comprises 20% of Japan’s, 21% of Singapore’s, 26% of South Korea’s, 28% of China’s, and 34% of Taiwan’s. These economies all combine a disproportionately large manufacturing share of GDP, a disproportionately low consumption share and, as a direct consequence, an historical reliance on trade surpluses to resolve the imbalances between the two.
When we look at the world economy as a whole, we find that China’s share of global GDP in 2025, measured in purchasing power parity (PPP), is 19.29%, the U.S. share is 14.84%, and the EU share is 14.19%.
Added together, these three economies account for nearly half of the world economy. The business model of two of the three, China and the EU, dominated by Germany, has been to sell more merchandise to the third, the U.S., than they buy from it. China’s surplus in trade with the U.S. in 2024 was £280 billion while Germany’s was almost as high—£230 billion—even though Germany’s population is 16 times smaller than China’s.
It is true that the U.S. runs a global surplus in services like tech and finance, but in 2022 the service sector surplus was $260 billion, meaning that service exports would need to increase fourfold in order to compensate for the goods deficit of more than a trillion dollars.
When it comes to merchandise trade surpluses, Germany’s leaders, along with the neo-mercantilists of China, Japan, and South Korea, have long agreed with Mae West: “Too much of a good thing is wonderful.” But sooner or later the surplus countries will learn the hard way that Stein’s Law, named after the American economist Herb Stein, cannot be evaded: “If something cannot go on forever, it will stop.” Germany’s ability to power growth by running trade surpluses as the expense of its European neighbors, the U.S., and much of the world may be coming to an end.
Germany’s ability to power growth by running trade surpluses as the expense of its European neighbors, the U.S., and much of the world may be coming to an end.
In a trade war between surplus and deficit countries, the surplus countries like Germany have the most to lose. To be sure, a country that tries to reduce its trade deficit by means of tariffs, quotas, or local-content requirements might inflict pain on domestic consumers of imported products or domestic businesses that rely on imported inputs, and higher prices might contribute to inflation. But import-substitution protectionism can also have a stimulative effect, as existing domestic businesses or domestic entrepreneurs and investors compete to fill the demand left by the exclusion of foreign products. At the same time, locked out of former markets, the surplus country is stuck with massive overcapacity in export industries and the prospect of mass unemployment or painful dislocation for their workers.
The Trump administration, then, in trying to preserve or rebuild particular American manufacturing industries, can threaten trading partners that run chronic bilateral merchandise trade deficits from a position of strength. The goal, shared by U.S. administrations from Obama’s to Trump’s, is rebalancing, with the manufacturing share of the U.S. economy growing somewhat while Germany manufactures less and expands its domestic service sector and domestic investment—if necessary, by unilateral American protectionist measures that deny the American market to German imports.
The trade imbalance undermines German threats to retaliate in trade because the US has less than Germany to lose. Nevertheless, Berlin does have some leverage in trade negotiations with Washington. Germany, unlike China and like Japan and South Korea, holds American hostages, in the form of U.S. military bases. The top three countries where U.S. troops are stationed overseas are Japan (53,246), Germany (35,188), and South Korea (24,159).
The headquarters of US European Command (EUCOM) is in Stuttgart, the US Army Europe is headquartered in Wiesbaden, the US Marine Corps Forces of Europe and Africa are headquartered in Boblingen, near Stuttgart. Five of the seven US Army garrisons in Europe are in Germany. The US Army Bavaria Garrison at Grafenwoehr is the largest overseas U.S. army base in the world. Ramstein Air Base is a hub for operations in the Middle East, Central Africa, as well as Europe.
From the Cold War to the present, America’s ability to project global power has depended on forward bases on the territory of its German, Japanese, and South Korean protectorates. The costs are partly paid by the countries in which the bases are located. In addition, America’s allies are major purchasers of U.S. weapons and military vehicles. The U.S. has fallen behind in many areas of manufacturing, but today it accounts for around 40% of global arms exports.
It is no surprise that from the days of Truman and Eisenhower to the present American defense policymakers and national security officials have often argued against aggressive U.S. retaliation in trade directed at the export-oriented mercantilism of U.S. military protectorates like Germany, Japan, and South Korea. It remains to be seen if Trump can resist the pressure from the Pentagon and the U.S. foreign policy establishment to go easy on these allies.
America’s mercantilist client-states in Europe and East Asia have also found American allies in service industries like finance and tech, which enjoy surpluses in Europe and Asia, and among American commodity exporters that seek foreign markets and do not fear competition from imports. Long ago, Japan learned the trick of defusing American efforts to reduce its manufactured goods surpluses by offering to import more American beef or soybeans.
Will American natural gas exports be the new soybeans? It is hard to imagine that Germany, having resisted pressure for decades to gradually rebalance its economy by boosting domestic demand, borrowing to fund infrastructure investment, and attracting more FDI, will completely abandon its lucrative export-oriented model. A more likely scenario is one in which Germany responds to pressure from the U.S. in trade negotiations by agreeing to increase its military spending (enriching American defense contractors) and buying more American natural gas. For its part, the Trump administration could get a short-term boost from a combination of military Keynesianism, funded in part by arms purchases and military-base offsets by U.S. client-states, and more oil and gas exports.
Modell Deutschland 2.0, the export superpower, arose in the 2000s, having replaced the earlier Modell Deutschland 1.0 that existed in West Germany from the 1940s until the end of the Cold War. Modell Deutschland 2.0 is breaking down, but it is unclear what Modell Deutschland 3.0 might be. In the long run, the lopsided economies of both Germany and the U.S. somehow must be rebalanced. But to paraphrase Keynes, in the long run we are all kaput.