Interviewer: Hasti Rabiee

Interviewee: Hamzeh Arabzadeh

Hasti: With the release of Angela Merkel’s memoir, discussions about her economic legacy have intensified in global media. This debate has gained traction, particularly as Germany’s economy has struggled in recent years, earning it the label “Europe’s sick man.” Many argue that Merkel’s policies are largely responsible for Germany’s current economic woes. The Economist even ran a piece with the subtitle: “The heavy cost of 16 years without reform for Germany and Europe.” So, what exactly has happened to Germany’s economy, and to what extent can Merkel’s government be held accountable?

Hamzeh: When we talk about Germany, we’re talking about the world’s third-largest economy, one long admired for its resilience, innovation, and productivity. For decades, it has been the economic backbone of the European Union, maintaining a strong export-driven model that positioned it as a global leader in industrial machinery, automobiles, and chemical exports. During the 2008 financial crisis, when economies worldwide experienced mass layoffs and soaring unemployment, Germany’s Kurzarbeit (short-time work) scheme helped keep job losses minimal. The result was what economists later called the German labor market miracle—a testament to the country’s economic strength.

Yet, in recent years, this powerhouse appears to have lost momentum. From 2020 to today, Germany’s GDP has grown by just 0.1%—a stark contrast to the 12% growth in the U.S. over the same period. In 2023, Germany’s economy shrank by -0.3%, making it the worst-performing economy among G7 nations.

The outlook for 2024 isn’t any better. The IFO Institute has projected a GDP contraction of -0.1%, while the IMF has revised its 2025 forecast downward, predicting that growth will remain below 0.5%—far below the expectations for other major economies.

To put this into context, global GDP growth in 2024 is projected at 2.6%, while the Eurozone (excluding Germany) is expected to grow by 0.7% in 2024 and rebound to 1.7% in 2025. In short, while the global economy, including Europe, is seeing modest growth, Germany is increasingly becoming a drag on the Eurozone’s overall performance.

Meanwhile, industrial production—historically Germany’s engine of growth—has been shrinking. In 2023 alone, German manufacturing output declined by 1.5%, while chemical production, one of its key export industries, contracted by almost 10%. Compounding this, new foreign direct investment (FDI) into Germany has dropped sharply, with 2023 marking a 40% decline compared to pre-pandemic levels.

All of this paints a clear picture: Germany is not just slowing down—it is falling behind its peers in ways that go beyond short-term fluctuations. The real question is no longer whether Germany’s economic model is under pressure, but whether structural weaknesses accumulated over the past two decades—many of them dating back to Merkel’s tenure—are responsible for the country’s current stagnation.

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Hasti: Can Germany’s economic struggles be attributed to the impact of the pandemic and lockdowns? Did Germany suffer more than countries like France, the U.S., or the UK? Or is there a different story behind it?

Hamzeh: Not really. In fact, Germany was less affected by COVID and lockdowns than many of its European neighbors. If we look at 2020—the peak of the pandemic—France’s GDP shrank by -7.9%, the UK’s by -11%, Spain’s by -11.3%, and Italy’s by -8.9%. By comparison, Germany’s economy contracted by only -4.0%, making it one of the least affected major economies in Europe.

The reason for this is that lockdowns hit service-heavy economies the hardest. Tourism, hospitality, and retail—sectors that dominate economies like Spain, France, and Italy (where tourism alone accounts for 7-12% of GDP)—took a severe hit. Germany, by contrast, has a highly industrial economy, with manufacturing making up around 20% of GDP, nearly twice the share in France (9.5%) or the UK (10%).

Additionally, Germany’s short-time work program (Kurzarbeit), which covered up to 87% of lost wages for workers on reduced hours, prevented mass layoffs and stabilized consumer demand. In contrast, unemployment spiked in countries like the U.S. and the UK, which relied more on direct cash stimulus rather than employment subsidies.

So, no—Germany’s current economic struggles can’t be blamed on COVID alone. The real problems began in 2021–2022, after the lockdowns ended. If you look at the data, the gap in economic growth between Germany and its peers really widened once economies reopened

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Hasti: Then let’s focus on why Germany entered a period of stagnation and why its growth rate lagged behind its peers.

Hamzeh: Three major dependencies were established during Merkel’s tenure, which significantly shaped Germany’s economic trajectory: First, defense and security dependency on the U.S. Second, economic dependency on exports to China, and third, Energy dependency on Russian gas.

I’ll briefly touch on the military aspect, as it’s less central to our economic discussion. Under NATO agreements, member states are expected to allocate at least 2% of GDP to military spending. The U.S. typically spends around 3%, while smaller NATO members like Greece, Poland, and Slovenia often meet or exceed the 2% threshold. Even France and the UK maintain spending at roughly 2% of GDP.

Germany, however, consistently spent around 1.1% to 1.2% of GDP on defense, only recently increasing it to about 1.4%. This underinvestment has left Germany highly dependent on the U.S. for its security. But the two economic dependencies—on Russian gas and Chinese trade—are even more critical in understanding Germany’s current economic troubles.

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Hasti: Let’s start with energy. How did Merkel’s policies make Germany more reliant on Russian gas?

Hamzeh: Two key decisions defined Merkel’s energy policy are shutting down Germany’s nuclear power plants and also expanding natural gas imports from Russia. The decision to phase out nuclear energy predates Merkel—it was first introduced in 2000 under Chancellor Gerhard Schröder (SPD) in coalition with the Greens, with a plan to completely phase out nuclear power by 2022.

When Merkel came to power in 2005, she was initially in favor of maintaining nuclear energy, viewing it as a bridge to a cleaner energy future. However, after the Fukushima disaster in 2011, public pressure mounted in Germany, forcing her government to reverse course. Merkel accelerated the nuclear shutdown, closing eight reactors immediately and setting a deadline to eliminate all nuclear power by 2022.

At the same time, Germany also sought to reduce coal consumption due to environmental concerns. This left Germany with a growing energy gap, which was increasingly filled by Russian natural gas. One major consequence was Nord Stream 2, a project that would double Germany’s gas imports from Russia. The deal was finalized in 2014, ironically just as Russia annexed Crimea, an event that triggered Western sanctions against Moscow. Despite the heightened tensions, Germany proceeded with the pipeline, ignoring EU and U.S. warnings that it would increase Europe’s dependence on Russian energy.

Even before Merkel, Russia supplied 25-30% of Germany’s natural gas needs. By 2022, this had surged to 60%. When Russia invaded Ukraine, Germany was forced to cut off Russian gas imports, triggering an energy price shock. Industrial gas prices in Germany jumped by 45-50%, compared to 20-30% in France and 25-30% in the UK. Given that Germany’s exports heavily rely on energy-intensive industries like steel and chemicals, these soaring costs severely hurt its competitiveness. This energy dependency, widely criticized today, was a direct result of Merkel’s long-term energy policies.

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Hasti: And what about the second economic dependency—Germany’s reliance on China?

Hamzeh: Unlike many other advanced economies, Germany remains highly industrial and export-driven. Manufacturing still accounts for about 20% of GDP, whereas in the U.S., UK, and France, this share has declined to around 10%. Since 2015, China has been Germany’s largest trading partner, surpassing both the U.S. and the Netherlands. In 2023, total trade between Germany and China reached $254 billion, despite a 15% decline from the previous year.

However, after COVID, China’s delayed reopening (which occurred 1.5 years later than in the West) and its ongoing real estate crisis significantly reduced demand for German exports. Additionally, growing geopolitical tensions between China and the West have created further headwinds for Germany’s exports. What was once an economic advantage has now turned into a liability.

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Hasti: So, if we sum up what you've said, Germany has been hit by several major shocks in the past few years, which explain the weak economic performance you mentioned at the start. We’re talking about three major blows: the COVID-19 pandemic, the war in Ukraine and the subsequent energy crisis, and finally, the slowdown in China’s economy along with geopolitical tensions between China and the West. But do you think Germany’s problems are purely the result of these shocks, or are there deeper structural issues within the economy that have contributed to this situation? Because if these issues are just the result of temporary shocks, one could assume that either the shocks will fade over time or that the economy will eventually adjust.

Hamzeh: That’s a crucial question. We can break this down into two separate explanations. First, these shocks might not be as temporary as they seem. The problems with China and Russia aren’t just short-term disruptions—they may signal a broader, more structural shift in the global economy.

The German economic model thrived in an era of globalization, where open markets, free trade, and international cooperation were the norm. Merkel’s Germany was perfectly suited for a globalized world, where economic interdependence was seen as a stabilizing force rather than a risk: For years, Germany didn’t need to worry about defense spending because NATO, and especially the U.S., provided security. There was no serious concern about Russia weaponizing energy exports, because Moscow and Berlin had built deep economic ties.

But today, globalization is in retreat. Trade tensions, geopolitical rivalries, and economic nationalism are reshaping the world economy. If Germany fails to adapt to this shift, what started as short-term shocks could turn into long-term structural challenges. For example, with Trump returns to power in the U.S. tariffs on German and European exports or pushing for economic decoupling from China, that would be yet another major shock to Germany’s already struggling economy.

So that’s my first response—these external shocks could very well become permanent realities, and if that happens, Germany will need deep structural changes to remain competitive.

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Hasti: And what’s your second explanation?

Hamzeh: The second explanation is that Germany already had serious structural problems before COVID, before the Ukraine war, and before China’s slowdown—problems that have now simply become more visible. One of the biggest weaknesses of Merkel’s economic policies was underinvestment in infrastructure, particularly in transportation and education.

Take Germany’s rail system, for example. The country was once seen as a global benchmark for efficiency, but today, delays, cancellations, and aging infrastructure have become the norm. In 2023, Deutsche Bahn, the state-owned railway company, reported that only 63% of trains were on time, compared to 90% a decade ago. The situation has deteriorated so much that Germany now ranks below France, Spain, and even Italy in rail efficiency, according to the latest World Economic Forum rankings.

The same problem exists with roads and bridges. A government report in 2022 estimated that over 4,000 bridges in Germany were in urgent need of repair, with hundreds at risk of closure. The lack of investment in infrastructure has begun to weigh on economic productivity, as transport bottlenecks increase costs for businesses and weaken Germany’s traditional advantage in logistics and exports.

Education is another major area of concern. Germany has one of the lowest levels of government spending on education among major OECD economies. As a share of GDP, Germany spends 4.2% on education, compared to 5% in the U.S., 5.2% in the UK, 5.5% in France and the Netherlands, and over 6.5% in Scandinavian countries. The effects of this underinvestment are now showing up in Germany’s declining educational performance: In both the 2018 and 2022 PISA assessments, which measure student skills globally, Germany saw significant declines, particularly in math and science. This trend has raised serious concerns about future productivity and innovation, as Germany’s economic success has long been built on a highly skilled workforce. If these declines persist, they could erode Germany’s long-term competitiveness.

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Hasti: But why did Germany invest so little in infrastructure and education, despite having such a strong economy?

Hamzeh: That’s a great question. The main reason is Germany’s strict budget rules, which prioritized fiscal discipline over long-term investment. When governments want to increase spending on areas like education or transportation, they generally have two options. The first is to cut spending elsewhere and reallocate funds. The second is to increase overall spending, which means either borrowing money (deficit spending) or raising taxes.

In Germany’s case, reducing other expenditures was politically difficult. Governments prefer to spend money on projects that deliver immediate benefits—and infrastructure and education, which pay off over the long term, were not prioritized.

The other option, financing investment through borrowing, was severely restricted by Germany’s self-imposed "debt brake" (Schuldenbremse). Since 2009, Germany’s constitution has capped structural budget deficits at 0.35% of GDP, making it one of the strictest fiscal rules in the world. While the EU’s deficit limit is 3% of GDP, Germany voluntarily imposed an even tighter limit on itself. As a result, between 2012 and 2019, Germany consistently ran budget surpluses.

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Hasti: But wasn’t that a good thing? Running a balanced budget sounds like a positive sign for an economy, doesn’t it?

Hamzeh: It’s not inherently bad, but the timing was questionable. Germany was running budget surpluses at a time when interest rates were near zero. That was precisely when borrowing to invest in infrastructure and education would have been cheap and low-risk. But instead, Germany focused on fiscal discipline, missing a key opportunity to modernize its economy.

Now, in 2024, when Germany actually needs to invest more, interest rates are high, making borrowing far more expensive. In short, Germany lend money when borrowing was cheap and is now borrowing when it’s expensive—a classic case of a missed opportunity.

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Hasti: So Germany is now running budget deficits?

Hamzeh: Yes. In 2020, during the pandemic, Germany’s deficit spiked to around 4% of GDP, which was expected. But even after that, Germany’s deficits have remained above 2% of GDP every year, a stark contrast to the 2012-2019 period of surpluses.

For comparison, while Germany was running surpluses between 2012 and 2019, the average deficit in the U.S. and UK was around 4.5% of GDP, and in France, it was 3.5%. The result? Germany underinvested for years, and now its aging infrastructure and declining productivity are catching up with it.

Even as the global industrial sector recovers, Germany’s manufacturing sector, which has traditionally been its strength, is in recession. Factory orders fell by 11.3% in 2023, the sharpest annual decline since the 2008 financial crisis. Meanwhile, business confidence in Germany remains at its lowest level in a decade, according to the IFO Business Climate Index.

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Hasti: Since we’re running out of time, let’s wrap up. Any final thoughts?

Hamzeh: Yes. I think it’s important to clarify something about budget deficits, especially given how sensitive this topic is in our country, Iran. If a deficit is financed by printing money (as it is the case in Iran), it’s essentially a hidden tax on citizens, particularly harming lower-income households. That kind of deficit, where the central bank is forced to cover government spending, leads to inflation and is unsustainable.

But when a deficit is financed through government bonds, it’s borrowing from investors, just like a business taking out a loan. Whether that’s good or bad depends on two things. First, are borrowing costs (interest rates) low? Second, will the borrowed money be used productively?

If interest rates are low and the money is spent on things that increase future productivity, such as education, infrastructure, and innovation, then running a deficit can be a smart long-term investment. Germany had a prime opportunity to do this when interest rates were near zero, but instead, it chose fiscal austerity. Now, when investment is urgently needed, borrowing costs are much higher.

So when discussing Germany’s economic struggles, it’s not just about temporary shocks. It’s also about long-term policy choices.