Germany has reached an irreversible point, leading Europe's largest economy onto a potentially irreversible path of decline. After five years of stagnation, the German economy is currently down 5% from its pre pandemic growth trend. Due to the expected defeat of Prime Minister Scholz in Monday's vote of confidence, early elections certainly provide an opportunity to change course, but the gradually declining trend has brought almost no sense of urgency. The risk lies in slow policy responses and a lack of ambition to address potential challenges.

Amy Webb, founder and CEO of Today's Future Institute, which provides strategic consulting to German companies, stated that Germany will not collapse overnight. This is why this situation is so terrifying. This is a very slow and persistent decline. It's not just a company or a city, but the entire country and Europe are being dragged down

It seems that Germany will lose more energy intensive manufacturing industries and experience a decline in exports due to unstable companies restricting domestic investment. With the decline of living standards, voters look for the culprit everywhere, and social tensions drive away the foreign talents that the country badly needs. The toxic mixture of caution and resentment will subsequently spread throughout Europe.

Weber said, "Everyone's life will gradually get worse in the rest of their lives

Just as other European countries needed its industrial strength to cope with the replicated international situation, years of wrong decisions and some bad luck had shattered Germany's economic model. On the contrary, Germany is facing its biggest crisis since reunification.

Thirty five years ago, the fall of the Berlin Wall led Germans to unite and formulate a huge spending plan. Now the country is seriously divided, and polarized voters are unlikely to issue a clear mandate to the government in power after the elections in February next year.

Earlier this month, Joachim Nagel, the Governor of the German Central Bank, stated in a speech in Luxembourg that "the competitive position of German industry has deteriorated, and the continuously growing foreign markets have not provided the same growth momentum as in the past

After falling out with the pro business Liberal Democratic Party, Scholz submitted a vote of confidence to parliament, which he had no chance of winning, thus opening the curtain on his government. This will trigger early elections scheduled for February 23rd, seven months earlier than the originally scheduled end of the term. But the decline of mainstream power means that political paralysis is even more severe.

Friedrich Merz is the leader of the Christian Democratic Party, but his cautious reforms are unlikely to go far enough to reshape an economy that strives to bring prosperity to 84 million people.

Jamie Rush, the Chief Economist of Europe, stated that Germany's problems will not disappear on their own. The next government urgently needs to focus on restructuring the economy for the future, improving productivity, and addressing the reasons for high energy costs.

Mertz hopes to return to a policy framework that will help promote post-war reconstruction in Germany, including low taxes, limited regulation, and basic social assistance. Overall, this means that the role of the state is relatively small, and therefore there is a reluctance to significantly relax public spending restrictions (known as debt brakes).

Mertz stated that we do not need a heavily indebted government, but rather a new political path to address the root causes of the problem. The debt brake will certainly not change until we make a thorough adjustment to our spending.

In contrast, the Social Democratic Party led by Scholz is striving for more meaningful changes to the constitutional rules regarding lending. They also vowed to protect employment opportunities in aging industries such as steel and automobiles, and subsidize energy prices to support businesses.

The ruling center left party is far behind the third, with about half of the support rate of the conservative led by the CDU. Scholtz's re-election campaign is to some extent based on his cynical expectations of Mertz, who is prone to make divisive comments on women and foreigners.

Although the "grand coalition" composed of only two factions from the political party of the post German Chancellor may be able to gain a majority of seats and avoid forming a clumsy tripartite alliance, this cannot be guaranteed, as frustration drives voters to turn to peripheral parties.

The far right Alternative for Germany (AfD) ranks second in public opinion polls, while the left leaning coalition, Sahra Wagenknecht (BSW), may enter the Federal Parliament a year after its establishment. Together, they received the support of about a quarter of the voters.

As economists and business leaders call for cutting red tape, modernizing infrastructure, and accelerating digital efforts, political divisions may put Germany on a path of focusing on protecting the status quo rather than turning to the future.

During Angela Merkel's 16 year tenure as Chancellor of Germany, controversial debt brakes were implemented, resulting in insufficient investment in defense, transportation, and education. She also deepened Germany's dependence on cheap Russian energy. In a memoir promotion event at the end of November, Merkel said, "If it helps, then you can say it's Merkel's fault. I just don't think we're helping the country by doing this

Merkel defended her political legacy, stating that she should not be held responsible for the problems that later plagued the country. She stated that the Social Democratic Party (her partner in three of her four terms) is not interested in increasing military equipment spending. She also accused the Green Party of not wanting to reduce regulation, even though she had never allied with environmental organizations.

According to data from the German Council of Economic Experts, as the list of issues continues to grow, Germany's growth potential - the speed at which its economy expands without generating inflation - has narrowed to only 0.4%. Combined with cyclical fluctuations, frequent recessions become very realistic.

Veronica Grim, a member of the government's independent economic advisory group and a professor at Nuremberg Technical University, said that ultimately we must create attractive conditions for businesses, and she urged the next government to adopt a broad agenda to revive competitiveness.

She called for the implementation of a reform plan similar in scope and scale to the 2010 Agenda led by German Chancellor Gerhard Schr ö der in the early 2000s, which relaxed labor rules and paved the way for long-term expansion.

In order to revive competitiveness, Germany ultimately needs to increase spending. According to Bloomberg Economic Research, in order to catch up with other developed economies, the country must increase its investment in infrastructure and other public goods by about one-third each year, reaching 160 billion euros. This increase is equivalent to over 1% of GDP.

Even if the rebound in economic growth weakens the impact of increased borrowing, loose fiscal policies are unlikely to occur. Despite discussions aimed at relaxing the 0.35% limit on net new debt to GDP, constitutional reform faces challenges in Germany's fragmented political landscape.

The private sector has also resisted. The expenditure on machinery is more than 9% lower than before the pandemic. A recent survey of family businesses showed that nearly half of them do not even intend to replace damaged parts and attribute it to bureaucracy and unpredictable policies. This is actually a vote of no confidence in an effort to maintain its position as the world's third-largest economy.

Stefan Koopman, senior macro strategist at Rabobank, stated in a report after the latest decline in industrial production data that Germany's rapid deindustrialization "requires a deep reflection on the actual meaning of the 'German economy', and so far there is little sign that this is happening

But this is not entirely bleak. Germany's debt ratio is clearly the lowest among the G7 countries, providing spending space if there is political will. The recent outlook may also provide some impetus, with economists predicting a moderate economic recovery.

Solomon Fidler, an economist at Berenberg, said that while this is good news, "policymakers must not mistake it for a sign that reform has become less urgent

Germany also has nearly half of the world's' hidden champions' - small companies that are still leading the world in their respective fields. Many enterprises belong to the so-called small and medium-sized enterprises, including some century old enterprises that have experienced war and hyperinflation.

Economist Hermann Simon said, "Most of their products are irreplaceable, and he has written several books about these companies. 'This creates some stability, but it does not guarantee the future. The primary condition for becoming a world champion tomorrow is innovation.'

The challenges faced by Germany cannot be ignored, Bantleon's economists predict that the country's once proud automotive industry will lose market share and accelerate the shift of production overseas. Therefore, in the next 10 years, the industry's added value in Germany will suffer a loss of up to 40%.

This struggle has become public, with Volkswagen facing strikes due to plans to close domestic factories, and suppliers such as Schaeffler AG, Robert Bosch GmbH, and Continental Group also facing layoffs. Overall, so far this year, the Fortune 500 German companies in Europe have announced over 60000 layoffs.

ThyssenKrupp is the largest steel manufacturer in Germany, one of the driving forces of industrialization in Germany, and also one of the domestic companies cutting expenses. The company plans to reduce the workforce in its steel department by about 40% within ten years and shut down two blast furnaces.

CEO Miguel Lopez said, "The stability of the German economic system that we have known for decades is collapsing, and there is no doubt that action needs to be taken now.