Christian Scharpf, the mayor of this city of 140,000, Germany’s second richest, is looking for ways to save close to €100 million.
Carmaker Audi, headquartered here near the Danube river, used to pump over €100 million a year in municipal tax into Ingolstadt’s coffers through its parent, Volkswagen, but those flows dried up over a year ago. Audi in November reported a 91% decline in operating profit for the three months through September and has been cutting thousands of jobs in Germany.
Audi’s business in China, where Germany’s flagship car industry used to make a big chunk of its sales and an even bigger chunk of profits, shrank by a quarter in the nine months through September from a year earlier. Chinese carmakers, once mocked by Western auto executives as primitive, have turned into formidable rivals, gobbling up market share in and outside China.
Slowing economic growth in China and growing competition from companies there have undercut German industry as a whole. Combined with exploding energy costs and the threat of new trade tariffs, the forecast is grim.
German carmakers and their suppliers have announced tens of thousands of job cuts. Germany’s manufacturing industry, the world’s third largest, has shrunk steadily for seven years. And Germany’s economy as a whole has contracted for the past two years, marking only the second back-to-back annual contraction in records dating back to 1951, according to Germany’s federal statistics agency.
Gross domestic product has roughly flatlined since 2019, before the start of the Covid-19 pandemic—the longest period of stagnation since the end of World War II. Most economists expect it will stagnate again this year.
America, recently a relief valve, likely won’t come to the rescue: President Trump is threatening to disrupt global trade with a slew of tariffs that would raise barriers in the U.S., Germany’s biggest export market.
For Germans, who will elect a new parliament next month, this is a scarier version of the mid-2000s, when the unemployment rate reached 12%, double today’s rate.
At that time Berlin enacted unpopular overhauls of its labor market and welfare system that encouraged more people to find work, while holding down business costs and boosting exporters’ international competitiveness, paving the way for two decades of solid growth.
Economists say the current crisis is worse, because it questions the very foundation of Germany’s export-reliant economic model. In the earlier downturn, China’s economy was growing at around 10% or more a year, absorbing goods and powering global trade and the global economy. Today, China’s economy is growing at half that rate, and global trade volumes have stalled, according to the World Trade Organization.
Without fast-growing export markets, Germany’s model “is dead,” said Jacob Kirkegaard, a Brussels-based senior fellow at the Peterson Institute for International Economics in Washington, D.C.
Yet few politicians are focusing on the major changes economists say are required. Germans “don’t want to look at the problem in the face. They still think it’s a blip, and it can be addressed the way they usually do things,” incrementally, said Ludovic Subran, chief economist at Allianz, the German insurance group. “I don’t think this will suffice.”
The country, with 83 million inhabitants, grew into the world’s third largest economy by making and exporting the engineering products—cars, robots, trains, factory machinery—others wanted to buy. Now, the world is turning its back on made-in-Germany, and Germany has no plan B.
‘Spoiled over many years’
Until recently, the fallout from this slow-motion economic crash has been confined to newspaper editorials and economic data releases, with little tangible impact on voters’ lives.
This year, the crisis has turned political. Most polls show the economy has upstaged immigration, security and climate change as voters’ top concern. The outgoing government of Chancellor Olaf Scholz is the most unpopular since 1949.
Most politicians are focusing on how to tweak and improve the current export-reliant, manufacturing-heavy economic model. New ideas to encourage investment and consumption, boost trade inside Europe or open up to fast-growing tech or services sectors are virtually absent.
Scholz, whose coalition collapsed in November because of internal tensions over economic policy, has pushed for the European Union to sign new trade deals. The center-right Friedrich Merz, now front-runner to replace Scholz, wants lower taxes and fewer regulations for manufacturers.
“I see no serious initiative to try and develop a new economic model,” said Jens Südekum, an economist and professor at Heinrich-Heine-Universität Düsseldorf. “In the short term, it’s all about how to tactically deal with the situation along the lines of: ‘If Trump imposes tariffs, then we’ll go and manufacture there.’”
Germany’s industrial output has fallen by 15% since 2018, and the total number of people employed in the manufacturing sector is down 3%. Manufacturers in Germany’s metal and electrical industry, weighed down by costs, could lay off as many as 300,000 workers over the next five years, said Stefan Wolf, president of a lobby group for the sector. “Deindustrialization is in full swing,” said Wolf, adding that over €300 billion in investment capital has flowed out of Germany since 2021.
Trade in goods is more critical to Germany’s economy than oil is to Texas or tech to California—an overdependence that is the result of decades of government policy that supported export manufacturing while creating hurdles to investment in new sectors such as IT or in the country’s infrastructure. Exports support roughly one in four German jobs. More than two-thirds of cars produced in Germany are exported. Since the mid-1990s, exports’ share of Germany’s GDP doubled, reaching 43% of GDP, four times the share in the U.S. and twice as high as China.
Now that the heart of the German economy—its sprawling automotive sector—is struggling, the pain is spreading. In Schweinfurt, a former American garrison town north of Ingolstadt, workers at auto supplier Schaeffler went on strike late last year to protest plans to cut up to 700 jobs. ZF Friedrichshafen, another supplier, agreed in November to reduce local employees’ working hours by 7% to save jobs, as it starts to cut 14,000 jobs across the country. The IG Metall trade union has warned of thousands of possible job cuts in the central German industrial region.
To try to cover the shortfall in Ingolstadt, Scharpf, the mayor, has jacked up fees for museums, parking spaces and buses, and ordered that public lawns be mowed less frequently. He is considering raising property taxes and cutting spending further.
“You can’t simply replace a company with 40,000 employees,” Scharpf said.
Audi declined to comment.
The company is everywhere in the city: It sponsors the local ice hockey team, football arena and plenty of cultural events.
At the boutique Block Hotel, a couple of miles from Audi’s headquarters, owner Carolin Block said revenues have declined by about 10% since 2019 as conventions dried up and business guests stayed away. Room rates are down about 15%, and the length of stays has shortened.
“We were spoiled over many years. We didn’t have to do much to attract tourists because business guests had to come to Ingolstadt because of Audi,” said Block.
Jürgen Seissler, a master carpenter with 16 employees, said order books are shrinking and inexperienced carpenters are finding it harder to find work. Many of his clients are engineers at Audi or its suppliers. Businesses are becoming more cautious about hiring new employees and investing, he said. Seissler himself is rethinking plans to renovate his own house.
In the medieval city center, restaurateurs complain of being squeezed after Audi canceled Christmas dinners. Local businesses, including Block, stepped in to finance a free ice rink overlooking the New Castle after Audi pulled out. City authorities are considering whether to cancel next summer’s Bürgerfest, a two-day street festival in the old town with music, food and drink, that costs about €350,000.
Read more: https://www.wsj.com/economy/trade/germany-economic-model-broken-exports-095a488d?st=inBdSX
