Faiz Ahmed
Germany has long been a stronghold of the European Union, providing the economic engine for the Western continent. Its industrial competitiveness made it the European Union’s largest economy and a source of stability through multiple crises. Throughout the 2010s, particularly during the Eurozone crisis Germany aided countries such as Greece by providing bailout mechanisms while insisting on fiscal prudence. However, more than a decade on, the foundations that once felt fortified have started to show signs of fracture, raising the question as to whether the European model can continue to depend on the German model, whose assumptions are currently being stressed to their limit.
German manufacturing has long been a defining feature of the country’s economic prowess; led by firms such as Volkswagen, Siemens, and BASF. However, more recently that prowess has seen a steep and steady decline; China, which was once Germany’s largest export market, has slowly evolved to becoming their biggest competitor. This upheaval has largely been felt within sectors such as electric vehicles, renewable technologies, and advanced manufacturing.
German demographic challenges have further compounded the stress on the situation. An aging and shrinking workforce combined with decades of relatively low public investment have left the country’s digital and physical infrastructure relatively underdeveloped. Mario Draghi’s 2024 report reached a similar conclusion, arguing that Europe has underinvested in innovation and competitiveness relative to both the United States and China.
Additionally, Russia’s invasion of Ukraine has also caused devastating shocks to German supply chains that relied on inexpensive natural gas. Germany was made particularly vulnerable given its positioning as an energy intensive economy. The loss to inexpensive energy was transferred onto industry in the form of higher production costs, reducing competitiveness, which had long been a hallmark of Germany’s export-led growth.
These developments have not only exposed the vulnerabilities of the German economic model, but have underscored the EU increasing reliance on Germany’s export-oriented model as a foundation for broader European prosperity. Germany remains the largest economy in the European Union, accounting for roughly a quarter of the bloc’s GDP, being deeply integrated into European supply chains. Its decline has caused ripple effects within the continent; a slowdown in Wolfsburg or Stuttgart is rarely confined, spreading as a contagion through factories in Bratislava, Brno, and Katowice.
This structural fragility within the EU indicates the lack of dynamism assumed by policy makers, with key assumptions of the economy being rooted in continued deepening globalization, inexpensive access to energy, and an increasingly international market. However, the assumptions that once made Germany a fortified giant of industry have since begun to unravel.
The United States has embraced large-scale industrial policy through initiatives such as the Inflation Reduction Act, while China continues to heavily support domestic manufacturing. Europe, by contrast, often struggles to coordinate industrial policy across twenty-seven member states with differing national priorities.
This fragmentation highlights a broader weakness in the European model. Divergent national priorities often slow the implementation of common industrial policies, limiting the EU’s ability to respond cohesively to technological change and global competition. The result is a growth strategy that remains less coordinated than those pursued by either the United States or China.
These outcomes have partially served as a wake-up call to the larger European community to rethink their development model. Significant investments have been made in key emerging sectors such as AI, and clean tech as evidenced by key initiatives such as the European Chips Act to the Net-Zero Industry Act, respectively. However, the effects of these initiatives continue to remain heavily fragmented, favoring countries with preexisting industrial foundations, limiting growth asymmetrically, which only further perpetuates reliance on industrial countries such as Germany.
If Germany’s slowdown reflects structural rather than cyclical challenges, then Europe must focus less on restoring past advantages and more on reducing its dependence on them. A Union that depends too heavily on one country’s factories is ultimately less resilient than one whose prosperity is hedged across innovative industries, integrated markets, and multiple centres of growth.
As such the Union should accelerate strengthening capital markets, completing the Capital Markets Union, and accelerating the Single Market for services. This would aid in diversifying sources of European growth beyond traditional manufacturing, making it easier for innovative firms to raise capital, expand across borders, and compete globally.
Europe’s future cannot depend on rebuilding yesterday’s engine. Germany will remain indispensable, but the European Union’s strength will ultimately be measured by its ability to create new centres of growth rather than relying on one economic powerhouse.
Faiz Ahmed is an undergraduate student at Aga Khan University majoring in Politics, Philosophy and Economics (PPE). His writing explores the intersection of public policy, governance, political economy, and international affairs, with a particular interest in institutional accountability and development.
