Fixing Germany’s economy is a critical task for the country’s next government

MULFINGEN, Germany (AP) - Germany needs a new business model. The old one, fueled by cheap natural gas from Russia and lucrative exports to China, is broken, leaving Europe’s biggest economy mired in stagnation and angst about the future.

Delivering that fresh growth strategy is going to be the biggest challenge for the government that takes office after a national election set for Feb. 23, seven months ahead of schedule. The nation that became known for the quality of its products has not seen real economic growth for five years.

Multiple factors conspired to take Germany from industrial powerhouse to post-pandemic straggler: too much bureaucracy, a shortage of skilled workers, slow deployment of technology and a lack of clear direction from the outgoing coalition government are among them. Rising competition from China and high energy prices due to Russia’s war in Ukraine were additional hits.

"We really need a more company- and enterprise-friendly politics,” Klaus Geissdoerfer, CEO of industrial fan manufacturer EBM-Papst, said. "We have bright talent in Germany. We have good companies, but at the moment we don't have the awareness on the political level."

With 2.5 billion euros ($2.6 billion) in annual revenue and plants on three continents, EBM-Papst describes itself as the global leader in its field. The company reported last year that it was "suffering in Germany in particular" and experienced a 4.1% revenue decline in its home market.

Geissdoerfer said EBM-Papst's heating technology division lost 18.7% of its sales through a clumsily handled push to get property owners to replace gas furnaces with less polluting electric heat pumps.

The requirements of the Building Energy Act put forward by Chancellor Olaf Scholz' three-party coalition were so confusing, people put off the upgrades to their heating systems or rushed to buy new gas devices before the law took effect, he said. That sapped demand for the ultra-quiet heat pump fans EBM-Papst makes.

Consumers wondered, "What is the right technology for my house?" Geissdoerfer said. "And so everybody said, ‘If I don’t have to, I better wait.’"

Geissdoerfer made a complaint heard across industry: Germany’s bureaucracy is excessive. A 2023 law that requires public and private entities to combat climate change by reducing their energy use means EBM-Papst must assign employees to detail what the company is doing to comply, he said.

"So now, instead of implementing measures, they write and report," the CEO said, adding that the documentation work is a poor use of time at a company whose core business is energy-saving equipment. "I really hope with the new government we can get this solved, because at the moment it's too much."

EBM-Papst is moving in the direction where economists say Germany as a whole should put its industrial resources: into green and digital technology. The company, headquartered in Mulfingen, a town of 3,700 residents in rural southwest Germany, is equipping energy-hungry artificial intelligence data centers with efficient cooling systems for their servers. It also is working on incorporating AI features to help tech companies optimize their power use and to predict when equipment needs to be replaced.

In the meantime, EBM-Papst is coping with Germany's economic malaise by shifting its investment focus to Asia and the United States. The company now supplies U.S. customers, for instance, from plants in Farmington, Connecticut,and Telford, Tennessee. Its moves to localize production abroad predate the coronavirus pandemic but give EBM-Papst a shield against any new import taxes imposed by U.S. President Donald Trump.

On top of the homegrown issues, international relations have dealt another blow. Russia cut off most of the country’s natural gas supplies over the German government’s wartime support for Ukraine. Electricity prices, a key cost for industry, have risen to 2 1/2 times higher than in the U.S. and China.

Metalworking firm Mecanindus-Vogelsang Group, which makes precision parts for automakers and other manufacturers, says it pays twice as much per kilowatt hour for the electricity its German plants use as it does for its U.S. sites in Mt. Sterling, Kentucky, and Lakewood, New Jersey. That’s 100,000 euros in added costs and "a gigantic competitive disadvantage” CEO Ulrich Flatken said.

"To avoid deindustrialization, which is already taking place, we urgently need internationally competitive energy prices," Flatken said.

Another shock came from China, which throughout the 2010s served as a lucrative market for German-made machinery and automobiles. Once Chinese companies started making those same products, backed by government subsidies, German exports suffered.

Germany’s economy contracted in each of the last two years. By the end of 2024, it was only 0.3% bigger than it was in 2019, before the pandemic. The U.S. economy grew by 11.4% during over the same period, while China’s expanded by 25.8%, according to Germany’s Federal Statistical Office.

Marcel Fratzscher, president of the German Institute for Economic Research, thinks complacency set in during the boom years of exports to China. German companies weren't quick enough to respond to technological trends, such as the move to electric cars, he said.

"They enjoyed the success of the 2010s and they have been too slow in understanding that they need to change and adapt," Fratzscher said.

As the economic woes drag on, "mental depression" has set in, he said. "The pessimism is enormous among companies and citizens, and that's an important explanation why companies are not investing."

Many business executives and economists argue that Germany’s next government should work to loosen constitutional limits on debt so it can increase public spending on infrastructure and education. Fratzscher wonders if political leaders, like the economy, will falter in adopting new ways of doing things.

"For the past 75 years, Germany has been built very much on consensus, stability oriented, lots of checks and balances in the political system, and that makes rapid change very difficult," he said. "We need to change the mindset, to understand we need to be much faster on economic transformations."