Germany, the economic powerhouse of Europe, is experiencing something unprecedented in its postwar history: three consecutive years of recession. Yet if you glance at the DAX stock index, you’d never know it. German blue-chip companies are posting record profits. How can both things be true? The answer reveals a fundamental transformation in the relationship between German corporations and the German nation—one that threatens to hollow out Europe’s largest economy.
A Historic Economic Crisis
The numbers are stark. Since 2023, Germany has been in recession—not for a quarter or two, but for three full years. This has never happened before in the history of the Federal Republic. Not during the oil shocks of the 1970s, not after reunification in the 1990s, not even during the 2008 financial crisis. Germany always bounced back quickly. Until now.
Economists Bert Rürup and Michael Hüther, two of Germany’s most respected economic voices, describe this as a watershed moment. The German economic model—export-driven manufacturing built on engineering excellence, strong labor relations, and reliable infrastructure—appears to be breaking down. And unlike previous downturns, the usual tools aren’t working.
The Paradox of Profit
Here’s where things get strange. While the German economy stagnates, DAX companies—the country’s flagship corporations—are thriving. BMW, Siemens, SAP, and their peers are recording historic profits. How is this possible?
The answer is both simple and troubling: these companies have emancipated themselves from Germany. They’re German in name and heritage, but increasingly foreign in operation. The vast majority of their revenues now come from abroad. Their supply chains stretch across the globe. Their production facilities are in China, Eastern Europe, the American South, and Southeast Asia.
In economic terms, Germany’s largest companies have decoupled from the German nation. They benefit from German engineering reputation, German financial markets, and German tax arrangements—but they no longer depend on German workers, German suppliers, or German consumers for their success.
This isn’t a conspiracy or a moral failing. It’s rational business strategy. But it creates a profound problem: the success of “German” companies no longer translates into German prosperity.
The Deindustrialization Death Spiral
The real crisis is playing out one factory closure at a time, particularly in energy-intensive industries. Chemical plants, steel mills, glass manufacturers—these are the backbone of German manufacturing, and they’re bleeding.
High energy costs, stringent regulations, and global competition have made it increasingly difficult to operate profitably in Germany. So the large corporations do what corporations do: they relocate. A chemical giant closes its German plant and opens a new facility in Texas where natural gas is cheap. An automotive supplier shifts production to Poland where wages are lower.
But here’s the killer: when a major manufacturer leaves, it doesn’t leave alone. It takes its ecosystem with it—or rather, it doesn’t. German manufacturing is built on dense networks of specialized suppliers. Thousands of small and medium-sized companies (the famous Mittelstand) produce components, tools, and services for larger manufacturers.
When the anchor tenant leaves, these suppliers face a choice: follow them abroad (which few can afford) or find new customers (which may not exist). Most often, they simply wind down. Jobs disappear. Expertise evaporates. Industrial capacity rusts.
The large corporations can relocate because they have global operations and capital reserves. The suppliers can’t. They’re stuck on a sinking ship, and the water is rising fast.
Policy Failure: Rearranging Deck Chairs
Against this backdrop, Germany’s policy response has been, according to Rürup and Hüther, woefully inadequate. They single out a “growth agenda” commissioned by Economic Minister Katharina Reiche of the CDU as particularly emblematic of the problem.
The agenda, they argue, reads as if it were written in 2005. It recycles the old orthodoxy of German ordoliberal economics: reduce regulations, enhance competition, make labor markets more flexible, and trust that the market will sort things out. It’s not that these ideas are necessarily wrong in principle—it’s that they’re utterly disconnected from the reality of 2025.
Germany doesn’t have a shortage of market dynamism. It has a structural crisis of deindustrialization driven by energy policy failures, infrastructure decay, and the global reordering of supply chains. Telling struggling manufacturers to “be more competitive” when they’re facing existential cost disadvantages is like telling someone drowning to “swim harder.”
What Germany needs, the economists argue, is active industrial policy—strategic state intervention to rebuild industrial ecosystems, invest in energy infrastructure, and create competitive advantages in emerging sectors. But German economic orthodoxy remains deeply suspicious of such “intervention,” even as other countries—the United States, China, and increasingly France—practice it aggressively.
The Defense Spending Dilemma
Adding to the confusion is Germany’s dramatic increase in defense spending. Under pressure from NATO allies and shocked by Russia’s invasion of Ukraine, Germany has pledged to meet and exceed the 2% of GDP target for military expenditure.
On one level, this is necessary. German defense capabilities had atrophied to dangerous levels. But economically, it represents a massive misallocation of resources during a crisis. Defense spending, Rürup and Hüther note, has extremely low economic multipliers compared to other forms of public investment.
A euro spent on military equipment might sustain some jobs in defense contractors, but it doesn’t create new productive capacity. It doesn’t make the economy more competitive or innovative. Contrast this with investments in infrastructure, education, or care work (childcare, eldercare, healthcare). These sectors not only create immediate employment but build human capital and productive capacity for the future.
Germany is essentially choosing to spend billions on tanks and fighter jets while its bridges crumble, its rail network deteriorates, its schools lack teachers, and its care workers are exhausted and underpaid. From a pure economic efficiency standpoint, it’s madness. But geopolitics doesn’t care about economic efficiency.
The Crisis of Faith
Underlying all these specific problems is a deeper crisis: German economic policymakers appear to have lost faith in the postwar model that made Germany prosperous, but they haven’t found a coherent alternative.
The old model was simple: make high-quality manufactured goods, export them to the world, and reinvest the profits in even better manufacturing. Support this with strong labor unions, generous social insurance, and world-class infrastructure. The state wouldn’t pick winners, but it would create the conditions for industrial success.
That model is breaking. The global economy has changed. Manufacturing is fragmenting across multiple countries. Digital platforms are more valuable than factories. China has become both the world’s factory and a technological powerhouse. And Germany’s energy-intensive industrial base looks increasingly like a relic.
But rather than adapt boldly, Germany is paralyzed between competing visions. The ordoliberals want to double down on market principles. The Greens want industrial transformation toward sustainability. The center-left wants social protection. The populist right wants closed borders and nostalgia. Nobody has a comprehensive vision that addresses the scale of the challenge.
The Risk of Becoming Britain
There’s a cautionary tale here, and it’s called the United Kingdom. Britain was once the workshop of the world. Then it deindustrialized, telling itself that finance and services could replace manufacturing. London thrived while the Midlands and the North decayed. The result is a Britain that is economically unbalanced, politically fractured, and haunted by nostalgia for lost greatness.
Germany risks following a similar path. Frankfurt and Munich might remain prosperous hubs, connected to global capital and corporate headquarters. But vast swaths of Germany—the industrial heartlands of North Rhine-Westphalia, Saxony, and beyond—could become economic backwaters, their factories silent, their young people departed, their populations aged and angry.
The difference is that Britain deindustrialized over decades, with North Sea oil revenues cushioning the blow. Germany is deindustrializing in fast-forward, with no such cushion and far more people dependent on manufacturing for their livelihoods.
A Path Forward?
If there’s hope in Rürup and Hüther’s analysis, it’s that the problems are recognized and the solutions are knowable. Germany needs massive public investment in infrastructure—not just roads and bridges, but energy systems, digital networks, and public services. It needs an active industrial policy that identifies strategic sectors and supports their development. It needs to accept that the state must play a larger role in shaping economic outcomes.
This won’t happen easily. It requires overturning decades of economic orthodoxy, challenging powerful interests, and spending money that fiscal conservatives insist Germany doesn’t have (even though Germany’s borrowing costs are negligible and its infrastructure needs are desperate).
But the alternative is clear: continue the slow-motion hollowing out of German industrial capacity, watch as communities decay and populism flourishes, and wake up one day to discover that Germany is no longer an economic powerhouse but a financial hub surrounded by rust.
The great uncoupling of German corporations from the German nation is nearly complete. Whether German democracy can survive that divorce is the question that will define the next decade.
Germansplainer 
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