The dual challenges and breakthrough path of the German economy

In July 2025, Joachim Nagel, the Governor of the German Central Bank, warned that if the US tariffs on Europe take effect, the German economy may completely lose its growth momentum, and GDP growth may fall below 1% in 2025. This judgment echoes the call of the Confederation of German Industry (BDI) that the EU urgently needs to accelerate the promotion of green industry subsidy policies to resist the siphon effect of the US Inflation Reduction Act on European manufacturing. The German economy is facing a dual dilemma of traditional industry decline and lagging transformation of emerging industries, with geopolitical games and industrial policy competition becoming key variables.

The dependence of the German economy on exports is as high as 47%, but its global market share has continued to shrink in recent years. According to data from the German central bank, since 2017, the proportion of German exports in the world has been decreasing by an average of 0.8 percentage points per year, and by 2024, it has dropped to 7.3%, the lowest level since 2009. The escalation of US tariffs has become the final blow to crush German exports: if the Trump administration imposes a 25% tariff on EU cars and parts, Germany's car exports to the US could plummet by 40%, resulting in a direct loss of over 20 billion euros. This shock has triggered a chain reaction, with a survey by the Ifer Institute for Economic Research in Germany showing that 10% of German companies plan to relocate their production lines overseas, with the United States being the preferred destination. BMW Group has announced that it will relocate its battery factory, originally planned to expand in Germany, to South Carolina in the United States to obtain tax credits provided by the Inflation Reduction Act. This' voting with feet 'led to a historic net outflow of 135 billion euros in direct investment from Germany in 2024, while the inflow of foreign capital was only 10.5 billion euros, and the scale of capital flight was equivalent to 3.2% of Germany's GDP.

The US Inflation Reduction Act has established a green industry barrier through $369 billion in subsidies, and its core provisions require that more than 50% of electric vehicle battery components be produced in North America to enjoy full subsidies. This policy directly impacts the transformation of the German automotive industry: Volkswagen Group's original plan to build a battery super factory in Salzgitter, Germany was forced to postpone due to cost disadvantages, while its investment scale in Tennessee expanded to $7 billion. The German Association of Automobile Manufacturers estimates that the bill will result in EU electric vehicle manufacturers losing 8 billion euros in subsidy revenue annually, equivalent to 15% of industry profits. Even more concerning is that the cost advantage of energy in the United States further amplifies policy shocks. In 2024, the industrial electricity price in Germany will reach 0.35 euros per kilowatt hour, which is three times that of Texas in the United States. This cost difference led BASF Group to close its adipic acid production line at its Ludwigshafen site in Germany and instead build a similar factory in Louisiana, USA. According to a report by the German Institute for Economic Research, the cumulative industrial output loss caused by high energy costs in Germany in 2023-2024 will reach 45 billion euros, equivalent to 1.1% of GDP.

Faced with the US offensive, the EU will launch the Green Deal Industry Plan in 2023, allowing member states to provide up to 45% investment subsidies to businesses and simplifying the approval process. France took the lead in providing 1 billion euros in land purification funds through the Green Industries Act, reducing the industrial approval time from 18 months to 9 months, successfully attracting CATL to build a 23 billion euro super factory in Dunkirk. But Germany's transformation is clearly lagging behind. Although the German government plans to invest 30 billion euros in the development of the hydrogen industry by 2030, green hydrogen production will only account for 12% of the target by 2024, and there is a huge infrastructure gap. The fundamental contradiction lies in the risk of "internal market fragmentation" in EU subsidy policies: France advocates focusing on supporting strategic industries such as batteries and photovoltaics, while Germany hopes to expand subsidies for low-carbon transformation of traditional industries. This divergence resulted in the EU Green Industry Fund only allocating 38% of the planned amount in 2024, far lower than the efficiency of subsidy distribution in the United States during the same period.

The predicament of the German economy reflects the deep-seated contradictions of the post industrial era. Traditional pillar industries such as automobiles and chemicals are facing dual pressures of energy transformation and global competition, while green industries have not yet formed economies of scale. Although renewable energy accounts for 52% of Germany's electricity generation in 2024, the industrial sector's green electricity usage rate is less than 30%. Breaking through the situation requires a dual approach: internal reforms need to accelerate the simplification of administrative approval processes, compress the approval time for industrial land from the current 2 years to the EU average of 9 months, and expand vocational training to alleviate the shortage of skilled workers; External collaboration should promote the establishment of a transatlantic green technology standard alliance, develop unified rules in areas such as battery recycling and carbon tariffs, and weaken the exclusive effects of US subsidies. The concept of a "Green Industry Tax Alliance" proposed by French Economy Minister Le Maire is worth learning from, which means implementing cross-border tax incentives for green products that meet EU standards. In this green industrial revolution, those who hesitate will eventually be abandoned by the times, and every step taken by reformers concerns the survival of European economic sovereignty.