Three Experts, One Economy: Deep Dive into Germany’s Challenges

Germany’s economy in 2025 stands at a pivotal juncture, facing stagnation and entrenched structural challenges. As economic uncertainty looms, Chancellor Friedrich Merz has introduced an ambitious policy agenda aimed at revitalizing growth, bolstering Germany’s global standing, and addressing systemic weaknesses.

In a dramatic shift, Merz’s administration has committed €500 billion over the next decade to modernizing Germany’s transport, energy, and digital infrastructure. The long-debated debt brake has been loosened to allow for increased spending, signaling a pragmatic approach to fiscal policy. This investment is seen as essential to overcoming Germany’s lag in digitization and addressing deteriorating public infrastructure.

Merz’s government has pledged to build Europe’s strongest conventional army, moving beyond the traditional 1% GDP threshold for defense spending. Military contractors such as Rheinmetall have experienced exponential growth, reflecting increased demand for advanced military technology. This shift is driven by regional security concerns and Germany’s strategic realignment in European defense policy.

With its traditional export-dependent model under strain, Germany is actively diversifying trade partnerships to reduce reliance on the U.S. and China. Negotiations on tariff reductions for key industries are underway, reflecting a strategic shift toward strengthening ties with emerging markets and bolstering European economic resilience.

What do the experts say?

The first expert who gave exclusive interview for REUC digital magazine, about German Economy is Andrea Thoma-Böck – Initiator and President of IZW – Initiative for the Future of the German Economy ( Initiative Zukunft Wirtschaft Deutschland e.V. )

Initiative for the Future of the German Economy ( Initiative Zukunft Wirtschaft Deutschland e.V. ) is a non-partisan platform advocating for Germany’s economic future. Founded in November 2023, it seeks to protect the Mittelstand—Germany’s vital network of over three million companies—amid worsening business conditions.

IZW unites experts across industries, including energy, to propose practical solutions and engage policymakers and the public in urgent economic reforms. With a focus on transparency, it aims to highlight the consequences of ineffective regulations and drive action for a more competitive and resilient German economy.

Interview

Journalist: What economic challenges is the Merz government facing, and what strategies are being proposed for recovery?

Andrea Thoma-Böck: „The new government under Friedrich Merz inherits an economic landscape in disarray. Decades of mismanagement, stalled investments, excessive taxation, and an ideologically driven energy policy have led Germany into structural economic stagnation.

The energy sector, in particular, reflects the consequences of a political miscalculation – shaped over many years and intensified in the past three.
Economic growth requires energy that is reliable, affordable, and base-load capable. So far, there is no sign of a fundamental policy shift.

The coalition agreement mentions a few relevant points but remains far too cautious. There is a lack of clear priorities, spending discipline, and structural reform. On key levers such as taxation and social expenditures, concrete answers are missing. Bureaucratic burdens remain high – and are not even systematically measurable.

IZW calls for a fundamental economic reset – based on realism, planning security, and entrepreneurial freedom.„

Journalist: What political and economic interests are driving Merz’s leadership?

Andrea Thoma-Böck: „Friedrich Merz seeks to restore Germany’s economic strength and rebuild public trust in the state’s capacity to govern effectively. His economic stance emphasizes market-based principles, individual responsibility, and technological realism – yet his start has been bumpy.

„He faces immense pressure: to deliver on the economy and to bridge deepening societal divides. The real question is whether he has the strength and political backing to push through structural reforms against entrenched resistance.

So far, these ambitions are barely reflected in the coalition agreement: many announcements, little substance, and no clear prioritization. One striking point: a junior coalition partner, with just 16% of the vote, dominates key ministries and core policy areas. The political balance does not suggest reform readiness.

IZW observes this process with critical optimism: The key issue is whether economic expertise will finally guide political action – and whether Merz can assert his leadership even within the coalition.„

Journalist: What are the most urgent economic challenges Germany faces today, and how does your organization contribute to solving them?

Andrea Thoma-Böck: „Germany’s most pressing challenges include: excessive bureaucracy, a burdensome tax and social contribution system, a severe skilled labor shortage, and a growing gap in key technologies. Added to this are geopolitical uncertainties and an increasingly hostile environment for investment.

These problems are compounded by an energy policy that disregards core location factors such as supply security, pricing, and long-term reliability.
Without a fundamental course correction in energy policy, there will be no return to economic strength. Germany needs reliable framework conditions – not new risks.

But it’s also important to recognize: the long silence of many businesses has contributed to this situation. Those who carry economic responsibility must also speak out politically – consistently, publicly, and constructively.

IZW – Initiative Zukunft Wirtschaft Germany e.V. addresses these problems, offers practical solutions, and strengthens the voice of business – publicly, politically, and with conviction. Our mission: to make SMEs not just the backbone, but the driving force of a new economic direction. Because change takes courage.„

Journalist: What fundamental changes must Germany implement over the next ten years to remain competitive in the global economy?

Andrea Thoma-Böck: „Germany doesn’t need more policy fine-tuning – it needs a true economic reorientation. This includes: faster planning and permitting procedures, less bureaucracy, a globally competitive tax system, and a serious push in education and digital infrastructure.

Any country that aspires to be a leader in AI needs more than data centers and research funding – it needs energy security on an industrial scale. Without a solid energy foundation, technological leadership remains an illusion.

Competitiveness is not created through subsidies but through structural strength. This also requires a leaner, more efficient state – one that enables rather than obstructs, both fiscally and administratively.

What’s needed is a shift in political culture: away from bureaucratic routine, toward entrepreneurial thinking.

IZW calls for: realism over ideology. Determination over symbolism. Clarity over self-deception. Only then can Germany remain a strong, future-ready economy.„

Germany’s Economic Comparison: 2020 vs. 2025

• GDP Growth: In 2020, Germany’s GDP contracted by -4.9% due to the pandemic. In 2025, growth is projected at 0.7%, showing weak recovery.
• Industrial Output: Manufacturing and construction sectors have declined sharply since mid-2022, with weak foreign demand.
• Trade Surplus: Germany’s trade surplus was 6.9% of GDP in 2020, but has dropped to 4.3% in 2024, reflecting lower global demand.
• Inflation: Inflation was 0.5% in 2020, but surged to 6.9% in 2022 before stabilizing around 3.2% in 2025.
• Labor Market: Unemployment was 4.2% in 2020, but has risen to 6.0% in 2025, with 2.82 million people unemployed.
• Energy Costs: The loss of cheap Russian gas caused inflation spikes, but gas prices have now returned to 2018 levels.

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We invite more experts to investigate this topic. Carsten Brzeski is the Chief Economist ING Germany and Global Head of Macro Research ING. Previously, he worked at ABN Amro, the Dutch Ministry of Finance and the European Commission. He is a 2019 JFK Memorial Policy Fellow at Harvard University and member of the Advisory Council on International Affairs for the Dutch government and Parliament. Carsten has studied at the Free University of Berlin, Northeastern University in Boston and Harvard University in Cambridge, USA.

Interview

Journalist: What are the economic challenges of the Merz government in Germany, and what strategies are being proposed for recovery?

Carsten Brzeski: „The main challenge is to get the German economy out of a five year stagnation. And there is more, the government needs to improve German competitiveness and renew the economy’s business model, which over decades had been driven by cheap energy and strong exports. With the war in Ukraine and China having become a system rival, this model is broken. 

The government has already announced a large investment package for infrastructure and defence. This should support growth but will not be sufficient to improve competitiveness. The caveat, unfortunately, remains that the fiscal measures alone – impressive as they might be – will do very little to improve the economy’s competitiveness. Modern infrastructure is essential for one of the world’s largest economies, but it doesn’t inherently drive innovation, sector transformation, or new growth opportunities. the economy needs a reduction in bureaucracy, more digitalisation (also in federal and regional administrations), more risk and venture capital, a clear longer-term energy strategy and more broadly-speaking incentives for private investments.„

Journalist: Who are the key influencers shaping Merz’s policies, both within his administration and externally? 

Carsten Brzeski: „It is mainly Merz and his chief of staff, Frei. For the rest, it is unclear who really has access to Merz and who hasn’t. Merz has a reputation of have a strong network with German business leaders but not individual names are known.“

Journalist: What are the political and economic interests driving Merz’s leadership?

Carsten Brzeski: „Change and modernising the economy. Merz waited decades to make it to the top. He will want to prove that he can do it. Hope is that Merz will leave personal and political party interests behind and will really want to change something for the better. If he and his government fail, the risk is high that the AfD will become the largest political party in Germany.“

Journalist: How does Merz plan to reshape the Franco-German axis, and what implications might this have?

Carsten Brzeski: „To visit France and Poland on his very first day in office sent a clear message: both countries are utterly important for Germany. Merz will try to improve the personal relationship with Macron and will be better prepared than his predecessor to comfort French cultural needs but also economic needs. The recent announcement that Germany would no longer block the European initiative to include nuclear power into the EU taxonomy was also a symbolic signal to France.“

France-Germany: A Cornerstone of European Trade

France and Germany form the backbone of Europe’s economy, with bilateral trade exceeding €40 billion in 2024. France exports transport equipment, chemicals, and vehicles, while Germany supplies machinery and industrial components.

Despite a 6.96% drop in German exports to France, cooperation remains strong, particularly in renewable energy and technology. With a combined GDP of nearly $8 trillion, their economic alignment continues to shape EU policy and global trade strategies.

Third expert

Antoine Renaux is strategic intelligence and geopolitical analyst with expertise in defense, security policy, and economic intelligence. Trained in Political Science & EU Affairs, with experience in public affairs, military representation, and competitive intelligence. Key contributions include OSINT analysis in the defense sector, policy work at the French Embassy in Austria, and event management for the Warsaw Security Forum.

Interview

Journalist: How does Merz plan to reshape the Franco-German axis, and what implications might this have?

Antoine Renaux: „Friedrich Merz travelled to Paris on 7 May for his first official trip as Chancellor. This choice follows in the footsteps of his predecessor Ola Scholz, and also Angela Merkel, who also visited France for their first diplomatic trip. In Paris, this continuity is seen as the embodiment of the Franco-German couple, which is widely used by the French political and media establishment. However, this expression is a French chimera. The Franco-German couple has no translation in German, and France is Germany’s European partner like any other, in the same way as the United Kingdom and now Poland.

Chancellor Merz’s plan to relaunch the Franco-German partnership, notably with the creation of a Franco-German Security and Defence Council to coordinate defence policies and industrial investment, seems to me to be yet another initiative in the continuity of his predecessors. Already, the 2019 Aachen Treaty has not given any new impetus to Franco-German defence cooperation, particularly the MGSC (Main Ground Combat System) and FCAS (Future Combat Air System) projects, which are at a technical and industrial standstill and are constantly punctuated by economic conflicts between French and German manufacturers.

In its press release, the Federal Government also states: „A new start for Europe: Europe must be more secure, more competitive and more united. To achieve this, France and Germany must stand together, ‘find compromises and move things forward, together with our European friends and neighbours’, said Mr Merz.” If we read between the lines, this statement means seeking to align the economic and social reforms of the two countries to strengthen the competitiveness of the European Union. On this point, it looks like a repetition of the Treaty of Aachen, which did not produce the expected effects and was strongly criticised in France as an attempt by Berlin to impose its economic and social model on France. But, it should be remembered that while the Hartz IV reforms boosted German competitiveness following reunification, they also had the effect of increasing job insecurity and poverty across the Rhine, and can be seen as social dumping, an act of economic warfare by Germany against the national economies of EU member states. In French economic intelligence circles, France is seen as one of the main victims of the economic war waged by Germany within the EU.„

Journalist What will be the strategy for this German France economy development if we know how bad situation is in France?

Antoine Renaux: „The current economic and financial situation is very bad for Paris and Franco-German relations. While the German economy and its industry are suffering, Berlin still has a budget surplus, while Paris has no room for manoeuvre with its deficit of €2,981.5 billion.

Behind this talk of deepening Franco-German relations for the benefit of the EU, what is at stake here is a cognitive, informational and economic battle for leadership in Europe. It is thus an opposition between a French vision of the EU’s strategic autonomy, derived from General De Gaulle’s vision of national strategic autonomy, and an approach based on the European pillar of NATO, dominated by Germany.

In this battle for European leadership, Berlin has an undeniable advantage. While France will be the world’s 2nd largest arms exporter between 2019 and 2023, accounting for 11% of international defence trade, compared with 5th place for Germany with 5.6% of the market, Berlin remains Europe’s 2nd largest arms supplier. Germany will account for 6.4% of arms exports to the EU over this period, followed by Paris with 4.6% of the market. Europe thus represents 26% of total exports for Berlin, compared with 9% for Paris. These figures illustrate the importance of the European market for Germany, and the challenge of imposing its equipment on its partners and creating dependencies in the defence systems of European states. As a symbol of the success of this strategy, Rheinmetall’s Main Battle Tank Leopard II has 1691 units in service in 12 EU countries, representing 40% of the MBT fleet.

However, behind the successes of the German defence industry in Europe, Berlin cannot provide first-rate security guarantees, with a Bundeswehr that has only 181,174 soldiers, compared with 201,332 personnel for the French armed forces. Over and above the numbers involved, it is public knowledge in defence circles that the German soldiers in the Franco-German brigade do not train with French active soldiers, but with reservists, which illustrates the difference in operational levels. The credibility of the defence system is therefore to France’s advantage, even if it is ill-suited to sustaining a high-intensity war over the long term. This is all the more critical as Paris has little room for manoeuvre due to budgetary constraints.

Given the difficulties on both sides of the Rhine, this strategy of cooperation seems to be heading for another failure, given that the previous Aachen treaty in 2019 crashed against Berlin’s strategy of going it alone for the European Missile Defence Initiative (ESSI) in September 2022.„

Franco- German collaboration

Highlights from the Macron – Merz meeting

Emanuel Macron

Macron emphasized the vital role of Franco-German cooperation in securing Europe’s economic future. He stressed the need for aligned trade policies, investment strategies, and regulatory simplification to strengthen competitiveness. France and Germany will jointly develop AI, clean tech, biotech, and semiconductors while ensuring affordable energy and infrastructure upgrades. A unified European response to US tariffs and deeper trade integration will reinforce economic resilience. Coordination on tax systems and labor markets will further support industrial strength.

Friedrich Merz

He stressed the need for simplifying regulations, reducing bureaucracy, and deepening European capital markets to foster innovation and productivity. Germany and France will work together to strengthen the industrial base, ensuring a more open and competitive European internal market. Merz reaffirmed both nations’ commitment to trade agreements and expanding European trade policy, highlighting the need for rules-based, open trade. A key priority is mobilizing private capital to finance critical investments in high-tech industries and infrastructure. Both countries will also push for ambitious EU economic reforms, ensuring that Europe remains an influential player in global markets.

Editors Note: Please find official website of the photographer Steffen Kugler here www.steffenkugler.de.

Official IZW website can be found here.

Offcial ING website can be found here.