How Germany’s mighty Mittelstand blew up its economy

This strong backbone of businesses has driven export-led growth, enabled in part by a political willingness to trade more with China and rely on cheap Russian gas.

However, changing geopolitics derailed this economic model. Mittelstand was left at the mercy of authoritarian regimes who sought to use trade as leverage over Berlin — for example, Vladimir Putin, who thought European governments would stand aside when he invaded Ukraine because of his stranglehold on energy supplies.

Instead, Berlin went behind the rest of the West and dumped Russian oil and gas, sacrificing Mittelstand in protest.

At the same time, these businesses are also suffering from a slowdown in China.

„China’s slowdown has led to reduced demand for goods that Germany is very good at exporting,” said Chris Williamson, chief business economist at S&P Global.

However, punishing the German economy is not simply geopolitics.

„Germany has been hit hard by the transition to electric vehicles,” says Williamson. „We saw a decline in demand for combustion engine vehicles before the pandemic — there was a lot of uncertainty about whether to buy one or wait to buy an EV.”

The car industry has long been a powerhouse in Germany, home to Volkswagen, Mercedes-Benz and Porsche.

„Car manufacturers are making some changes now, but they haven’t won the war on EVs, which is why the European Commission is looking at tariffs,” says Williamson. „This has affected the automobile industry, which is a big driver of the German economy. There are many related industries that have been dragged along with it.

Today, the Mittelstand is in a long state of stagnation.

Few expect China to return to its pre-Covid growth rates and Russian gas not anytime soon.

Combined with poor demographics and a widespread reluctance to put in extra hours, „German potential growth is still not high,” says Solomon Fiedler, economist at Berenberg Bank.

Earlier this year, Finance Minister Christian Lindner sought to allay fears of a prolonged recession.

„Germany is not a sick man,” he told the World Economic Forum in Davos. „After a very successful period since 2012 and after this year’s crisis, Germany is tired after a short night, and low growth expectations are partly a wake-up call.

„Now that we have a good cup of coffee — that is, structural reforms — then we will continue to win economically.”

Yet not much help has come from the government, which has been plagued by bitter budget arguments between coalition parties, leaving businesses with little sense of direction.

„Germany is a bit of a drag at the moment,” says Fiedler.