The latest data for the German economy is once again signalling weakness. The ifo index for August has just been published, showing that nothing more than stagnation is to be expected in German industry at the end of the summer. This is not surprising. In the first half of 2025, Germany’s trade surplus was just over €100 billion, which was 22 per cent below the figure for the first half of 2024, even before the American tariff policy had really come into effect.
When exports stagnate (down 0.1 per cent) and imports increase significantly (up 4.4 per cent), this immediately means a reduction in demand for German companies with largely unchanged costs. Although many companies have already laid off workers, it is nevertheless certain that the profit situation, especially for German industrial companies, has deteriorated significantly once again in the first half of this year. And this comes immediately after the longest recession in German history.
The latest calculations by the Federal Statistical Office on GDP in the second quarter of 2025 show what is looming (the green line in the figure). After only two quarters of relative calm, recession fears are already returning. The third quarter will also be very weak. If Germany does not soon manage to turn the corner and achieve stable upward growth, not only the government but the entire social system will be under fire.
In view of the record decline in the economy, companies and their associations are crying blue murder. They are right to do so, because they are really suffering. But what are they crying about? They are not crying out that we need demand for our products, because demand is weak. No, as always, they are shouting in exactly the wrong direction. The welfare state is ‘insolvent,’ says Steffen Kampeter of the employers’ associations, setting the tone for the general outcry. Completely clueless commentators like Nikolaus Blome are even turning it into a culture war.
The employers are also letting the Chancellor shout that the welfare state is simply no longer affordable. Business-friendly media such as the FAZ know that the German economy right now ‘needs priority for competitiveness,’ which also boils down to reducing costs for companies. And the pseudo-intellectual lobby from the banks (the ranks of the so-called chief economists) is allowed to say at every opportunity that Germany now needs ‘strict supply-side policies.’
But what does the welfare state have to do with the acute problems of the German economy? Nothing! Is the welfare state insolvent? That is utter nonsense. Is the welfare state no longer affordable? Only if you continue to pursue completely misguided economic policies. Why do you need supply-side policies when demand is weak? Do you need a leg brace when you have a cough? And how can a reasonably intelligent person focus on improving competitiveness at a time when their most important trading partner is criticising and vigorously counteracting precisely this strategy?
Are entrepreneurs stupid?
Entrepreneurs are not generally stupid, but they are entrepreneurs. That is the problem. As entrepreneurs, they have a very limited world view. They believe they understand something about economics because they do business every day, but in my long professional life I have only met two or three entrepreneurs who have realised that their entrepreneurial world view is completely unsuitable for the overall view of a national economy or even the global economy. They usually consider themselves to be the greatest experts of all.
When entrepreneurs find themselves in a crisis, they always have the same solution: they cut costs. From their point of view, this makes perfect sense, because they have control over costs, whereas they have little influence over demand. Those who cut costs by laying off workers immediately relieve the burden on their company (in this case, mainly at the expense of the state, which has to support the unemployed) and improve their individual competitiveness. As a result, all entrepreneurs, their associations and their lobbyists believe that cost reduction is the only thing that can be done in a crisis. And that is wrong.
Yes, it is simply wrong. It is not that entrepreneurs generally have a different perspective; no, they have the wrong perspective. Companies and their associations systematically act against their own interests when they transfer their entrepreneurial perspective to politics. This behaviour cannot be explained or rationalised by economic power or the forceful enforcement of interests. It would be completely absurd for the economically powerful to harm themselves, even though they have a proper understanding of how a market economy works. And that is precisely why economic policy is primarily about knowledge and only secondarily or thirdly about power and interests.
No, a normal entrepreneur cannot understand that his entrepreneurial actions, applied at the level of the economy as a whole, are most damaging to himself. One person can stand up in the cinema to improve his view, but not everyone can. When entrepreneurs try to reduce their costs, they always reduce the demand of other entrepreneurs. When companies follow their ‘innate instincts’, they are digging their own grave. When the companies affected by the cuts react entrepreneurially in turn, a downward spiral begins in the economy that can only be stopped by a state that does exactly the opposite, namely spending money like there’s no tomorrow.
The welfare state is the main source of costs for entrepreneurs. Of course, they have to pay wages that they always consider too high, and they have to pay social security contributions that they cannot reduce, even if they needed to. They are even required to pay taxes because the state has made it its mission to ensure that no one in society goes hungry. The entrepreneur sees that he ultimately has to pay for all of this, and that is not possible without losses if his capacities are not fully utilised.
Because entrepreneurs are generally unable to influence demand, they never recommend that politicians increase demand. It is simply beyond his comprehension to imagine that the state is in a position to directly solve his actual problem, namely insufficient demand. Even the central bank’s interest rate policy is a mystery to him, because he is never in a position to change interest rates in his favour.
Ignore entrepreneurs and their water carriers!
It must be said bluntly: the entrepreneurial view of the market economy is irrelevant and even dangerous. Anyone who listens to entrepreneurs and their lobby is lost. Once it succeeded, the objection comes from the very back. Yes, it succeeded once, because there were unique conditions that will never be repeated. The same scenario played out with the agenda policy at the beginning of the century, and there were exactly the same demands from the business side. However, wage cuts in a monetary union cannot be repeated, because otherwise you will permanently ruin your trading partners in Europe, and because the big brother in the US has understood that it must never allow this to happen again.
Nevertheless, what always happens will happen: stupidity will prevail. The pressure from all conservative sides will become so great that the SPD will cave in and sign its own death warrant out of ‘political responsibility’. This time, however, it will definitely backfire. Cuts will be made and made, and in this way the domestic economy will also be destroyed for good.
The Deutsche Bundesbank has just presented the new financial balances for Germany (for the past year), completely ignored by the German media and so-called financial experts. In 2024, private savings surplus (as I expected) was almost €350 billion (private households €300 billion and companies €40 billion). This will not have changed much this year.
It can also be assumed that the trade surplus will decline at an even faster pace than in the first half of the year, because US tariffs are now taking effect and the depreciation of the US dollar (by 15 per cent against the euro since the beginning of the year) is also further reducing German export opportunities in this half-year. Even if the current account surplus for the year as a whole falls to (still) 150 billion, the government will have to take on almost 200 billion in new debt (as explained here) to prevent a recession.
Currently, the federal government is planning for a deficit of slightly more than 80 billion euros (plus 60 billion from the so-called special funds), and no more than 90 billion (plus 80) is planned for next year. However, this only applies to the federal budget. Various institutes estimate that the overall government financing balance (i.e. including state budgets and social security funds) will be just over 100 billion euros this year. That is far too little. If, under pressure from the business lobby, social spending is significantly cut in the budget deliberations, every euro cut will directly reduce the already weak profits of companies. Those affected by the cuts have hardly any savings and will reduce their spending on goods and services, which means a renewed slump in demand.
Only those countries that manage to emancipate themselves from the whisperings of the business lobby have a chance of achieving reasonable economic development. Germany is unlikely to be among them. Consequently, the failed traffic light coalition will be followed in the not-too-distant future by a failed black-red coalition.
Add to this the fact that in a few days’ time the French government will probably also have to throw in the towel (due to the supposed European austerity measures), without anyone having any idea how things should proceed there, and Europe is facing a veritable crisis. If the two largest countries are virtually ungovernable, nationalism will very quickly take over – with completely unpredictable consequences, because its economic policies are even more absurd than those of the conservatives. It could still be averted, but the signs on the wall point in the wrong direction.