Why in news?

German Chancellor Olaf Scholz stated he’s open to facing a confidence vote before Christmas after his coalition collapsed over economic management issues, with the vote initially planned for January 15.

Germany’s economy grew slightly (0.2%) in Q3 after a contraction, reflecting a broader crisis affecting key industries, including Volkswagen.

For the first time in its 87-year history, Volkswagen, Europe’s largest employer, is considering closing three of its 15 factories in Germany due to financial difficulties.

What’s in today’s article?

• Volkswagen's Crisis Highlights Germany's Industrial Decline
• Economic Crisis in Germany
• Germany’s Fragile Coalition Struggles Amid Economic Crisis and Global Tensions
• Implications

Volkswagen's Crisis Highlights Germany's Industrial Decline

• Volkswagen, Germany’s largest carmaker and the world’s second-largest, is facing severe troubles that threaten the entire German automotive sector, the nation’s largest industry.
• The company plans to shut down up to three factories and lay off tens of thousands of workers due to declining sales and rising competition, particularly from China.
• This move reflects broader issues within Germany’s industrial landscape, with high energy costs, shrinking markets, and geopolitical tensions putting over 20% of the country’s industrial output at risk by 2030.
• The carmaker’s deepening troubles are set to have a domino effect through the entire German automotive industry.
  • It is the country’s single-largest sector accounting for 5% of GDP and employing almost 800,000 people — over a third of whom work for Volkswagen

Economic Crisis in Germany

• About
  • Germany was the only G7 economy to shrink last year (2023) and is set to be the group’s slowest-growing economy again this year.
  • According to the IMF, its GDP per head shrank 1 per cent between 2019 and 2023.
  • 
• Reasons behind this crisis
  • Volkswagen’s one of the main pillars of German economy, is struggling due to multiple factors including a late shift to electric vehicles.
    • Its reliance on internal combustion engines, rather than transitioning to electric vehicles, has left the industry lagging in the current energy landscape.
  • Germany’s deeper economic challenges is also due to the factors such as such as dependence on Russian gas.
    • Germany’s terms of trade deteriorated hugely after Russia’s invasion of Ukraine, as the price of natural gas soared. 
  • Experts argue that Germany’s reliance on authoritarian states like Russia and China and its failure to embrace the new digital economy have left the nation behind in global competitiveness.
  • Also, the post-pandemic rebalancing of global demand from manufactured goods towards services was also unfavourable for Germany’s economy. 
• Structural issues
  • The recent crisis highlights deeper structural issues within the German economy.
    • Germany was once a symbol of high-tech manufacturing but now seen as uncompetitive with a potentially reduced output outlook.
  • High debt and deficit levels, pushed by the government’s need to satisfy a diverse coalition, have also raised concerns in the EU.
  • Over-regulation and bureaucratic hurdles further impact Germany’s smaller and mid-sized firms.

Germany’s Fragile Coalition Struggles Amid Economic Crisis and Global Tensions

• Germany's "traffic light" coalition, composed of the Social Democrats, Free Democrats, and the Green Party, has hit a breaking point following Chancellor Scholz’s dismissal of Finance Minister Christian Lindner.
  • Linder belongs to the pro-business Free Democrats.
• The coalition has been divided on economic strategy, with the Free Democrats opposing tax hikes and debt increases, while the Greens and Social Democrats advocate for more state investment in infrastructure, energy transition, and digital growth.
• This internal crisis comes as Germany faces challenges from:
  • ongoing conflicts in Europe and West Asia and rising security and
  • tariff risks with the recent re-election of Donald Trump in the U.S.

Implications

• This economic strain, combined with political instability, could benefit far-right parties like the AFD, deepening divisions within Germany.
• The slowdown in Germany could exacerbate a Eurozone crisis, with potential negative consequences for global markets, including India.