Fortune 500 Europe: How Germany is flirting with long-term irrelevance

For many of the twenty first century, economists and neighboring international locations have regarded to Germany with admiration and envy because it managed to climate financial storms with relative ease, capitalizing on commerce with rising economies and increasing the facility of its industrial giants within the course of.

Nevertheless, a shifting world order has pulled the carpet out from beneath Germany. The commercial quirks that when helped it outgrow its European friends are quick changing into a burden, and disaster after disaster has uncovered an absence of planning on the prime of presidency.

Because the Fortune 500 Europe reveals Germany but once more dominating the record of Europe’s greatest firms, many are left with a troublesome query: What goes fallacious in Germany?

Germany within the Fortune 500 Europe

In the present day, when it comes to each illustration and income, Germany is the undisputed champion of the Fortune 500 Europe. There are 80 German firms on this yr’s record, which collectively racked up $3.2 trillion in revenues final yr, a fifth of the entire.

On the floor, the newest Fortune 500 Europe record would counsel Germany has solidified its grip on Europe’s financial engine. Volkswagen was the biggest firm in Europe by income in 2023, overtaking British oil and fuel large Shell. Not far behind within the prime 10 are BMW and Mercedes-Benz. 

Nevertheless, any reader of the record with even a cursory data of the European financial panorama will view the figures with skepticism, with the Fortune 500 Europe measuring firms’ revenues from 2023. That’s as a result of Germany, in addition to the businesses that drive its financial engine, is in peril.

The nation’s authorities expects the German financial system to contract by 0.2% in 2024, following a 0.3% decline in 2023. The financial pinch was felt in German firms’ prime line final yr. 

“Everything that could go wrong went wrong, or is going wrong.”

Carsten Brzeski, world head of macro for ING Analysis

Regardless of income for the Fortune 500 Europe rising as an entire by 5.2% in 2023, cumulative income for German firms on the record contracted by 2.6%. 

Purple alerts are flashing all around the nation’s financial indicators. Exports to its important buying and selling associate, China, have fallen, whereas power imports following Russia’s invasion of Ukraine have tanked.

Germany’s challenges span the structural and cyclical, home and geopolitical, creating an ideal storm for the nation’s financial system that almost all economists see little means out of within the brief run.

As Carsten Brzeski, world head of macro for ING Analysis, summarized to Fortune: “Everything that could go wrong went wrong, or is going wrong.”

The issue with Germany

Understanding the dimensions of Germany’s challenges requires a cautious have a look at its strengths, or extra appropriately, the way it constructed them.

Manufacturing makes up 18.4% of Germany’s financial system. For context, neighboring France’s share is 9.5%, whereas the U.Okay.’s is 8.4%. Most economies transfer away from manufacturing as they mature, however Germany has been an outlier—defying that development to nice financial success.

The nation started to shake its post-reunification tagline because the “sick man of Europe” on the flip of the century, as its manufacturing-heavy financial system struck gold after China joined the World Commerce Group (WTO) in 1995. Additionally in 1995, Germany exported $7.5 billion price of products to China. At its peak in 2021, this determine stood at $124 billion.

Round half of Germany’s GDP is drawn from exports, nicely above different European nations. Within the century’s first 20 years of worldwide growth, that has proved a gold mine for Germany.

Nevertheless, exports from Germany have shrunk since, owing to weakening client sentiment in China and the rise of homegrown Chinese language rivals.

Protectionism can also be on the rise, with the U.S. and China partaking in tit-for-tat tariffs which have spilled over into Europe.

Jens Eisenschmidt, Morgan Stanley’s chief Europe economist, identified exterior demand had all the time been a key driver of Germany’s financial system, however the present world buying and selling setting was much less conducive to development.

“We could describe the world that we are now in, or have awoken into, as being less collaborative,” Eisenschmidt advised Fortune.

Then there’s the query of how Germany powers its more and more uncovered manufacturing sector.

Germany voted to finish the rollout of nuclear energy on the flip of the century, ending years of debate over security fears, which had been confirmed within the minds of many German policymakers by the Fukushima nuclear catastrophe in Japan in 2011. This shift left the nation beholden to low-cost Russian oil and fuel to energy its manufacturing whereas the nation waited for different renewable sources to advance.

Then, in February 2022, that uncomfortable coalition got here crashing down with Russia’s invasion of Ukraine. The price of doing enterprise skyrocketed in Germany after the West slapped sanctions on Russian power.

The consequence has been a producing sector caught in recession for greater than two and a half years. The nation’s manufacturing PMI, a month-to-month survey of producing executives, has been in contraction territory since early 2022.

Germany is simply attending to deindustrialization a bit later than its friends, says Capital Economics’ chief Europe economist Andrew Kenningham.

ING’s Brzeski is extra blunt.

“The German economy has simply missed the train to innovate and modernize. For too long it’s been a combination of being too arrogant, too naive, too complacent—they just thought there would be no challengers to its own strong corporate world,” Brzeski says.

“If you just look at the last four or five years, Germany starts looking like it’s on track to get a lost decade.”

Jens Eisenschmidt, Morgan Stanley’s chief Europe economist

The issue for Germany is that it doesn’t have a aggressive benefit in different high-value sectors, for instance, one thing corresponding to the U.Okay.’s sturdy monetary sector. Ditto for any form of burgeoning tech sector.

“If you look at a lot of surveys of Germany’s adoption of digital technologies, the number of people using various kinds of modern technology, Germany scores very, very poorly in that respect,” stated Capital Economics’ Kenningham.

Germany ranked sixth in IMD’s World Competitiveness Rating in 2014. By 2023, it had dropped to twenty second as a mirrored image of that contraction.

Similtaneously it tackles structural points in its financial system, Germany can also be dealing with the existential stress of a shrinking working-age inhabitants.

Mixed, these elements level to a consensus amongst economists that German GDP will develop at a charge of 0.5% per yr within the medium time period, nicely beneath the pre-COVID development of 1.3%.

Morgan Stanley’s Eisenschmidt sees comparisons with development points confronted by Italy earlier than the pandemic, experiencing two “lost decades” of development. 

“If you just look at the last four or five years, Germany starts looking like it’s on track to get a lost decade, too,” Eisenschmidt advised Fortune.

Jewel within the crown?

Underpinning the narrative of a stagnating German industrial engine is its precarious automotive market. The sector accounts for 4% of Germany’s financial system, nevertheless it’s successfully 6% when factoring within the different firms within the provide chain.

The automotive sector has been the jewel in Germany’s financial crown for a number of years and has traditionally ridden out earlier globalization headwinds. Automotive firms make up an eighth of German firms represented on the Fortune 500 Europe in 2024 in consequence.

However once more, a change of fortune in China is blunting Germany’s financial edge. Autos stay the principle driver of Germany’s exports to China, however these exports are more and more underneath menace.

China has caught the Western world off guard with its providing of cut price electrical autos, with BYD main the cost on the continent whereas gaining market share shortly in its place of birth.

The European Fee is about to launch expanded tariffs that may see some Chinese language suppliers slapped with charges near 50% following an investigation into anticompetitive subsidies from the Chinese language authorities. Germany opposed these contemporary tariffs amid fears of retaliation from a key export marketplace for the nation.

BMW minimize its 2024 revenue steerage in September, citing a expensive braking system recall and slowing demand in China. Mercedes-Benz shares fell when it introduced an analogous steerage minimize in the identical month, additionally mentioning falling demand in China.

Germany’s automakers, nonetheless, are in a extra critical bind: Persons are dropping curiosity of their vehicles. German carmakers guess huge on the EV revolution, if later than rivals, and have been left puzzled by slowing development after preliminary widespread uptake.

The answer for Volkswagen, Europe’s greatest firm by income (it’s on the prime of this yr’s Fortune 500 Europe) and Germany’s greatest employer, is to dig into its price base.

Volkswagen promised €10 billion in price cuts in December final yr, paving the best way for a grisly battle with its highly effective works council and threats of its first-ever German plant closure. 

That might filter again into the German financial system within the form of job cuts.

“China has become a nightmare for Germany,” Felipe Munoz, world analyst at JATO Dynamics, advised Fortune. 

Munoz thinks Germany’s sturdy unions will in all probability decrease job cuts at Volkswagen. However this might level to a brand new actuality for Germany’s employees.

Capital Economics’ Kenningham stated: “The fear of losing your job will always be there, and I think there’s less benefits associated with them.” 

How do they repair it?

There are few simple choices for Germany to climb out of its structural and cyclical holes and maintain on to its spot as Europe’s greatest financial system. 

Structural reforms are a necessity, however because the de facto chief of the EU, overhauling commerce or introducing widespread subsidies is unlikely. The nation has made adjustments to introduce high-skill immigration from outdoors the EU, however sweeping reforms listed here are unlikely in a scorching political setting.

“There is a high risk that Germany wakes up too late.”

Carsten Brzeski, world head of macro for ING Analysis

Discovering new export companions is one other urgency for Germany. Nevertheless, ING’s Brzeski doesn’t predict one other nation will develop like China did 20 years in the past. Draw back dangers are extra seemingly, together with the potential for main import tariffs if Donald Trump is reelected as U.S. president this November.

Germany’s three-pronged coalition authorities isn’t nicely suited to enacting sweeping reforms owing to the dueling pursuits of the governing events. The nation has additionally seen rising recognition for events on the left and proper of the political spectrum.

Whereas it’s unlikely a far-right or far-left authorities will rise to energy, their rising vote share will make it tougher for the ruling coalition events to enact adjustments, notably to issues like innovation.

Germany can take solace in the truth that regardless of its present troubles, it’s nonetheless the most important financial system in Europe. And whereas revenues for Fortune 500 Europe firms declined final yr, earnings for companies on the record elevated by 12.2%.

“Germany has shown in the past that it can survive a crisis and structural reforms,” says Brzeski.

“There is a high risk that Germany wakes up too late, but it remains the largest economy in Europe. There is still relatively good infrastructure, so it still has the potential to be stronger 10 years from now than it is right now.”