Germany’s Economic Model Is Breaking—and Workers Will Pay the Price
Work Harder, Großpapa's Retiring Late
Last year, Volkswagen sat down with its unions. The people’s automaker was in trouble, but officials expected the usual bargaining over raises. Instead, management demanded a 10% pay cut— warning that three German factories might close. It was unthinkable decades ago, but here we are: job security, shredded overnight.
Germany’s economic woes are no secret. The real question is what, if anything, can fix it. Energy costs, Chinese comp, tariffs, immigration, and shrinking workforce have all backed the country’s economic model into a corner. And when barks come to bite, the biggest chunk is likely come out of— once again—labour.
Hartz Reform
We forget how bad things were after reunification. In 2005, unemployment had hit 12.1%. The Hartz reforms of the early 2000s—slashing welfare, weaking job protections, and pushing people back into the labour market—was stiff but effective. Not only did unemployment fall, but wages stayed controlled.
Today, that gain seems largely consumed. Unemployment is at historic lows, wages are rising – quickly, and Germany’s aging workforce can’t seem to keep up. Add inflation, minimum wage hikes, and shrinking exports, and you’ve got a structural crisis. The powerhouse of 2010. More of a break room now.
High-Cost Squeeze
German carmakers face some of the highest labour costs in the world— €62 per hour, compared to €29 in Spain or €20 in Portugal. That made sense when productivity kept up. High output offset high wages. But since 2018, output per worker has been declining. Investment in automation and digitization has lagged behind Asia and the US. The Germans stuck to analog ways. (Example: The Bundestag—the central bank—still accepts deposit instructions via fax)
Meanwhile, energy costs have struck heavy industry hard, and China—once Germany’s biggest client—is not its biggest rival. In 2023, VW’s China sales fell 9.5%, Mercedes’ 7%, BMW 13.4%. Beijing isn’t just beating them on price—it’s crawling up the value chain, eating into autos, chemicals, and machinery.
The EV Problem
The there’s the EV transition—a disaster for Germany’s industrial model. EVs require fewer workers (an electric motor has 20 moving parts vs 2000** in a combustion engine). It leaves the Mittelstand – the bosom of German manufacturing—out in the cold. The government has yaked on EV subsidies, and the new CDU-led coalition is even pushing to overturn the EU’s 2035 combustion engine ban.
Tariffs? The EU slapped duties on Chinese EVs – over Germany’s objections. Berlin fears retaliation, and fair enough. Their market share might be declining, but China remains critical for exports.
Labour market endgame
So, what’s left?
Fiscal stimulus might help, but it risks overheating domestic demand, pushing wages higher—exacerbating the labour cost issue. Immigration has helped ease worker shortages, but the political backlash has made this impossible. The CDU, once Merkel’s party, has tacked right to fend off the extremists.
That leaves market liberalisation – the hartz playbook.
And the new coalition has already signaled its priorities:
- Tax breaks for overtime + working retirees
- More flexible working hours
- Easier settlement for foreign workers
In other words: fewer protections, more work.