Leading Think Tank warns Germany facing ‘dramatic economic decline’

Germany’s economy is in “dramatic decline” after years of stagnation, falling private investment, and surging government spending, according to a new report by the Munich-based ifo Institute, one of Europe’s leading economic think tanks.

The study shows that Germany’s GDP has remained flat since 2018, with public expenditure on pensions, schools, and infrastructure rising by 25% since 2015, while corporate investment in factories and machinery has dropped below 2015 levels.

Clemens Fuest, president of the ifo Institute, warned that Germany risks sliding into what he described as “Italian conditions”—a term referring to chronic economic stagnation and inefficiency. He said the decline is already hitting millions of citizens through falling living standards and predicted that without rapid reform, Germany could face a 25-year economic downturn.

Fuest urged the government to enact a sweeping reform plan within six months, including pension changes and a rollback of costly regulatory requirements for small and medium-sized businesses. Removing red tape related to CO₂ reporting, supply chains, and wage documentation could boost the economy by up to €146 billion annually, he claimed.

Germany’s economy contracted in both 2023 and 2024, marking its first consecutive annual declines in two decades. The loss of affordable Russian energy and rising production costs have eroded competitiveness, with Chancellor Friedrich Merz acknowledging that key sectors are in “structural crisis.” Both the ifo Institute and the IMF forecast near-zero growth this year, underscoring the deepening economic malaise.

Image credit: Ansgar Scheffold