Germany and the privilege of being too important to fail

Posted on: 23 December 2025

Say chocolate and you think Switzerland. It's an automatic association, rooted in decades of marketing and perception. Yet anyone who has looked into the matter knows that Belgian chocolate is superior, that the artisan tradition of Flanders produces results the Swiss rarely match. But the association persists. Because once an identity has crystallised in the collective mind, facts struggle to dislodge it.

The same applies when you speak of the European economy and think of Germany. Engine of Europe. Fiscal rigour. Industrial efficiency. The model to emulate. These associations are so deeply embedded that we continue to use them even when the numbers tell an entirely different story. And the story they tell today is of a country in its third consecutive year of recession, with corporate insolvencies at twenty-year highs, and an industrial fabric that is fraying in worrying ways.

The interesting thing is not the crisis itself. Crises come and go. The interesting thing is the structural mechanism that makes this crisis particularly insidious: Germany cannot afford to be in crisis because the entire European architecture depends on the premise that it is not.

Let us put the numbers in a row

Let us look at the bare facts, without interpretation.

German GDP has contracted for the third consecutive year. This has never happened since the war. In 2023, minus 0.3%. In 2024, minus 0.2%. Projections for 2025 oscillate between stagnation and further contraction. The BDI, the Federation of German Industries, hardly a den of pessimists, estimates another year in negative territory.

Corporate insolvencies have reached levels not seen in twenty years. In 2024, over 22,000 proceedings. In 2025, the figure is expected to exceed 24,000. The second quarter of 2025 marked the absolute record since 2005, worse than the 2009 financial crisis. In Bavaria and Hesse, the economically strongest Länder, insolvencies increased by 80% and 79% respectively year on year.

Industrial production is in freefall. In August 2025 alone, minus 4.3% compared to the previous month. Since the pre-Covid period, German industry has lost approximately 10% of its productive volume. The automotive sector, the jewel in the crown of Made in Germany, is in structural contraction. Volkswagen announces cuts, suppliers close, the supply chain hollows out.

Energy costs, after the 2022 shock, have never returned to competitive levels. The abandonment of nuclear power has proved a strategic choice whose real costs are only now emerging. And the dependence on Russian gas, which once seemed a competitive advantage, has transformed into an existential vulnerability.

These are not disputed figures. They are official, verifiable numbers that tell a rather clear story: the engine of Europe is stalled on a dead track.

The identity constraint

And here the interesting pattern emerges. Because these numbers are not producing the type of reaction one would expect.

When Greece entered its crisis, Europe responded with an arsenal of interventions, conditionalities, restructurings. When Spain wobbled, support mechanisms kicked in. The European architecture, for better or worse, is designed to manage the crisis of peripheral members.

But it is not designed to manage the crisis of the centre. There is no protocol for when Germany is in difficulty. And not only for technical reasons, given that Germany is too large to be saved with existing instruments, but for deeper reasons that have to do with the very identity of the European project.

Europe, in its current configuration, is built on an implicit pact: Germany provides economic stability and fiscal discipline, in exchange for a single market that structurally favours its exports. If Germany is no longer able to provide that stability, what remains of the pact?

Here is the constraint: admitting the German crisis would mean questioning the fundamentals of the entire construction. Therefore, the crisis cannot be admitted. Not in the terms in which it ought to be admitted.

Who said the leader cannot fall?

This mechanism is not new. It manifests whenever an entity has built its identity, and its systemic role, on being the reference of success for others.

Post-1990 Japan is the most studied example. After the bubble burst, the Japanese economy entered a stagnation that continues to this day, thirty years later. But for at least a decade, the official narrative spoke of adjustment, prudent consolidation, responsible management. The Japanese had built their postwar identity on being the champions of Asian growth. Admitting the failure of that model was psychologically and politically impossible.

The result was what economists call the "lost decade", which then became two, and perhaps three. Zombie companies kept alive by banks that could not afford to recognise deteriorated credits. Investments in increasingly useless infrastructure to maintain the illusion of activity. An entire generation that entered the labour market in structurally worse conditions than the previous one, without anyone publicly admitting it.

The pattern repeats itself at the corporate level with impressive regularity. Companies that have been sector leaders for decades develop what we might call identity blindness: the inability to see the signs of decline because seeing them would require questioning everything the organisation believes itself to be. Kodak not seeing digital photography. Nokia not seeing the smartphone. IBM nearly not seeing the personal computer.

It is not stupidity. It is a defensive mechanism operating at the systemic level. When an organisation's identity is built on excellence in a certain domain, any signal that this excellence is waning is filtered, reinterpreted, minimised. Not through bad faith, but because the collective cognitive system lacks the tools to process that information without crashing.

Who benefits from the narrative

There is then a second level of analysis, less psychological and more structural: the narrative of Germany as Europe's engine serves specific interests that have no incentive to change it.

Financial markets need an anchor of stability in the eurozone. German bunds are the benchmark, the European risk-free rate. If Germany is no longer safe, the entire pricing system for European sovereign risk must be recalibrated. Nobody wants to open that Pandora's box.

European politics has built twenty years of institutional architecture on the premise of German discipline. The fiscal rules, the Maastricht parameters, the Fiscal Compact: everything assumes there is an adult in the room who does the homework and can therefore ask others to do theirs. If that adult is in as much difficulty as the others, on what does the moral authority of the rules rest?

German industry itself has an interest in minimising. Admitting that the problem is structural, that it depends on energy costs, on regulation, on demographic ageing, on dependence on an export-driven model that is creaking, would require painful changes. Better to speak of an unfavourable cycle, temporary factors, adjustment in progress.

And finally, paradoxically, even the countries that have suffered most from German discipline have an interest in not seeing the decline. Because if Germany is no longer the benchmark, who decides what is virtuous and what is not? The void of authority frightens more than the demanding creditor.

What the numbers do not say...yet

The relevant question for those who must make decisions is not whether Germany is in difficulty, because the data clearly say so. The question is: what type of difficulty?

There are two structurally different scenarios, and they require opposite responses.

Scenario one: it is a prolonged unfavourable cycle, exacerbated by external shocks such as energy, China, interest rates. In this case, the correct response is to resist, manage the transition, wait for the cycle to turn. Those who maintain their positions in Germany will be rewarded when the recovery arrives.

Scenario two: it is a structural change in the German economic model, requiring a profound redefinition of what Germany produces, how it produces it, and for whom. In this case, waiting for the return to normality means accumulating losses on a model that will not return.

There is, however, a factor that weighs on both scenarios, and that makes the German situation structurally different from other industrial crises of the past: demographics. Germany is one of the oldest countries in the world. Each year, hundreds of thousands of workers retire, and they are not replaced in proportion. An industrial crisis in a young country can be resolved through innovation, risk-taking, the energy of a generation with everything to build. A crisis in a country that is losing critical human mass is a crisis that lacks the principal instrument to reinvent itself quickly. Even if the cycle turned, even if external conditions improved, who would lead the transformation? With what hands, with what minds, with what appetite for risk?

The problem is that the two scenarios produce the same data in the short term. Distinguishing them requires indicators that are not yet visible, or that are actively obscured by the narrative.

Some signals to watch: where are the investments of major German companies going? If they are building productive capacity outside Germany, in the United States, in China, in Eastern Europe, they are voting with their feet. How is talent moving? Are young German engineers staying, or seeking opportunities elsewhere? And above all: what is happening to the Mittelstand, that fabric of medium-sized family businesses that has always been the true engine of the German economy? Are the insolvencies concentrated in marginal companies, or are they beginning to hit the healthy core?

The trap of partial rationality

There is a final element that makes the German situation particularly difficult to navigate: every single actor is acting rationally from their own point of view, but the sum of individual rationalities produces a dysfunctional collective outcome.

The companies that relocate are doing well, they are optimising costs. The banks that do not recognise deteriorated credits are doing well, they are protecting their balance sheets. The politicians who minimise are doing well, they are avoiding panic. The media that repeat the narrative are doing well, they are maintaining credibility with their sources.

But the sum of these partial rationalities is a system that cannot correct course because nobody has the incentive to say aloud what many know in private.

This is perhaps the most important pattern to recognise: do not look for the culprit, do not look for stupidity, do not look for bad faith. Look for the structure of incentives. Ask yourself: who would pay the cost of admitting the truth? And who instead pays the cost of silence?

In the German case, the cost of silence is distributed and deferred. Everyone will pay it, little by little, for years. The cost of truth would be concentrated and immediate. Whoever speaks would pay it, at once.

Every time you see this asymmetry, you already know how it will end. At least until reality becomes impossible to ignore. And when that happens, everyone will say it was unforeseeable.

But it was not. The numbers were there. One only had to put them in a row and accept what they were saying. Just as one only had to taste Belgian chocolate to understand that the automatic association with Switzerland was, in the end, merely a mental habit.