Germany is about to hold national elections—and the timing couldn’t be worse. The outgoing government broke apart after years of squabbling and is toxically unpopular. The economy is in recession and the “German model,” which worked so well for many decades, seems to be on the brink of falling apart. A series of deadly terror attacks, many perpetrated by refugees whose bid for asylum had long ago been rejected, has recently rocked the country. After decades in which Germany seemed like Europe’s Musterschüler, the best in class, the country has once again become der kranke Mann Europas, the sick man of Europe.
Perhaps unsurprisingly, the main party which has profited from this crisis is the far-right Alternative for Germany (AfD), famous to an American audience mainly because Elon Musk has repeatedly boosted it. The AfD, which according to polls is set to double its support, taking about 20% of the vote, is riding high for many of the same reasons that other right-wing parties in Europe are ascendant: They promise an alternative to a morose establishment and they have been more willing than their competitors to voice widespread concern about recent levels of immigration. But (as I argued in December) there are also important differences between the AfD and other far-right parties. Unlike Marine Le Pen’s Rassemblement National, for example, the party has not moderated over the course of the last years, and still remains home to far-right politicians who openly downplay Germany’s Nazi past.
All of this bodes ill for what will happen after this Sunday’s elections. Friedrich Merz, the leader of the Christian Democratic Union, is likely to top the polls, becoming the country’s presumptive next Chancellor. Following an unmistakable shift in public opinion, Merz has moved to the right over the course of the campaign, promising that he will close the country's borders to asylum seekers and push those whose applications for asylum have been rejected to actually leave the country. But in his bid to demonstrate that he means business, he disregarded one element of the longstanding the firewall between the established parties and the far right by putting forward a motion in the Bundestag to toughen up asylum and immigration policies even though he had reason to believe that it would pass with the support of the AfD.1 This created deep animosity between Merz and the two center-left parties, the Greens and the Social Democrats—even though he will likely need to strike a deal with at least one of them to form a stable government.
So if the current polls are even approximately correct, Germany faces another grim period of infighting and inaction. Since Merz has repeatedly ruled out forming a coalition with the AfD, the center right and the center left will have no choice but to enter some kind of joint government in the end. And so Germany will once again be governed by an ideologically incoherent coalition—composed of Merz’s Christian Democrats, plus either the Social Democrats or the Greens—that will struggle mightily to address the underlying challenge: how to fix Germany’s failing model.
I will likely write more about all of that—and what it means for Europe more broadly, and how it relates to J. D. Vance’s speech at the Munich Security Conference—in the wake of this Sunday’s election. But in the meanwhile, I asked one of the most astute observers of Germany to come on the podcast to talk about the urgent challenges that will continue to face the country well beyond this Sunday. So here’s Wolfgang Münchau’s deep dive into why Germany is in a deep economic and political crisis—and what it would take for the country to get out of it.
–Yascha
Wolfgang Münchau is the Director of Eurointelligence and a journalist focusing on the European Union and European economy. His most recent book is Kaput: The End of the German Miracle.
In this week’s conversation, Yascha Mounk and Wolfgang Münchau discuss why the German car industry—and broader economy—is in decline, and explore the potential political future of Germany as the country heads to the polls.
Note: This episode was recorded in January 2025.
This transcript has been condensed and lightly edited for clarity.
Yascha Mounk: I've been a fan of your work and writing for a long time, but the occasion to have you on is your latest book with the lovely German title that is also understandable in English: Kaput. You're arguing that Germany’s economic and political model is really at an unprecedented inflection point in an unprecedented crisis. Why is Germany in a severe crisis?
Wolfgang Münchau: Germany was based on an economic model—which both left and right adhered to—of generating very large export surpluses with the rest of the world. This economic model has influenced German foreign policy and is responsible for its relationship with Russia and China. It is also responsible for Germany’s energy policy and dependency on Russian gas, hence the decision to get rid of nuclear power because it had that backup arrangement with Putin. It is a model that's been basically operational in different disguises since the Second World War. If you look at the debate today, there isn't anybody who questions this model. The debate is about who can run it better.
It appears to me that this model, which is very much based on 1980s and 1990s technologies, no longer works in the 2020s. The symbol of Germany for me is the car, because that’s its biggest industry. Twenty years ago when Germany had a crisis, they fixed it through competitiveness measures, making the labor market a bit more liberal.
Mounk: What's interesting is that, at the time, labor costs had gotten very high and there were other countries that could compete on cost, but German carmakers still had a real technological lead. Part of the reason why the car industry is in crisis today is not just that you can produce cars more cheaply in other countries around the world, but that it's really no longer clear that the German car brands have the allure and the technological innovation that they once did.
Münchau: Cost is a factor—the cars that are produced in Germany are too expensive. But these car companies have factories everywhere in the world these days. So they can branch out, they get their parts from everywhere in the world. But as you said, the cars are no longer what they used to be. German electric cars are absolutely rubbish. At the moment, Germans are paranoid about batteries. They invested in batteries, and virtually all of these ventures have failed. But the real thing that worries me is the software, because this is where Germans are taking no interest. They've not invested in digital technologies at all. So they're behind.
Mounk: Just as a point of illustration here, I believe I may be wrong about this, but the technology company with by far the biggest market capitalization in Germany is still SAP, which was founded in 1972.
Münchau: That's right, SAP is an oldie among the digital technology companies. They run basically completely integrated business software for companies from accountancy to stock management and everything hangs together. And they've maintained that niche for a long time. It's not as dynamic as Google or Amazon or Facebook. It's a different generation.
Mounk: I don't think that the big tech companies in Silicon Valley fear the innovativeness of SAP.
Münchau: No, definitely not. Nothing comes from Germany in that respect. The car industry is nowhere on AI—and that's where the big money will be in 10 years’ time. The German industry will probably end up as the junior partner of Tesla or the Chinese because they don't have the capacity to innovate. This is where the problem is. There's no savings program in the world that can make you innovate—they need to invest to innovate. That's something that Germans have kind of forgotten. If you export surpluses, that means you save more than you invest. Germans have been investing outside of Germany. That's what happened. VW built factories in China. They built a cluster risk because they created factories in exactly the same sector that they're already engaged in. They didn't invest in other stuff, which could have shielded them against their own mistakes.
Mounk: So let me put a question to you here. You, I believe, are somebody who’s more rooted in what Germans would call Volkswirtschaftslehre, which roughly is the equivalent of macroeconomics. There's also Betriebswirtschaftslehre, which is really more about the economics of business. That, I think, is a less perfect analogy to something like microeconomics. I feel like there are two explanations for the crisis of the German car industry that could be drawn from those different modes of looking at the world.
One story here is to say that Germany has an economic model that is so based on experts that it over indexes both on foreign policy and on the behavior of companies. This has a cultural dimension because for a long time Germany has seen itself as an export Weltmeister, as the world champion in exports, which I believe it no longer is. And it was a kind of displacement patriotism for the country as well. So one story you can tell is that this led German industry and German politics to make the wrong bets, to bet on cheap gas from Russia or to bet on exports to China, and those bets went wrong. I have a lot of sympathy for that story.
But I think somebody who wants to push back might say, well, what about the business economics side of this? Don't we see in all kinds of industries that incumbents find it very hard to innovate? Like, Kodak has a very dominant business in photography, but because they are so strong in the traditional world of analog photography, it is just really hard for reasons of the internal structure of big corporations for them to also take the lead in digital technology. And so once we move to digital photography, Kodak goes belly up. And isn't it unfortunate that Germany is hit by exactly that kind of development?
Münchau: Absolutely. In my book, I give the example of Smith Corona, which was a typewriter manufacturer in the United States, which actually managed to integrate digital technologies and its typewriters quite successfully. It peaked in, I think, 1989, when the PC had long since been invented. But then only a few years later, it was the laser printer that killed them.
I would not expect VW and BMW to be the champions of the world of electric cars because it's just generally not the same thing—just as newspapers are not the owners of social media. The problem with Germany is that Germany did not allow these other companies to come up. Germany as a country has good people, good schools, good universities, and there are lots of successful Germans out in the world. But why aren't there more SAPs? Why aren't there any SAPs in the car sector? It's not a lack of educated people. It's a question of group think. The German model was premised on the idea that if something gets invented, it gets invented by Volkswagen. And the subsidy system, the way the EU funding investment projects work, means funding always ends up with existing companies. There isn't a capital market that would give venture capital to startups. They have startups. It's gotten a little better. But they don't have a private equity market that would take a little startup up to the stock market level. This route is blocked. This is not a country for entrepreneurs, and this has to do with costs, taxes, and bureaucracy.
But it’s also cultural, because it's not that cool in Germany to be an entrepreneur. Society doesn't reward you. It doesn't reward failure. If you're in the EU and you want to set up a company, you go to Luxembourg or Belgium, as they are much more business friendly.
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Mounk: I believe that Angela Merkel, to her credit, was obsessed with the fact that there were no billion-dollar patents coming out of Germany, that Germany had all kinds of small and medium businesses making innovations that are value creating and significant, but very few that make innovations that really can create a large new company, or something that is really transformative. It's not clear to me that she did very much about that while she was Chancellor, but at least she seems to have been aware of that problem.
It seems to me that the roots of this situation really go quite deep. My mother is a conductor. It would never have occurred to me that founding a company was something I should do or I could do. It was just completely outside of the realm of my social milieu. Now, there are obviously other social milieus in Germany that are much more entrepreneurial. There are many, many companies in Germany. But I think that's kind of indicative of something interesting. There is a problem with universities in Germany. There are many decent universities—but, for historical reasons, no truly excellent German university that can compete with the Havards, Stanfords, Cambridges, or Oxfords of the world, or for that matter Tsinghua or Beijing Normal.
There are bureaucratic obstacles to innovation, and as a result of that, there aren’t the VC firms that are willing to place big bets on companies that, you know, might have a very big payoff.
Münchau: The problems are very deep, cultural, and system-wide. I was one of the founders of the Financial Times Deutschland in the year 2000. One of the first things that happened to us was like we had a workers’ council. We were sort of the start-up challenger to the existing media landscape, but suddenly we found ourselves with the same structures and with the same conservatism that all our competitors had as well.
There is an awful lot of resistance to change in Germany. If you look at the German elections, you can describe it pretty squarely like a game of musical chairs. You have four parties, and three chairs. At the end of the elections, three of them will be sitting in chairs and the other one will be the opposition party. The same parties will always be in coalitions. There is now a very deep unhappiness with the current government, the so-called traffic-light coalition between the Social Democrats, Free Democrats and the Greens. But at least one of them will end up in government. That is almost certain.
We have a firewall against the AfD, the party of the right, because we want to protect democracy. We want to protect ourselves again. There’s a lot of protectionism, like with X and the fake news it generates. In America, the attitude is, yeah, sure, there's fake news. I'll read something else. People are less fearful of the world. I get a sense that the 21st century and Germany don’t go well together.
Mounk: Well, the 20th century and Germany didn't always go well together, either. I want to get back to the political questions because there's an election coming up and I would love to explain the nature and the stakes—and perhaps the lack of stakes—in that election to our readers. But let's double down for a moment on this question of change. I have one response to what you were saying, which is that I’m deeply aware of the fact that the worst that can happen in politics is much more significant than the best you might achieve. So on normative grounds, I am in virtually no situation an accelerationist. I think that this desire for things to get worse so that they can get better is nearly always a mistake.
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In purely empirical terms, I guess I would distinguish between two different things, which is, one, the only circumstances under which things would change is if things get a lot worse. And two, it may be that things get a lot worse and they still won't change and they still won't improve and then we get into an even worse crisis and that's the reason why we shouldn't hope for that. What you said convinced me that if things get worse, that may not be enough for Germany to take the steps it should to reform itself. But it didn't really convince me that there's any realistic chance of Germany reforming itself unless things get worse.
The other point I wanted to make is about what a real deterioration would look like. As you're saying, Germany is still a very affluent country. It's a country in which there are some general problems with infrastructure, but if you go to Germany it's clearly a functional country in which most people live lives of pretty high quality in terms of their material well-being and also in terms of other kinds of indicators.
Münchau: When we discuss decline, there's always this question of how does it end? Often in life, the most likely way decline happens is for decline simply to happen. It might just not be resolved. The decline comes gradually and then suddenly. This has gone on for almost 10 years—German industry started to stagnate pretty shortly after the Brexit referendum. Britain could no longer be integrated into supply chains. That was a blow to German industry. They needed to have some more slack in the supply chain in order to be able to function in a crisis. Then came Russia's invasion, which drove energy prices up. And now comes Trump, who poses tariffs and makes all sorts of threats to Europe. So this has been one crisis after another.
Germany does have an investment crisis and a competitiveness crisis that will simply continue. Volkswagen wanted to close three factories, and the government and the trade unions leaned on them not to do this. So they cut a classic German deal—the unions get a bit less money and everything is done in consensus. But it's hard to see how this deal will resolve the company's fundamental innovation problem. I don't think it matters whether Volkswagen produces something in Wolfsburg or in Slovakia. What does matter is that the company isn’t even interested in cutting-edge software technology. I've never heard a German car boss saying anything intelligent about AI, engaging with 21st century themes in the way other tech leaders do in the world.
Let me try to chart what's going to happen. Let's assume the polls are roughly right. Friedrich Merz will become Chancellor, form a coalition, with the Social Democrats maybe. And there will be some changes, some cosmetic changes, some competitive stuff, the stuff they always do. And then they’ll realize they still have this problem and that they're still falling further behind the Chinese and the Americans. And then, by the next election, the AfD will probably be the largest party with around 30% and it will no longer be politically possible to form a government without it. This just happened in Austria, where the old, centrist parties—very similar to the Germans—could no longer form a government. Then there will be a right-wing government and things will get really bad.
The main characteristic of both the AfD and the parties of the left is not that they are particularly extremist or right-wing or left-wing. It is that they're wedded to the old system more than anybody else. They wanted more steel companies. I don't think that Elon Musk knows who he was endorsing. They are the least tech-friendly party in Germany.
Mounk: Let’s switch to politics. Is there a political sense in which Germany has learned the wrong lessons from the last 60 years, perhaps even in a broader intellectual sense? Germany went through the cataclysm of World War II, and its political leaders after 1945 had the wisdom and foresight of integrating Germany clearly into the Western Alliance, making it at first an imperfect but genuine democracy that became freer over time. From very early on, the greatest desire that the political leadership as well as ordinary citizens had, very understandably, was for stability in light of what had happened over the previous 15 years and even the previous 50 years. It feels to me that this has come to be the basic shared outlook of all the establishment parties in Germany.
That makes it very, very hard for a country to change its model, when its basic attitude to the world is that the least responsible thing in the world is to have a strong opinion and to say we have to change a bunch of things. Those are only kind of weirdos or radicals. It strikes me that the German public sphere is much less argumentative, with a much narrower range of voices, than the public sphere in England or the United States or in different ways even in a country like France. That has some compensating benefits—it means that we don't have a Marjorie Taylor Greene, and that some of the silly, woke ideas don’t have as much influence in Germany as in other countries, and so on. But it also makes it really hard to grapple with the kind of caesura that Germany is living through at the moment in terms of its economic and political model.
Münchau: The trouble with consensus societies like Germany is that when the consensus is wrong, you don't have corrective forces. You have this in the United States. Correction shifts in politics almost happen unexpectedly. You think there is a consensus in one direction, then suddenly Donald Trump wins an election and things go off in a very different direction. That doesn't happen in Germany. To take the example of the car industry, it failed because the entire industry and the government believed in it. There wasn't any Elon Musk who said, I'll do something different. I'll test the model, because the media and the whole system would have ganged up against him. This is what the consensus system is. It isn't just companies, it's everybody. It's the entire intellectual and commercial climate.
I don't think things will get that bad. Decline can happen slowly and gradually. Industries don't just go away, they just reduce their output. There's going to be an investment somewhere else and there are going to be some job cuts. If you're starting from a high level, as Germany does, it can take a long time.
Mounk: There's an election coming up on February 23rd, 2025. As you explained, the basic party system in Germany is that for the last few decades, there have been four centrist political parties. There’s two on the center right, including the Christian Democrats, the party of Angela Merkel and now Friedrich Merz, the likely future Chancellor. There's also the smaller center-right party, the Free Democrats, who claim both to be a philosophically liberal party and a party that is in favor of free enterprise. And then there are two parties on the center left: the Social Democrats, which is sort of the big traditional social democratic party, as well as the Green Party, which has taken a lot of the left-wing voters that are more affluent. Then there is a leftist party that is in some complicated sense the successor party to the SED, the communist party that ruled in East Germany, which is now declining. In this new parliament, there will potentially be a kind of split-off from that party led by a politician called Sahra Wagenknecht, who is economically left wing, but on social issues is more conservative.
And then of course there's the AfD—the upstart right-wing populist party endorsed recently by Elon Musk, that had its roots in some economics professors who were worried about the euro, but that has undergone a very different trajectory to other right-wing populist parties in Europe. Whereas most of those parties started on the far right—like the Sweden Democrats, who were literally in the milieu of neo-Nazis—and then moderated over the course of decades, the AfD started as a kind of bourgeois conservative party, and has been drifting further and further to the right, pushed by more extreme leaders at each stage of the party's evolution.
As you were saying earlier, it was sort of a game of musical chairs between the main German political parties during Angela Merkel's rule. She ruled at some point with the Free Democrats, the most natural coalition because they’re both center-right parties. Then after a new election, she led a grand coalition with the Social Democrats. Then at the last election, the Social Democrats surprisingly came top. They didn't have a coherent majority on the center left. So they ended up in what was called a traffic-light coalition, the red Social Democrats, the Green Party and the traditionally yellow Free Democrats from the center right. That was unstable and not very ideologically coherent. The government floundered, both on its internal contradictions and on some genuine mistakes, and the parties split apart, necessitating these new elections.
What is the outlook for the upcoming elections? Does it even matter who is going to win?
Münchau: There is a bit of uncertainty, because for three of the parties you mentioned their fate is extremely uncertain. One is the FDP, one is the left party, and one is the Sahra Wagenknecht splinter from the left. They're all polling at around 5%. They could all be out. Or some in, some out.
Mounk: That’s relevant because in the German system of proportional representation, you need to get 5% of the vote nationally in order to be represented in parliament, except in certain complicated circumstances.
Münchau: There is a bit of uncertainty about the eventual coalition-building, but it’s not possible to form a coalition against Friedrich Merz. So he will almost surely be the Chancellor, unless he tanks. I don't expect this to happen, but you can't exclude it. Now, if the current polling is correct, he has only one coalition option, which is with the Social Democrats. So you would get what is called in Germany a grand coalition. This is language based on the times when they had 40% of the electoral support each. Think of it as a coalition between the Republicans and the Democrats, or the Tories and Labour in the UK. It’s very hard to imagine this in those countries, but that's basically what a grand coalition is in Germany. We could end up with a centrist grand coalition where the Greens would be the main opposition party. You wouldn't count on this coalition to do much differently to what the current government has done.
If Friedrich Merz has a choice of coalition partners, say between the Greens and the SPD, and he goes for the Greens, then he’d get a slightly different mix. The Greens might be open to some of his tax policies, and they might support him on Ukraine. Olaf Scholz, the current Chancellor, has been a very reluctant supporter of Ukraine. He recently blocked another three billion euros of aid to Ukraine, which his foreign minister and his defense minister had demanded. Scholz has been playing a double game on Ukraine, pretending he supports them, while behind the scenes trying to prevent significant German deliveries and frustrating the process all the way.
Mounk: Tell us a little bit about Friedrich Merz, because, as we’re recording, he’s likely to be the next Chancellor of Germany. I don't think that he is very well known in the United States.
In the rest of this conversation, Yascha and Wolfgang discuss Friedrich Merz, the AfD, the state of the eurozone and the future of the European Union. This conversation is reserved for paying subscribers…
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