German voters demand change as Europe's biggest economy stalls

Gelsenkirchen: Lars Baumguertel wants Germany's politicians to get out their cheque books.

The 58-year-old executive runs one of the last surviving manufacturers in Gelsenkirchen, a former coal town in the industrialized Ruhr Valley.

But his company, like many in the Mittelstand - the tissue of small- and medium-sized manufacturers that powers Germany's economy - is reeling from high energy costs after the Ukraine war ended supplies of cheap Russian gas.

Europe's largest economy contracted for a second consecutive year in 2024, its worst performance in two decades. And Gelsenkirchen has been amongst its hardest-hit cities - it has Germany's highest unemployment rate, which has fuelled a dramatic rise in the popularity of the far-right Alternative for Germany (AfD) party.

Ahead of a general election on Sunday, a national debate is raging about how to revive Germany's economic fortunes.

Baumguertel hopes a new government will provide long-overdue infrastructure investment needed to rebuild Germany's energy system and to transition to a greener, more modern economy. Germany has pledged to become carbon-neutral by 2045.

"The entire Ruhr region, and Gelsenkirchen in particular, shows how constant change is needed to sustain economic growth," he told Reuters during a tour of his factory. The family-run firm, founded in 1889, still employs some 2,000 people making galvanizing steel coatings.

But Germany's constitutional debt brake has prevented successive governments from making vital investments, ranging from public infrastructure to skills training, needed to overhaul Germany's ailing economic model, economists say.

The brake - part of Germany's response to the 2009 financial crisis under former chancellor Angela Merkel - limits the federal government's deficit to a mere 0.35 per cent of output. By comparison, last year the US budget deficit was more than 6 per cent of output.

Reuters spoke to eight residents of Gelsenkirchen, as well as senior politicians and economists, who said that a new government must consider fundamental change to Germany's austere, export-driven model, including the debt brake, in order to revive the economy.

Friedrich Merz, the conservative who is the runaway favourite to emerge as chancellor of a coalition government after the election, is quietly leaving the door open to reform, party insiders told Reuters.

His official stance is that the debt brake must remain in the constitution and that there are no plans for reform. Indeed, Merz rejected a push last summer by senior members of his CDU party to explicitly mention debt brake reform in its election manifesto, citing its totemic appeal to austerity-minded conservative voters.

But senior party leaders told Reuters Merz had privately accepted that change is inevitable due to Germany's huge investment needs in the economy and defence, with American engagement in European security no longer a given under President Donald Trump.

"Of course, we will have a reform after the election," a conservative leader of a German federal state told Reuters, asking not to be identified given the sensitivity of the issue.

Residents want change

In Gelsenkirchen, the signs of a downturn are visible everywhere. While the city played a big part in Germany's post-war "economic miracle", the rot set in with the decline of coal and heavy industry in the 1960s. Its population tumbled from 390,000 then to just 260,000 now as the local economy cratered.

The city now has one of Germany's lowest levels of income per capita and highest rates of child poverty, according to official data.

Many residents no longer feel the economy is working for them and want change.

Klaus Herzmanatus, a fourth-generation coal miner, was forced by pit closures into early retirement in 2000 at the age of 40. He has watched in dismay as the industrial decline in Gelsenkirchen has spread elsewhere in Germany.

"We are an industrial nation. We can't create chaos in industry," he told Reuters, voicing a litany of complaints about how politicians in Berlin let Germany down. "There must be affordable energy supply for companies."

Many residents are turning in desperation to extremist parties. Once a stronghold of the Social Democratic Party (SPD), the Ruhr Valley has seen a rise by the far-right AfD, which is now the second-most popular party nationally behind the CDU, according to opinion polls. In Gelsenkirchen, the party garnered 22 per cent of the votes in June's European election, its strongest result in Germany.

The AfD sees the issue of energy costs as a vote-winner. It blames Germany's years-long phase-out of nuclear energy, which started in the 2000s and was backed by all mainstream parties.

"We've shut down the power plants here - some of the safest nuclear power plants in the world - to import electricity from the nuclear plants in France," said local AfD official Christian Loose.

When Germany pulled the plug on its last three nuclear power stations in April 2023, it became a net importer of energy from France, which produces 70 per cent of its energy from nuclear. However, French energy imports represent only 3 per cent of Germany's energy consumption.

The CDU, which is expected to lead a coalition government after the election, has left the door open to reopening these nuclear plants. Its leader, Merz, has described their closure as "a fatal decision."

While some pro-business voices are urging Germany to defer its net-zero carbon targets, the political consensus is still in favour of an energy transition that would keep climate ambitions on track and promote a new generation of green jobs and growth.

The issue is: where's the cash for that?

Addressing Germany's structural challenges - ranging from its energy needs and climate obligations to overdue improvements to housing, transport and training - would cost 600 billion euros in the next decade alone, the IW economic institute estimates.

With debt at around 63 per cent of output last year, Germany has more leeway than most. The United States, by contrast, is running a national debt at 123 per cent of GDP.

For Germany's right in particular, maintaining the debt brake has become sacrosanct - until now.

One possible reform would be to lift the spending cap imposed on Germany's 16 federal states, whose regional budgets cover everything from social housing to green transition. The brake is even tougher on them, permitting no annual deficit at all.

"An addition to the debt brake for the federal states is conceivable," Mathias Middelberg, one of Merz's top budget aides, told Reuters. "This could certainly be corrected."

A small increase in the deficit could free up 6.0 billion euros a year, according to the Ifo Institute - not peanuts but certainly no game-changer for the economy.

A bigger step would be if left-leaning Social Democrats and Greens conditioned their entry into a grand coalition led by Merz on him agreeing to remove certain spending items - notably on long-term investment - from the brake altogether. Merz has ruled out cooperating with the AfD.

"This is the time when Germany needs to invest and everybody else is doing it except Germany," Nikolaus Wolf, director of the Institute of Economic History at Humboldt University of Berlin, told Reuters. "It's really kind of suicidal."

The scope of any reform will depend on the outcome of the election. But one source close to Merz told Reuters in November that when he says publicly he has no plans for debt brake reform, it should be interpreted as meaning that he has no such plans for now.

'Many mistakes'

Some in Gelsenkirchen say missteps there mirror a wider reluctance of Germany's leaders to change as advanced economies around the world have gradually moved from industrial to knowledge-based models.

While neighbouring Bochum, also a former coal and steel hub, spotted the trend early and founded the Ruhr region's first university in 1965, local Gelsenkirchen leaders chose not to follow suit.

Bochum's unemployment rate of 10 per cent is now more than 3 percentage points lower than Gelsenkirchen's.

"The mood was 'We have coal and steel, what do we need with these crazy academics?'," said Karl-Martin Obermeier, professor at the Westphalian University of Applied Sciences, which the city only opened up some 27 years later in 1992.

"We focused solely on large-scale industry, classic coal and steel," he told Reuters. "Many mistakes have been made."

Gelsenkirchen's mayor Karin Welge, a member of Germany's ruling Social Democratic Party (SPD), said additional fiscal leeway would have helped her city with its structural transformation, in particular redeveloping neighbourhoods and investing in education.

"We are reliant on the support of the state here," she said. "A reform of the debt brake could also pave the way for the repayment of old debts, which in turn would give us room for investment."

No quick turnaround

Close observers of the German economy do not expect this election to yield dramatic change. Two major economic institutes are already forecasting a third year of economic contraction in 2025, the longest period of weakness in Germany's post-war history.

Franziska Palmas, senior Europe economist at Capital Economics, said it was unlikely the next government would prioritise major long-term structural change, not least given the current uncertainties in the global economy. Policymakers could have more of an impact on Germany's long-term prospects by focusing on the business environment for new growth sectors, boosting digitalisation and improving the environment for start-ups, Palmas said.

"However, while these issues are included in most parties' manifestos, we doubt they will be a priority for the next government," Palmas said.

Back in Gelsenkirchen, the former miner Herzmanatus says he is convinced "we can get out of this hole again". Once a backer of the Social Democrats who used to be able to count mining towns as their heartlands, he long since switched to the CDU.

To visitors at the mining museum he runs as a volunteer, he gives the customary miners' salute at the end of a day's work down a shaft - "Glueck auf" - "good luck for the ascent".

The same could be said for the German economy.