Why Germany Stopped Working

Germany committed to borrowing something in the order of a trillion euros last year and the first visible sign of that money, in Berlin at least, was a lot of traffic calm. Let me back up because the specifics here are the good part. Germany has spent most of the last century as the most fiscally cautious country in the developed world. Back in 2009, in the wake of the credit crunch, it wrote a rule called the debt break directly This was a hard legal limit on how much the government was allowed to borrow. Many other countries wondered if they should do the same at the time. While the rest of the world ran up enormous debts, Germany kept its own remarkably low and treated the idea of borrowing to spend as something close to a moral failing. So, in a world where the usual worry is governments that can't stop borrowing, Germany had the opposite problem. A country that could easily afford to spend, sitting on very little debt and constitutionally forbidding itself from doing it. Then, 18 months ago, that all changed. Rattled by a US security realignment that suddenly made Europe responsible for its own defence, Germany did something close to the unthinkable. It suspended the sacred debt break, lifted the cap on defence spending and set up a special fund of around half a trillion euros for infrastructure. In the German press, it was compared in terms of importance to reunification. Some of that money was meant for the country's crumbling roads, bridges and railways. According to the Wall Street Journal, the first visible result was that red and white barriers went up all across Berlin, closing vital traffic arteries, but with no work going on behind them. While Germany had finally agreed to spend enormous sums fixing itself, the only thing it managed to build was a construction site with no actual construction, which is an unusual opening move for the country that gave the world the word Autobahn. Now Germany has been in the news lately for a political shock, but that's not really what I want to talk about, because underneath the politics is an economic story that's a lot stranger and a lot more interesting. As recently as a decade ago, Germany was the economic engine of Europe, the country that everyone else was told to imitate. These days, it very much isn't, and the papers will tell you a powerhouse like this fails because of one big villain. It was either the loss of cheap Russian gas, Chinese competition or Trump's tariffs. You can take your pick, but the money arriving and then just sitting there is the part that doesn't fit any of those stories. If the problem were the gas or China or the tariffs, then handing the country a trillion euros to spend would help, and so far it mostly hasn't. The cash is mostly still sitting there, unspent and tangled up in Germany's own rules. So this isn't really a story about a single villain. Germany took off the enormous break that everyone could see, the constitutional debt break, the one that made all the headlines, and found a second break underneath it. One that nobody legislated, that nobody can vote away, and that turns out to be clamped a good deal tighter than the first one was. Now, to understand why half a trillion euros hasn't fixed this, you first have to start with how badly the repairs were needed in the first place. The German government hadn't just been frugal over the last couple of decades, it had kept public investments so low that the spending wasn't even covering the depreciation on the existing infrastructure. One widely cited figure states that around 5,000 bridges on the Autobahn network were flagged for urgent repair, though depending on who's counting, that number runs even higher. And in Dresden, you don't need a survey to see the problem. A section of the Corolla Bridge collapsed into the Elbe River overnight. Fortunately, the last tram had crossed safely just minutes before. Germany could have easily afforded to fix these problems. Its debt at the time was sitting in the mid-60s as a percentage of GDP against over 110% in France and well over 120% in the United States. So, Germany was one of the few countries that actually had the borrowing room. It also had a good credit rating and the political mandate. It had finally given itself permission to spend. So, everything was in place, which brings us to what happened next. But before we get to that, let me quickly tell you about this week's video sponsor, Taylor Store, where I've been getting all of my shirts from for the last two years. Taylor Store makes custom clothes cut to your measurements, so everything fits properly. You enter a few details on their website. They work out your size and make a shirt just for you. If it's not right the first time, they'll remake it for free. 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The mayor of Weissenberg, a small town outside Berlin, told the Wall Street Journal that he hadn't seen a single cent of the 2 million euros he was expecting for road and school repairs. His explanation was that Germany had simply forgotten how to take on debt, which is, I suppose, a wonderful problem to have. Most governments have to be dragged kicking and screaming into any kind of spending restraint. Germany had to be handed a half a trillion euro credit card and then sat down for a tutorial on how to swipe it. Further south in Bavaria, the mayor of Mühldorf am Inn has spent decades trying to get a single track diesel rail line upgraded to an electric double track route. His town was allocated a million euros from the federal fund, which is great, but as he pointed out, it costs 5 million just to build a kindergarten, so it doesn't go very far towards a modern railway. And when the projects do get funded, they run straight into the rules. The reason those barriers went up in Berlin with no construction behind them is a legal requirement in Germany that forces public authorities to carve big infrastructure projects into small individual lots and tender each one separately. The idea behind this rule is admirable. It makes sure that small and medium-sized firms get a shot at government contracts instead of the giant conglomerates taking everything. In practice, though, it means that before you can resurface a road, you have to run half a dozen separate tenders, the asphalt, the drainage, the barriers, the line painting. If one contractor hits a delay or one rejected bidder files an appeal, the whole project freezes. So the road then doesn't get built. Not because anyone was careless and not because anyone was corrupt, but because Germany insisted on being fair, transparent and legally immaculate. Failing, you might say, responsibly. The delays aren't confined to local roads either. There's a major high-speed rail tunnel being finished through the Alps, built to move freight and passengers between Italy and Munich at 155 mph. Italy and Austria have largely finished their sections. Germany, on the other hand, is years behind on its stretch of the track. Imagine that, Germany being less efficient than Italy. So, when the tunnel opens, the train will race through the mountains at top speed and then slow to a crawl the moment it crosses the German border. Of the money that did get out the door, economists at the IFO Institute and the German Economic Institute tried to trace where it actually landed. They found that somewhere between 86 and 95 percent of it had been relabeled to cover everyday running costs, keeping the hospitals open and that sort of thing, rather than building anything new, which is obviously nice for the patients, but it doesn't do much for the bridges. Now, Germany can move fast when it decides it has to. Back in 2022, after Germany made the strategic decision to wean itself off Russian gas, the government suspended its own environmental and planning rules and built its first floating LNG terminal in about 10 months, the kind of project that would normally take five years to build. Chancellor Schulz stood at the opening and said the speed should be a model for a new, pacier German economy. He was right about that, but the catch is that they only hit that speed by passing a special law that let them waive the environmental reviews and the paperwork, the very things that freeze everything else. So, the Germans can build when they decide the situation demands it and switch off their own rules, but hand them half a trillion euros and a clear instruction from parliament under normal conditions and the machine defaults to caution. The debt break was never really the problem. It was just the break that they could see. Angela Merkel had a favorite statistic. Europe, she liked to point out, has 7% of the world's population, 25% of its GDP and 50% of its social spending. As Adam Tooze puts it, those three numbers basically were Merkel's economic worldview. Proof, as she saw it, that Europe's generous social model couldn't survive unless the continent got dramatically more competitive. And those numbers get pulled out endlessly to support a bigger claim that Europeans are work-shy layabouts lounging in cafes while the Americans do the actual work. The trouble with that theory is the data. As Chris Giles pointed out in the FT this week, prime age adults, 25 to 54, are now more likely to be working in Europe than in the United States. Older workers, 55 to 64, also have higher employment rates in Europe. The only group where America comes out ahead is the under 25s and that's mostly because young Europeans stay in education longer. The share of young people doing neither work nor study is actually higher in the United States. So whatever is wrong with Germany, it isn't an epidemic of afternoon naps. And you can't even blame it on a lack of political will either. Suspending a constitutional borrowing limit they treated as a holy scripture for 15 years, committing hundreds of billions to defense and infrastructure, that took enormous political will. They did the hard part. They made the decision that everyone said was impossible, but then the money still didn't move. So whatever is jamming the system, it sits below the level of politics. It isn't the Russian gas issue either. The 2022 energy shock was real and it did lasting damage to heavy industry. But the acute crisis, the scramble of that first winter passed and Germany still didn't move. Chinese competition is a serious problem too, probably the most serious of the three. Bloomberg made a whole documentary on how Chinese car makers leapfrogged the Germans on electric vehicles. And it's gone further than cars. China has moved from competing with Germany abroad to beating German firms at the things Germany was best at, machine tools and industrial machinery, inside Germany's own markets. I'm not going to wave that away, but even a full-blown China shock doesn't explain why a town outside Berlin can't spend two million euros to resurface a road. China isn't the one splitting the contract into six lots, which leaves one last place to look. The machine itself. And I'll be honest, I have a certain amount of sympathy for this German instinct, the urge to do things carefully by the book and to never change a thing that's working, because I'm exactly the same. I run this channel as a consensus economy too. The consensus is, of course, me, and I agree with myself on pretty much everything. There's an unshakable standing rule here that the thumbnail design will never change. A dark background, high contrast, and a photo of me in a suit looking mildly concerned about something off to one side. People write in suggesting that I try a different font or that I take a photo with my mouth wide open and pointing at things the way all of the successful YouTube channels do. I just don't know what to tell you. The consensus has considered these proposals and rejected them. It's the same reason I ignore people in the comments section telling me to tie a Windsor knot. A big fat tie knot is totally unacceptable to me, and it's simply not up for discussion. It's a matter of basic standards. Sticking rigidly to what's worked before is a perfectly rational strategy, right up until the moment where it isn't. In my case, of course, there's no real cost because I'm right, and I want to be very clear about that. There's no version of events where I'm the problem, which, now that I say it out loud, is roughly the position that Germany's been taking for the last decade. The difference, though, is that when a whole country does it, the cost comes in a good deal higher because this isn't really a quirk of a few German committees. It's an entire economic operating system built around the avoidance of failure. Now, to be fair to the Germans, you have to understand where this instinct comes from. For most of a century, that instinct served them brilliantly. Germany didn't become Europe's powerhouse by accident. If you wanted a chemical plant, a set of precision machine tools, or a saloon car where the door shut with a heavy reassuring tud like a bank vault, you bought German. Nobody on earth was better at building complicated physical objects. And they were pretty good with software too, but in a very particular way. As Wolfgang Munschow explained in a great interview on the Hidden Forces podcast, which I've linked to in the description, German engineers were brilliant at writing the kind of software that controlled machines. If a cog was turning or a fuel injector was firing, they could write code to measure it, monitor it, and tune it to perfection. The software served the machine. The trouble is that the world moved on to products where that relationship runs the other way. In a modern car, the machine serves the software. An electric vehicle has more in common with a smartphone than it does with a traditional car. Most of the value now sits in the operating system and the battery chemistry, not in the machining of metal parts. The engine, the thing that Germany spent 100 years perfecting, became almost a detail. On top of that, software gets built in a way that runs against everything German engineering stands for. It involves rapid iteration, constant updates, and a willingness to ship something that just about works on the understanding that you'll patch it as soon as possible. To a German engineer whose entire training says that you test a component until it's flawless, shipping something that you know is imperfect is a moral failing. And it isn't just that the engineers are stubborn either. The country trains them specifically to be this way. Germany's vocational and apprenticeship system is without a doubt one of the best in the world. It's a system that other countries have spent decades trying to replicate. It takes young people and trains them in partnership with industry so they walk out of the classroom already able to do the types of jobs the German industry needs. And this worked amazingly well, right up until the point where the mechanical era hit a slowdown. You then find yourself with a national training pipeline turning out world-class expertise in the kind of work that the world is walking away from. And that can't be fixed with a memo. A master toolmaker can't retrain as a machine learning engineer over a weekend. And a factory that's built to machine metal to a thousandth of a millimeter does not become a battery plant because a politician would like it to. It's worth remembering, for any country currently promising to bring manufacturing home, that the German model is what a serious manufacturing economy actually looks like. The apprenticeships, the supplier networks, the decades of accumulated know-how. It is enormously hard to build. And as Germany is now discovering, enormously hard to change once you have it. Reshoring a factory is the easy part. Reshoring the ecosystem that makes the factory worth having takes a generation, which is roughly 10 times longer than any politician's attention span. And no tariff or subsidy speeds that process up. There's a parable that Munchau reaches for in that same hidden forces conversation. And it's not even a German example that he uses. He brings up the American typewriter company, Smith Corona. By 1989, the personal computer was clearly on the rise, but it was still an expensive office machine. And for most people, the word processor was a perfectly sensible thing to buy. Smith Corona was the global market leader in them. A word processor was essentially a typewriter with a small screen and a floppy disk drive bolted into the frame. It was a triumph of incremental engineering. They took the machine they already knew how to build and stuck a small single function computer onto it. Their chief executive said at the time that computers were a logical extension of our line, not a replacement. Six years later, they went bankrupt, finished off by the cheap home computer and printer. It's not unlike the way the smartphone killed the BlackBerry 20 years later. Germany, as Munchau puts it, has a Smith Corona problem where they're hanging on to old technologies and old companies for way too long. Being the world leader, it seems, can be a lagging indicator. And that was essentially Germany's position in the 2010s. As Munchau points out, the German press spent those years reporting the country's enormous trade surpluses, the way other national newspapers report football results, crowning Germany the export weltmeister or export world champion season after season. This, we should point out, is a strange thing to celebrate because running an 8% current account surplus is a serious economic imbalance, not a trophy. But they were pinning the medal on right as the floor was starting to fall from under them. Which brings us to Germany's famous suspicion of anything digital. In 2013, Angela Merkel called the internet Newland, meaning uncharted territory, which was a bold read given that the iPhone had been released six years before that. People laugh about the German MP who in the 1990s objected to email on the grounds that the country already had a perfectly good telegraph service and the fact that large parts of the German health system and police still run on the fax machine. Now, I'm not going to mock the fax machine here. I want to instead make the case for it because the German attachment to it is more rational than it might have first seemed. A fax produces a physical piece of paper, something you can stamp, sign and file in an actual metal drawer. It needs no software updates. It doesn't stop working because a data center went down. The machine you bought in 1994 will still work just as well in 2035 as it did the day you bought it, which is more than you can say for almost anything that comes with an app. If your whole society is organized around stability, permanence and never being caught out by something new, the fax is a wonderful piece of equipment. The logic behind it is airtight, but the attachment to it just happens to describe a country that has decided to keep living in 1994. And that is the whole system right there. A German institution facing a hard problem doesn't panic and doesn't do anything reckless. It sits down, calculates the risk, consults the proper committees and arrives at the mathematically correct decision. The careful one, the defensible one, the one that nobody would ever be blamed for. Failing, in other words, responsibly. And it does this every single time, right up until the point where the correct decision is to keep making typewriters. There's one more piece of the German story worth putting on the table before we cross the Atlantic because it's what makes the comparison land. Germany found more than one way to hold itself back. And the second one is the key to understanding America. Economists like Michael Pettis have spent years pointing out that running a massive permanent trade surplus isn't winning a competition. Exporting is just how you earn the foreign currency you need to buy the things that you actually want to import. A country that runs an enormous surplus year after year isn't getting ahead. It's producing real goods for foreigners to enjoy while suppressing consumption at home and piling up IOUs from other countries instead of investing in its own standard of living. Germany is the classic case, though China runs much the same playbook. It's a strange vision of success, getting rich by making things for other people while declining to spend the proceeds at home. But if Germany's mistake was starving itself of investment, the United States has found a way to do things that look like the exact opposite. Where Germany hoards, America gambles, and yet underneath it's possibly the same mistake. Each country doubling down on the one thing it already knows how to do. Germany can't stop building machines and America can't stop funding moonshots. The Financial Times published an article this week about how Silicon Valley is pouring money into a new wave of moonshot bets. Wilder, more capital-intensive ideas than the safe enterprise software companies VCs have favored since the dot-com crash. Excluding AI, investment in deep tech, think things like fusion reactors, space stations, quantum computers, the hard physical stuff, has passed $150 billion since 2024, more than the whole decade before it. And this isn't hardware in the sense of things people actually need. According to the FT, investors are backing startups that plan to float giant mirrors in orbit to reflect sunlight back to earth. A Florida company called Starcatcher raised $65 million to build a power grid in space using something called optical power beaming. There are firms seriously evaluating pitches to put data centers and biology labs into low earth orbit. Now, you might ask how anyone justifies writing big checks for these kinds of projects. And the honest answer per the FT is that they don't really. Investors concede that there's no traditional valuation metric that can win over an investment committee for putting a biology lab in orbit. So why is the money flooding in? Well, they say it's that because a few early backers firms like SpaceX made a fortune and everyone who missed out on that is now terrified on missing out on the next one. They're piling into these types of investment. This isn't cold financial analysis. It's fear of missing out at the scale of the national economy. And we've seen how this kind of thing ends already. The last big wave of this type of investment back in 2021 poured money into electric vehicle and battery startups like Rivian and Northvolt, a lot of which in the FT's words, turned sour. Investors didn't learn the lesson from that. They just waited a few years and went looking for a wilder version of the exact same bet. So we're looking at two opposite ways to go wrong. One country is so frightened of a mistake that it won't resurface a road after parliament has already handed over the cash. The other is so relaxed about mistakes that it'll hand $65 million to a man who wants to bounce sunlight around in space. It's tempting to look at that and score it as a win for America, the risk takers beating the bureaucrats. But these are just two different pathologies. Germany is suffering from institutional sclerosis. America is quite possibly suffering from speculative mania. One country builds phantom construction sites. The other is trying to build an extension cord to the moon. There are two different ways for a wealthy country to set fire to its own capital. You don't want underinvestment, but malinvestment can burn just as much money and burn it faster. Every mature successful economy drifts towards failure aversion eventually. It's a natural by-product of doing well. Success builds institutions and the first instinct of an institution is to protect what already exists. Germany is just the most advanced case of a trap that every rich, comfortable country ends up walking into. We tend to assume that making things is the real economy, that a country with big factories and huge trade surpluses has a solid, unshakable foundation. And everyone else is just shuffling paper. Germany is the country that believed this the most and did it best. It built the machines, ran the surpluses, kept the factories humming. But it turned out that being the best in the world at making things was not by itself a shield against economic difficulties. And that's worth remembering for every country now promising to bring manufacturing back home. Factories are hard to build and easy to romanticize. They're not a substitute for being able to change. I've spent most of this video poking fun at a country that won't change. But I told you earlier that I'm no better. And let's be honest, neither probably are you. Which leaves us with the question, can a system with no dissenting voice reform itself? When the reform is exactly the kind of dissent the system is built to suppress. Because this isn't a story of inevitable decline. If you look at the recent numbers, Germany is actually growing again on track for its strongest year since 2022 with business confidence climbing. But it's worth being clear about why. A good part of that growth is the government money finally starting to move. The defense spending, the first of the infrastructure billions working their way out into the economy. Which is to say that the recovery is in part the second break grudgingly beginning to give. The will to fix the country is real and so is the money now being spent. But the unspent billions are real too and the clock is running. The anxiety this paralysis produces has started showing up at the ballot box, even in the wealthy manufacturing towns that used to be the heart of the German model. Nobody can tell you how this ends. Economic decline isn't a law of nature. But as countries like Argentina remind us, it isn't impossible either. What we know is that Germany made the hard visible decision to release the fiscal break that everyone could see and then discovered a second break bolted to the machine itself. Whether it can work that one loose is the whole question. The specifics are German, the debt break, the fax machines, the surpluses. But the broader issue, the pull towards protecting what you've already got rather than building what's next comes for every successful country eventually. Germany is just the one you can see it most clearly in right now. If you found this video interesting, you should watch this one on Scott Bessen's war with the bond market next. Don't forget to check out our sponsor Taylor store using the link in the description and see you in the next video. Bye.