“The welfare state as we all know it right this moment can now not be financed by our economic system.”
With that single sentence, Chancellor Friedrich Merz broke one among Germany’s and Western Europe’s best political taboos, daring to query the welfare state’s sacred standing at a time when its financial prices can now not be ignored.
For many years, Germany was celebrated as Europe’s financial success story. Its postwar Soziale Marktwirtschaft — the social market economic system — mixed free-market dynamism with a restricted welfare for these actually in want, powering West Germany’s rise from postwar devastation into one of many world’s most affluent nations.
Immediately, nonetheless, that mannequin is faltering. Germany faces stagnating development, declining competitiveness, and the heaviest welfare burden in its historical past — indicators that Europe’s financial engine is seizing up underneath the burden of its personal system.
From Financial Miracle to Welfare Entice
Germany’s rise from postwar smash was constructed on Ludwig Erhard’s financial imaginative and prescient — a system that balanced free enterprise with a modest social security internet inside a aggressive framework. By liberalizing costs and commerce, stabilizing the forex, and chopping taxes, Erhard unleashed competitors, ended inflation, and sparked the so-called Wirtschaftswunder — the “financial miracle” that introduced fast development, full employment, and rising dwelling requirements.
But Erhard’s imaginative and prescient of a modest security internet progressively gave approach to intensive welfare enlargement — proving why the state ought to by no means be trusted with the facility to engineer social stability by way of taxpayers’ cash. As soon as governments achieve legitimacy to intervene within the economic system “for equity,” intervention not often stops; it solely grows.
Beginning with the 1957 pension reform and persevering with by way of the Nineteen Sixties and Seventies, successive governments expanded medical health insurance, training help, household advantages, housing subsidies, and unemployment safety — laying the foundations of one among Europe’s most beneficiant welfare techniques. Immediately, Germany spends 31 p.c of its GDP — roughly €1.3 trillion — on social applications, one of many highest ranges amongst OECD international locations.
The pension system is the clearest instance of this extra, consuming 12 p.c of GDP — over twice the share spent within the UK (5.1 p.c). Because the inhabitants ages and the workforce shrinks, the pressure on public funds has turn out to be unavoidable. In 1962, six staff supported every retiree; right this moment, barely two do, and that quantity is anticipated to proceed falling within the years forward. A system constructed on such demographics can not final — it might probably survive solely by way of greater taxes, mounting debt, and rising deficits.
To maintain this mannequin, German employers are paying the value. Underneath German legislation, they need to cowl half of their staff’ insurance coverage contributions, so each welfare enlargement instantly raises labor prices. Because the pandemic, non-wage labor prices have risen quicker than complete wages, consuming into earnings and leaving little room for pay will increase. Social safety contributions — lengthy secure under 40 p.c of salaries — have now climbed to 42.5 p.c and are projected to succeed in 50 p.c inside a decade. The result’s predictable: squeezed employers, fewer hires, smaller raises, and declining competitiveness.
How Welfare Enlargement Undermined Germany’s Prosperity
The financial toll of Germany’s overgrown welfare state is now unmistakable. As soon as Europe’s development engine, Germany has turn out to be one among its laggards. Since 2017, GDP has grown by simply 1.6 p.c, in comparison with 9.5 p.c in the remainder of the eurozone. By 2023, it had ranked because the world’s worst-performing main economic system, shrinking by 0.3 p.c and 0.2 p.c in two consecutive years — the primary contraction because the early 2000s — and continued to slip underneath the brand new present authorities, with GDP falling by 0.3 p.c in Q2 2025.
Nowhere is that this decline extra obvious than within the automotive sector — the spine of Germany’s postwar prosperity. As soon as world pioneers, Volkswagen, Mercedes-Benz, and BMW now lag behind leaner Chinese language and American rivals. Hovering labor prices (€62 per hour, in comparison with €29 in Spain and €20 in Portugal), mixed with heavy regulation and inflexible labor guidelines, have eroded competitiveness. A sluggish transition from combustion engines to EVs has enabled BYD and Tesla, with quicker innovation cycles, superior know-how, and aggressive pricing, to grab the lead within the trade.
The power disaster has deepened their woes: the sudden lack of low cost Russian gasoline, mixed with the federal government’s arguably short-sighted choice to section out nuclear energy, has left German industries paying as much as 5 instances extra for electrical energy than their American or Chinese language opponents. Weighed down by excessive prices and sluggish adaptation to new applied sciences, automakers have been compelled into painful cost-cutting measures, from plant closures to mass layoffs. Since 2019, the trade has already misplaced 46,000 jobs, and one other 186,000 might comply with by 2035.
In the meantime, welfare and debt proceed to develop. Germany’s famed fiscal self-discipline — as soon as anchored in its constitutional “debt brake” — has all however collapsed. Repeatedly suspended because the pandemic, the rule has been bypassed by way of off-budget funds and “emergency” spending to finance welfare spending and power subsidies. Now, Berlin plans to borrow €174 billion in 2026, 3 times the extent of two years in the past and the second-highest in postwar historical past — threatening not solely its personal stability but in addition the credibility of Europe’s fiscal guidelines.
On the root of Germany’s malaise lies a harmful phantasm: that beneficiant welfare can coexist with excessive productiveness. When redistribution outpaces wealth creation, prosperity tends to fade. Left unchecked, welfare states develop quicker than the economies that fund them, eroding productiveness and burdening future generations. But reform stays untouchable — ageing voters resist cuts, politicians worry backlash, and the younger bear the price of a system that will not survive.Europe is watching intently. If Germany — the continent’s anchor of fiscal self-discipline and industrial power — exposes the bounds of its outsized welfare state, the European religion in expansive welfare techniques might lastly collapse. Step one is to finish the denial; the subsequent is to rediscover the realism that when fueled the Wirtschaftswunder. Germany as soon as taught Europe tips on how to rebuild prosperity from ruins. Now it should train Europe tips on how to confront the reality about welfare states — earlier than they collapse underneath their very own weight.
