The autumn Gemeinschaftsdiagnose by leading German economic institutes, including DIW Berlin, projects GDP growth of just 0.2 percent for 2025 and 1.3 percent for 2026. This heralds a modest improvement after years of stagnation, driven by government spending on defense, infrastructure, and climate. But without reforms, analysts warn, the recovery will be short-lived, because it masks structural weaknesses rather than curing them.
Wolfgang Steiger, secretary general of the Wirtschaftsrat (Economic Council) of the CDU, calls for abandoning superficial debates and focusing on the framework conditions for investment. The comprehensive report, produced by the research institutes DIW, ifo, the Kiel Institute, IWH, and RWI in cooperation with IHS Vienna, argues for cautious optimism and the necessity of structural change. After a first half of 2025 marked by stagnation, the economy is expected to accelerate thanks to loosened debt rules. The federal government is using them to bolster defense capabilities and invest in infrastructure and climate protection. These impulses will lift growth to 1.4 percent in 2027, primarily in the services sector and public administration. Exports, formerly the engine, are weakening due to a loss of competitiveness and rising tariffs. Inflation will stabilize at slightly above 2 percent, and the labor market will improve thanks to growing real household incomes. However, as Dr. Geraldine Dany-Knedlik of DIW emphasizes: "The economy stands on shaky legs. The improvement over the next two years will not be lasting in the face of chronic structural weaknesses."
Expansionary fiscal policy is sparking controversy. The institutes estimate that funds are flowing more slowly than planned — lengthy planning and procurement procedures are delaying construction and defense projects. By 2027, the need for fiscal consolidation will emerge, despite spending shifts. German policy is deliberately concealing the weakness of economic growth rather than durably strengthening the domestic economy. In the long term, high energy and labor costs, a shortage of skilled workers, and an erosion of competitiveness are holding it back. Productive potential is declining, foreshadowing further economic slowdown. External risks, such as an escalation of U.S.-EU trade disputes, compound these difficulties.
Wolfgang Steiger warns against the illusion that large funds alone can substitute for reforms. "It is not just about the size of the funds, but above all about the framework conditions into which they flow," the expert stresses, citing Japan as an example: "Despite higher gross investment (a difference equivalent to the 800 billion euros per year proposed by Draghi for the EU), the Japanese economy has stood still for a quarter century. Per capita income, equal to Germany's 20 years ago, now lags behind even Italy's. Even in innovation — Japan spends 3 percent of GDP on R&D, twice the EU average — the results are meager, because funds are concentrated on giants, while small firms generate 16 times more patents per employee."
In Germany, ideological blockades persist, such as the nuclear phase-out, which create shortages and hamper innovation. The DIW institutes propose a so-called "economic policy compass" with 12 points that need to change to ensure genuine, lasting economic growth. They recommend urgent changes to strengthen Germany as a business location, from reducing bureaucracy to attracting talent. Without them, they warn, fiscal expansion will prove to be a Band-Aid on a wound. More important than the scale of investment programs is a deliberate turn toward pro-competition and pro-innovation thinking. In the global context, China dominates in 57 of 64 high technologies, and Europe is falling behind — Germany once again stands at a turning point. Fiscal consolidation after 2027 urges action before the pressure of debt strangles the credit-fueled recovery.
