--:-- [Theme music fades out]
--:-- Host (Jessica Mendoza): Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza.
--:-- Host (Jessica Mendoza): It's Friday, February 21st. Today, we're talking about Germany's economic model, which has been the backbone of the country's success for decades. But that model is breaking down, and the country's leaders are offering few alternatives in the upcoming election.
--:-- [Sound effects: A brief clip of a German cityscape]
--:-- Host (Jessica Mendoza): Tom Fairless, our colleague, has been covering the German economy. Tom, thanks for joining us.
--:-- Tom Fairless: Thanks for having me, Jessica.
--:-- Host (Jessica Mendoza): Tom, can you tell us a bit about Germany's economic model and why it's breaking down?
--:-- Tom Fairless: For decades, Germany has been known as the king of luxury cars. The soul of BMW. Where will you find it? At Mercedes-Benz. We've always been a company. It's a funny thing about a Porsche. There's the moment you know. This is Audi. These luxury cars are at the heart of Germany's economy, which is the third largest in the world. Over decades, Germany developed an economic model based on manufacturing and exporting products like these. And it turned the country into a global powerhouse. But that model, which has been so effective for years, is on the verge of falling apart.
--:-- Host (Jessica Mendoza): That's right. And it's not just the auto industry that's struggling. The entire manufacturing sector is facing challenges. Can you tell us more about that?
--:-- Tom Fairless: The business model that Germany has used to get rich since World War II was based on exporting to the world. And that model has broken down. Since 2018, there's really been a steady downward trend in manufacturing. And the economy now, on the back of that, has contracted for two years in a row. And no one really seems to know what to do next.
--:-- Host (Jessica Mendoza): Unless there's a turnaround, the fallout will reach far beyond the country's borders. It's central to Europe's economy and especially to Europe's big manufacturing sector. And it's deeply intertwined with other countries like Italy and Eastern European countries like the Czech Republic. So if Germany sneezes, Europe catches a cold.
--:-- [Sound effects: A brief clip of a news broadcast]
--:-- Host (Jessica Mendoza): Tom, you recently took a reporting trip to a city in southern Germany called Ingolstadt. Can you tell us about what you saw there?
--:-- Tom Fairless: Ingolstadt is a prosperous town. Like many other cities in Germany, Ingolstadt relies on just one company. In this case, it's the luxury car manufacturer Audi. So Audi has about 40,000 employees in town. And a lot of the rest are car suppliers or providing services that cater to the Audi workers, hotels, restaurants, that kind of thing. So it's really centered on this one company.
--:-- Host (Jessica Mendoza): And what's happening to Ingolstadt now that Audi is struggling?
--:-- Tom Fairless: Ingolstadt's fortunes have been tied to Audi for 75 years. In the 60s, the company was acquired by Volkswagen. And since then, most of Audi's cars have been exported. Nearly 90% of Audis are sold outside of Germany. And its biggest foreign market for many years has been China. But over time, China has stopped turning to Germany for as many products. China has become a much more problematic trading partner.
--:-- Host (Jessica Mendoza): That's right. And China's not the only challenge facing Germany's manufacturers. High energy costs are also a major issue. Can you tell us more about that?
--:-- Tom Fairless: With the war in Ukraine, the gas has been cut off from Russia. So it's really causing problems and distorting the European market. And this Texas-based chemicals manufacturer who has operations in Germany told me he can pay 10 times or more as much for energy in Germany as he pays in Texas. So that's a real problem for the industry.
--:-- Host (Jessica Mendoza): And what about the impact on Audi and the town of Ingolstadt?
--:-- Tom Fairless: Audi has been a casualty of these shifts. The company reported a 91% decline in operating profits for its third quarter of 2024. It's been cutting thousands of jobs across Germany. This downturn at Audi has had a ripple effect on Ingolstadt. Audi, through its parent company, has historically been an important source of tax revenue and business for the town. Now, that's changed.
--:-- Host (Jessica Mendoza): And what does that mean for the town itself?
--:-- Tom Fairless: I spoke to the mayor, and he is in a bit of a bind because Audi used to provide quite a big chunk of his budget. That has dried up completely, I understand, in the last, for over a year. So he suddenly has a big hole in his budget. And he's having to start making cuts. At the moment, they're quite small, but he's increasing prices for museums and cars parking spaces and thinking about deeper cuts.
--:-- Host (Jessica Mendoza): And what's the mood like in Ingolstadt right now?
--:-- Tom Fairless: It was a boom town for a long time. And suddenly it's run into a wall. And it's not sure what the next move is going to be. And when you talk to the residents and the businesses, they're all talking about Detroit. That's the sort of fear in their minds that it's going to become the next Detroit.
--:-- Host (Jessica Mendoza): That's a sobering thought. And it's not just Ingolstadt that's facing challenges. The entire German economy is struggling. Let's talk to Bertrand Benoit, our Germany bureau chief, about what's at stake in the upcoming election.
--:-- [Sound effects: A brief clip of a news broadcast]
--:-- Bertrand Benoit: Thanks for having me, Jessica.
--:-- Host (Jessica Mendoza): Bertrand, can you tell us a bit about the state of the German economy and what's at stake in the upcoming election?
--:-- Bertrand Benoit: The economy has shrunk for the past two years. And these two years of recessions in a row, it's not really something that German voters have any experience of. It's not something that they've lived through in the past. And the economy has been gaining in significance for voters for the past year. It's really been the dominant topic.
--:-- Host (Jessica Mendoza): And what about the candidates? Are they offering any solutions to Germany's economic woes?
--:-- Bertrand Benoit: Voters are unhappy with the current government under Chancellor Olaf Scholz. His efforts to turn around the economy haven't worked. Scholz has been making only incremental tweaks, when many economists say what the country needs are big changes.
--:-- Host (Jessica Mendoza): And what about the upstart anti-establishment parties? Are they offering any alternatives?
--:-- Bertrand Benoit: One of the contenders is Alice Weidel. She represents AFD, a populist right-wing party that's been associated with neo-Nazis. And her proposals about how to fix the economy are focused on smaller modifications, meant to revitalize Germany's export model.
--:-- Host (Jessica Mendoza): And what about the head of the CDU, Friedrich Merz? What's his take on the economy?
--:-- Bertrand Benoit: He is thinking, if you want to sum it up, it's that the German economic model is not entirely broken and doesn't need to be reinvented from scratch. It can be fixed through making it more competitive in decreasing the costs that are piling on business, decreasing taxes, red tape and so on.
--:-- Host (Jessica Mendoza): And what about the challenges of making big changes? Is it possible to reform the German economy without sacrificing its competitiveness?
--:-- Bertrand Benoit: The main challenge, the way I see it, is that you need to do two things that are a little bit in conflict with one another. On the one hand, most economists think you need to apply some of the recipes that Merz is calling for. You need to remove some of the shackles on business. And for that, you need to make the state smaller. The state needs to retreat in terms of taxes.
--:-- Host (Jessica Mendoza): And what about the other challenge? The need to make the state bigger to invest in the economy?
--:-- Bertrand Benoit: And that's the contradiction. You need probably to make the state also bigger. And the reason is because there is a lack of investment in Germany. And if Germany is going to generate more of its growth internally, that is not just through exports. It will need to spend more of its money at home.
--:-- Host (Jessica Mendoza): And what does that mean for Germany's future?
--:-- Bertrand Benoit: It could mean a loss of economic might and influence for Europe. If Germany is not doing well, you know, German companies have manufacturing all across the EU, not just in Germany. And if jobs start getting lost, that's also going to affect neighboring countries.
--:-- Host (Jessica Mendoza): That's a sobering thought. Thanks, Bertrand, for joining us today.
--:-- Bertrand Benoit: Thanks for having me, Jessica.
--:-- Host (Jessica Mendoza): And that's all for today's show. Thanks for listening.
--:-- [Theme music starts playing]
--:-- Host (Jessica Mendoza): Don't forget to check out our sponsors, Indeed and AARP. And if you want to learn more about the topics we discussed today, check out the links in our show notes.
--:-- [Theme music continues to play as the show ends]
