Germany

Stagnation persists

After two years of non-growth around the 0-line, Germany is poised to record another year of quasi stagnation in 2025, with a tiny recovery expected in the second half of the year. It seems that the German economy is caught in a perfect storm. In the first half of 2024, Germany had the highest industrial electricity prices in Europe after Ireland and Cyprus. On top of the generally high wage level are very elevated production costs and therefore selling prices, which are reducing demand for many German industrial products. German companies also criticise the cumbersome and rising level of bureaucracy. The Ifo Institute estimates that the cost of excess bureaucracy in Germany in 2024 is equivalent to EUR 146 billion per year (3.5% of GDP) and erodes productivity of the German economy. Productivity has been contracting, in particular since 2022. First, the share of manufacturing in the economy is decreasing (19.4% of gross value added in 2024 vs. 22.6% in 2015) in favour of services, which have less productivity gains due to lower technological input. Second, fewer hours are worked in Germany even though the number of employees reached an all-time high in 2024 on back of immigration (mainly the integration of refugees into the workforce). Last, the high level of (economic) policy uncertainty is also weighing on companies and households. The Economic Policy Uncertainty Index for Germany reached its highest level since its creation in 1993 in November 2024 when the government coalition collapsed (please see last section), by far outstripping the previous peak in September 2022 when gas supplies from Russia were stopped. Many of these problems are structural in nature and will not be solved in 2025. However, a new government consisting of a Grand Coalition formed with two instead of three parties would bring more political stability, even if major economic policy measures are not implemented immediately.

On the demand side, private consumption (52% of GDP) should pick up a little. The conditions for this have been in place for some time now. Real wages have been rising since Q3 2023 and, with growth rates of up to 3.8% year-on-year (Q1 2024 recorded the highest level since the start of the time series in 2008), offset the loss of purchasing power from the energy price and the pandemic crises by the end of 2024. According to the Bundesbank, real wages should grow by around 1% year-on-year in 2025. Nevertheless, only a small proportion of wage growth has so far translated into higher consumer spending. Instead of spending the money, citizens have mainly preferred to save, prompting a rise in the savings rate to 11.8% during the third quarter of 2024. Barring the trend during the pandemic, this is the highest savings rate since 1996. The financial assets of private households rose to a record high of EUR 9,004 billion in the third quarter of 2024. At the end of 2024, there were some signs of a slight upturn in consumer spending. It is therefore expected that private consumption could pick up somewhat more after the general election and the expected stronger political stability. This also applies to commercial investment and construction. The lower interest rate level should also support investment activity. In 2024, the ECB already cut its deposit rate four times from June onwards, taking the rate down by a total of one percentage point to 3.0%. The trend is expected to continue in 2025 with the interest rate likely to fall to 2% (the neutral level). Positive momentum should also come from government spending. Although restricted at the start of 2025 by the provisional budget that is preventing new investment projects for the time being, higher investment in infrastructure, digitalisation, defence and education, in particular, were the components that kept the GDP balanced in 2024. Further similar investments can also be expected in 2025. Foreign trade remains the big unknown for 2025. Following Donald Trump's inauguration, it is not yet clear what form tariffs are likely to take against US trading partners, notably China and Germany. As the US is Germany's largest export partner, accounting for 10% of all goods exported, this could have a significantly negative impact on Germany's economic prospects, especially if Germany’s other major trading partners – China, the Netherlands and France – are also negatively affected by tariffs and have lower demand for German products.

Provisional budget management and discussion about the debt brake

As the government and the Bundestag were unable to agree on a budget plan for 2025 by the end of 2024, provisional budget management has been in place since the beginning of 2025 until a new budget plan is adopted. This means that only expenditures that are necessary to maintain administrative activities or to fulfil legal obligations (e.g., interest payments) will be made. New investment packages or other discretionary expenses have been postponed accordingly. This is not a novelty; provisional budget management of this kind was previously in place for one month at the beginning of 2024 and for six months in 2022. With a probable CDU/CSU-led future government, the main relief for companies is likely to come in the form of lower taxes. A reform of the debt brake is also being discussed, which could allow for higher investments. That said, the debt brake is enshrined in the Constitution and limits new borrowing for the German state in its entirety to 0.35% of nominal GDP (not including long-term special funds or “Sondervermögen”, e.g., for the Bundeswehr) except in the event of natural disasters and exceptional emergency situations. A two-thirds majority is required to amend the Constitution. The CDU/CSU is only prepared to make limited changes to the debt, while the AfD rejects any reform whatsoever. It therefore remains to be seen whether a reform can take place this year and the extent of any fiscal room for manoeuvre - especially given that Germany's debt is only slowly approaching the Maastricht target of less than 60%.

Germany's current-account surplus recovered in 2024 thanks to an improvement in the surplus on trade in goods, as imports fell more sharply than exports. For 2025, we forecast a roughly unchanged current account balance. However, this is highly dependent on potential tariffs, countermeasures and repercussions with other trading partners.

Back to the Grand Coalition?

From December 2021, Chancellor Olaf Scholz (Social Democrat, SPD) led the very first three-party coalition in German history with the SPD (207 out of 735 seats in Parliament), the Greens (118 seats) and the liberal FDP (91 seats). In November 2024, the coalition collapsed. The reason behind the break-up was the failure to agree on a joint budget plan for 2025, as well as a general economic strategy and associated measures to achieve economic recovery. In addition, a personality clash between Chancellor Scholz and Finance Minister Christian Lindner (FDP) became increasingly apparent, which ultimately led to Lindner's resignation and the FDP's departure from the coalition. As the government lacked a parliamentary majority, Chancellor Scholz called a vote of confidence in the Bundestag on 16 December, which was rejected as planned. This enabled him to dissolve the Bundestag, upon which Federal President Frank-Walter Steinmeier (SPD) called snap elections for 23 February 2025, seven months before the regularly scheduled elections. The Christian Democratic CDU/CSU is clearly ahead In the polls with around 30% of the vote and will most likely provide the new chancellor in the shape of Friedrich Merz. However, the far-right Alternative for Germany (AfD) is in second place with around 20%, which would double its share of the vote compared with its last election score of 2021. For ideological reasons, it is not considered a coalition partner for any of the other parties in Parliament and will therefore be the largest opposition party. The SPD is currently polling at 16% (a significant loss after 25.7% in 2021) and the Greens remain unchanged at around 14%. It will be extremely tight for the FDP, which, currently scoring 4% of the votes in most polls, would fall short of the 5%-threshold to enter the Bundestag and would therefore have to leave the Parliament. The same is likely to happen to the Left Party. Its only hope is founded on obtaining three direct mandates (a special rule to ensure the representation of election districts). With three direct mandates, the 5% threshold is not imposed. The left-wing conservative party Bündnis Sarah Wagenknecht (BSW), a split from the Left Party, could just about make it over the 5% threshold and thus be elected to the Bundestag for the first time ever, one year after the party was founded. Depending on how many parties make it into the Bundestag, the distribution of seats will change and, with it, possible coalition options. The most likely combination would be a Grand Coalition between the CDU/CSU and the SPD. However, this might not prove to be enough and the Greens could still join the government. It should be noted that the conservative Christian Democrats are positioning themselves against the Greens in the election campaign. However, this tactic is likely to hold only as long as the Greens are needed for a majority. The next election would then be scheduled for 2029.

Payment

Bank transfer (Überweisung) remains the most common, means of payment. All leading German banks are connected to the SWIFT network, which enables them to provide a quick and efficient funds transfer service. The SEPA Direct Debit Core Scheme and the SEPA Direct Debit B2B are the newest forms of direct debit.

Bills of exchange and cheques are not used very widely in Germany as payment instruments. For Germans, a bill of exchange implies a critical financial position or distrust in the supplier. Cheques are not considered as payment as such, but as a “payment attempt”: as German law ignores the principle of certified cheques, the issuer may cancel payment at any time and on any grounds. In addition, banks are able to reject payments when the issuing account contains insufficient funds. Bounced cheques are fairly common. As a general rule, bills of exchange and cheques are not considered as effective payment instruments, even though they entitle creditors to access a “fast track” procedure for debt collection in case of non-payment.

Debt Collection

Amicable phase

The amicable collection is an essential step to the success of collection management. The collection process generally begins with the debtor being sent a final demand for payment, via ordinary or registered mail, reminding the debtor of their payment obligations.

According to the law for the acceleration of due payments (Gesetz zur Beschleunigung fälliger Zahlungen) a debtor is deemed to be in default if a debt remains unpaid within 30 days of the due payment date and after receipt of an invoice or equivalent request for payment, unless the parties have agreed to a different payment period in the purchase contract. In addition, the debtor is liable for default interest and reminder fees upon expiry of this period.

Debt collection is recommendable and common practice in Germany.

Legal proceedings

Fast-track proceeding

Provided the claim is undisputed, the creditor may seek order to pay (Mahnbescheid) through a simplified and cost-efficient procedure. The creditor describes the details of their claim and is subsequently able to obtain a writ of execution fairly quickly via the Online-Dunning Service (Mahnportal), direct interfaces or (only for private individuals) pre-printed forms. Such automated and centralised (for each Bundesland, federal state) procedures are available all over Germany.

This type of action falls within the competence of the local court (Amtsgericht) for the region in which the applicant’s residence or business is located. For foreign creditors, the competent court is the Amtsgericht Wedding (in Berlin). Legal representation is not mandatory.

The debtor is given two weeks after notification to pay their debts or to contest the payment order (Widerspruch). If the debtor does not object within this timeframe, the creditor can apply for a writ of execution (Vollstreckungsbescheid).

Ordinary proceedings

During ordinary proceedings, the court may instruct the parties or their lawyers to substantiate their claim, which the court alone is then authorised to assess. Each litigant is also requested to submit a pleading memorandum outlining their expectations, within the specified time limit.

Once the claim has been properly examined, a public hearing is held at which the court passes an informed judgement (begründetes Urteil).

The losing party will customarily bear all court costs, including the lawyer’s fees of the winning party to the extent that those fees are in conformity with the Official Fees Schedule (the Rechtanwaltsvergütungsgesetz, RVG). In the case of partial success, fees and expenses are borne by each party on a pro rata basis. Ordinary proceedings can take from three months to a year, while claims brought to the federal Supreme Court can reach up to six years.

An appeal (Berufung) may be brought against the decision of the Court of First Instance if the objected in exceeds €600. An appeal will also be admitted by the Court of First Instance if a case involves a question of principle or necessitates revision of the law in order to ensure “consistent jurisprudence”.

Enforcement of a Legal Decision

Enforcement may commence once a final judgement is made. If debtors fail to respect a judgment, their bank accounts may be closed and/or a local bailiff can proceed with the seizure and sale of their property.

For foreign awards, in order to obtain an exequatur, the creditor needs a notarised German translation of the decision which also has to be recognised, an enforcement order of this judgment, and an execution clause. Judgments of courts of EU member states are recognised without further procedure – unless certain restrictions arising from European law are applicable.

Insolvency Proceedings

OUT-OF COURT PROCEEDINGS

Debtors may attempt to renegotiate their debts with their creditors, which helps to protect debtors from early payment requests. However, the procedure is in the creditors’ interest as it can be faster and tends to be less expensive than formal insolvency.

RESTRUCTURING

Following a petition filed before insolvency court on the basis of illiquidity or over-indebtedness, the court may open preliminary insolvency proceedings, where it appoints a preliminary administration aimed at exploring the chances of restructuring the company. If the administration authorizes this restructuration, it then initiates formal proceedings and nominates an administrator in charge of continuing the debtor’s business whilst preserving its assets.

LIQUIDATION

Liquidation may be initiated upon demand of either the debtor or the creditor provided that the debtor is unable to settle its debts as they fall due. Once recognized through a liquidation decision and once the company has been removed from the register, the creditors must file their claims with the liquidation administrator within three months of the publication.

RETENTION OF TITLE

This is a written clause in the contract in which the supplier will retain the ownership over the delivered goods until the buyer has made full payment of the price. There are three versions of this retention:

simple retention: the supplier will retain the ownership over the goods supplied until full payment is made by the buyer;

expanded retention: the retention is expended to further sale of the subsequent goods; the buyer will assign to the initial supplier the claims issued form the resale to a third party;

extended retention: the retention is extended to the goods processed into a new product and the initial supplier remains the owner or the co-owner up to the value of his delivery.

Last updated: January 2025