“After years of hard work, savings, and a loan from the bank, we started to build a house for ourselves. However, the growing scarcity of materials, the rapid increase in costs, and the severe shortages of skilled laborers have put the project on a very slow and difficult process … it is becoming a torment for us.” This sentiment was shared with me by a couple striving to become first-time homeowners in the west-central part of Germany. Similar stories of frustration echoed in conversations across the country. When viewed alongside the February 2025 Economic Survey by the German Chamber of Commerce (DHIK) – forecasting a third consecutive year of recession and 0.5% GDP contraction – it becomes clear that such shared agony is rooted in both political and economic turmoil.

Germany’s post-COVID recovery was derailed by an unexpected energy crisis that was triggered by the federal government’s response to Russia’s military invasion of Ukraine in February 2022. This crisis deepened political mistrust within governing institutions and gave momentum to political forces such as the Alternative for Germany (AfD). The inability to disentangle the adverse impact of the energy crisis on the national economy led to the collapse of Chancellor Olaf Scholz’s coalition government in December 2024, and now threatens the new government led by Chancellor Friedrich Merz. Further, this political instability risks undermining Germany’s global standing just as the Trump administration’s shift in U.S. foreign and domestic policy priorities demands an integrated European Union with sovereign foreign policy.

How We Got Here

The current economic distress and political fallout are deeply rooted in Germany’s overreliance on exports and structural problems – excessive bureaucracy, declining competitiveness, and a shortage; yet, the energy crisis triggered by the war in Ukraine is the most significant factor.   Since the 1990s, Germany’s manufacturing sector has been powered by cheap Russian gas, helping it becomes the third-largest exporter of high-quality industrial goods.

In the wake of Russia’s invasion and subsequent Western sanctions, Germany initially showed resilience, and the Scholz administration promised a swift victory. However, the unexpected prolongation of the war and its economic toll exposed vulnerabilities that no one was prepared for. In June 2022, the Russian state-owned Gazprom cut gas flow to Germany by more than half, citing sanctions that prevented turbine deliveries from Canada. The subsequent sabotage of Nord Stream I and II gas pipelines and Germany’s commitment to an E.U. embargo ended Russian crude oil imports, compounding the problem.

Swedish and German investigation of the sabotage of Nord Stream 1 and II – [Shutterstock/Frame Stock Footage]

Germany, which previously imported 55% of its natural gas and 34% of its petroleum oil from Russia, found itself unprepared. Efforts to secure alternative energy sources triggered soaring prices, which slashed consumer spending and slowed economic growth. By January 2023, Germany had entered its third year of recession, with accelerated inflation. A strident upsurge in consumer prices (up to 10.4% year-on-year) marked the highest rate since the early 1950s.

The DIHK labeled this the “longest period of weakness in the country’s post-war history.” With high labor costs, shortages of skilled labor, high prices, and burdensome bureaucracy, the energy crisis degenerated the ability of the country to recover. The DIHK estimated that the combined cost of the export ban and higher energy prices amounted to €91.4 billion annually. Military and humanitarian assistances and support for over 1.1 million Ukrainian refugees inside Germany adds even more pressure to a throbbing economy.

This economic decline triggered a parallel political crisis resulting from decreased public confidence. The head of Germany’s digital industries association, Bitkom, declared Germany a “failed state” in terms of having the digital infrastructure to compete at the global level. DIHK Managing Director Helena Melnikov suggested bold reforms: “Politicians must finally give companies the signal that their concerns are being taken seriously and that the pressing problems are being tackled with determination.” Despite public antipathy toward Moscow, the sanctions’ economic repercussions overwhelmed national priorities, leaving Germany’s political elites unable to respond effectively.  The resulting political gridlock over spending and support for the war led to the Social Democratic Party (SPD)-led coalition government’s collapse in December 2024.

Christian Lindner behind the Greens economy minister Robert Habeck with chancellor Olaf Scholz on the right/ Tobias Schwarz/AFP

Grand Strategy versus Grand Ideology

The no-confidence vote for Chancellor Scholz in December 2024 and the February 2025 snap election brought a political earthquake. The AfD overtook the SPD as the second-largest political party, trailing only the Christian Democratic Union (CDU) of Germany. In the context of German post-WWII politics, the rise of AfD evoked comparisons of the political turbulences of the Weimar era and its aftermath. Much soul-searching across mainstream political parties has since taken place. Chancellor Scholz  blamed the economic and security emergency conditions on “the Russians’ 2022 full-scale invasion of Ukraine.” Nonetheless, his explanation – while factually accurate – did not address how German policy makers failed to prevent or mitigate the fallout.

Co-leaders of Germany’s far-right Alternative for Germany (AfD) party Alice Weidel and Tino Chrupalla react to the first exit polls of the 2025 general election, in Berlin, Germany, February 23, 2025. REUTERS

With the Russian military invasion of Ukraine, the Scholz administration adopted a Transatlantiche Westbindung (a strategy of Transatlantic solidarity), aligning closely with the Biden administration and viewing Russia as a direct military threat against the security and stability of Europe. The Scholz Administration devoted €100 billion to rearm the Bundeswehr, prioritizing geopolitics over structural reform and economic strategy for the country. This ideological posture, framing global politics as a binary struggle between liberal democracy and authoritarianism, underestimated Russia’s industrial capacity, immense wealth of natural resources, and regional and international influence, particularly with China and India. Additionally, the Biden Administration poorly misjudged the durability of the BRICS (Brazil, Russia, India, China, and South Africa) partnership, which enabled Moscow to evade sanctions that were expected to produce economic and political instability in Russia, generate regime change in Moscow, destabilize the Russian military, and allow the U.S.-backed Ukrainian military to expel them from occupied territories, including Crimea. This grand ideology – rather than strategy – sacrificed economic priorities for the sake of geopolitical ambitions. As a result, this approach nullified the possibility of first- or even second-track diplomatic communications all together to better manage the conflict with Moscow.

(BRICS Summit in Johannesburg, South Africa – 26 July 2018) President of South Africa, Cyril Ramphosa (center), poses with BRICS heads of state and government, namely Chinese President Xi Jinping, Indian Prime Minister
 Narendra Modi, President of the Federal Republic of Brazil, Michel Temer, and Russian PresidentVladimir Putin. Conversely, Moscow’s anti-sanction measures enabled Russia’s economy to endure the harshest
sanctions in history

Conversely, Moscow’s anti-sanction measures enabled Russia’s economy to endure the harshest sanctions in history. According to the International Monetary Fund (IMF), the Russian economy recovered from a mild decline in 2022 and attained 3.6% GDP growth in 2023 and 4.1% in 2024. As illustrated in my October 2022 article, this turn of events enabled Moscow to tolerate the cost of the war and a growing number of casualties, while the Biden Administration’s reliance on this poorly assessed grand strategy prevented the U.S. and NATO military planners from committing the needed weapon systems and capacity-building in time to make the best out of Ukrainian professional military capabilities.

The presumption of a quick victory by the Biden White House resulted in weakening American support; its entanglement with looming economic turmoil and an energy crisis made the cost of war for the U.S., Berlin and other NATO allies excruciating.  Add to this the tumultuous mixture of economic and political crises that ended the Biden administration in November 2024, and the collapse of the SPD-led coalition government in Germany one month later became a foregone conclusion.

Militarization versus Statesmanship

The new CDU-led coalition under Chancellor Merz inherited a daunting task: to lead Germany out of crisis. This mission demands a departure from the 20^th-century Cold War rivalry legacy toward a pragmatic cooperative competition that fits within the strategic requirements of 21^st-century international relations. A hostile and militaristic stance toward Russia and a delayed engagement with the Trump administration overshadows the post-WWII tradition of diplomatic brilliance, where Berlin often played a middle ground role and acted as a bridge-builder within the EU and in international conflicts. This strategic inertia left Germany vulnerable to Trump’s disruptive policies on climate, trade, multilateralism, and the UN Charter.

{Reed: Silence in a 1960s German Town}

Drawing inspiration from Konrad Adenauer’s Groß Politik for European integration and Willy Brandt’s bold reforms could provide a framework for Germany’s transformation to cooperative competition – even if it requires fragwürdige Erfindungen (“questionable inventions”). Instead of relying on militarization and geopolitical posturing, Merz must reduce hostilities and put the economic and political stability of Germany centerstage. A diplomatic reset, recognizing the end of uncontested U.S. dominance, could promote a new global order rooted in managed conflict, not perpetual escalation. Germany’s stability is central to the EU’s strength in this emerging multipolar world. This means that conflict in Ukraine needs to be defined around economic and political stability in Germany and the E.U., not the other way around. Yet through these efforts, a future peaceful Ukraine at peace with itself and its neighbors can be granted.

The Way Forward

Russian offensives across all lines haven’t been stopped since the collapse of Avdiivka in February 2024. Even if one counts Merz’s rearmament of Germany as a strategic vision, which it is not, it demands long-term access to cheap energy. Relying on rearmaments to force the Russian military back to pre-2014 borders in Ukraine is a multigenerational agenda that will require decades. Instead, Germany’s path to regaining its strength and reemerging as a regional leader in the European Union involves a multifaceted strategy, balancing domestic resilience with bold international engagement. No international ambition can succeed without a strong democratic foundation at home. Rising populism, political fragmentation, and economic anxiety threaten Germany’s social fabric. Furthermore, China’s limitation of access to the American market could multiply pressure against Germany’s industrial output. Germany needs ground-breaking structural reforms to invest in green technologies, digital transformation, and incentivize small and medium-sized enterprises with R&D funding, workforce training, and streamlined regulations. This strategy can awaken the might of German businesses and industries, support the plight of Ukrainian people, and deepen transatlantic ties.

If Germany’s pro-democracy parties cannot restore public trust, fringe groups like AfD will emotionally engage their bases on single hot issues like migration and housing. Without addressing key economic issues, defeating AfD politically would be very difficult. Conversely, this risk of senior CDU/CSU leaders defecting to AfD would increase, which could cause the collapse of the new government and a deepening political crisis.

Merz already blurred partisan lines, zigzagging through political factions. In January, he became the first CDU leader to pass a motion through the Bundestag that was supported by AfD. In March, he went against his campaign position and joined other leaders (SPD and Greens) in agreeing to a debt brake reform to open the way for €1 trillion in new loans. Still, the energy crisis looms large. Senior CDU members have called for the restart of the flow of Russian natural gas, a position that is shared across AfD, and which could substantially impact the projection of further future political gains for AfD.  According to a February 2025 Bloomberg report, German industries began calling for access to Russian gas as well. At the same time, the estimated impact of the Trump Administration’s tariffs, if not negotiated favorably, could cost Germany over €200 billion over the next three years.

Leader of the Christian Democrats Friedrich Merz, is applauded after being elected new chancellor at the German federal parliament, Bundestag, at the Reichstag building in Berlin, Germany, Tuesday, May 6, 2025. MARKUS SCHREIBER / AP

Germany remains the third largest economy in the world, after the U.S. and China. This gives it the leverage to drive E.U.-wide constitutional integration and a unified European security structure with only 2-3% GDP expenditure and without a German rearmament plan. A unified European security architecture via the Organization for Security and Co-operation in Europe (OSCE) – which includes focus on an integrated E.U.-wide energy grid – can evolve only if current political, financial, and industrial integration is institutionalized within a Unified European Constitution.  The E.U. as a sovereign power would be essential for furthering cooperative competition vis-à-vis the U.S., China, and Russia. Given the protectionist character of the Trump administration and its withdrawal from most international conventions, the E.U. could also take the lead on sustainable development, climate transformation, and badly needed support for the UN Charter.

Germany’s future lies not in a return to the past, but in a leap toward a bold, visionary Europe. With 96 seats in the European Parliament, a €29 billion annual contribution, and the largest population, Germany remains the E.U.’s backbone. It must embrace its role—not as a reluctant hegemon—but as the indispensable anchor of a unified, resilient, and forward-looking Europe.

{Reed: 21st Century Collision or Cooperation: China, U.S. and the European Union}