Why Europe's Largest Economy Is Going Broke

0:00 You know, just 7 years ago, Germany's economy was so strong that economists were calling it their second golden age. These days though, it's the worst performing economy among G7 countries. The IMF and European Commission have cut their growth forecasts multiple times. But how did this economic fall from grace happen to one of the most stable countries so quickly? They're the world's top exporter of advanced machinery. If you're building a factory, whether it's in China, Brazil, or the US, you can bet the machines inside of it are Germanade. Their brands like BMW, Mercedes-Benz, Audi, Porsche, and Volkswagen are embedded in global production lines. These are fundamental parts of every industry, and it's a

0:46 domino effect. So, how will these pieces fall in the rest of the world and affect your pocket? And most importantly, why is Europe's largest economy going broke? Welcome to Alux, the place where future billionaires come to get inspired. Season 1, the second golden age. Now, there's a reason the products that Germany makes and exports were are the building blocks and foundations of almost every other industry. It's like they break the ground and make and pour the cement and build the pillars that hold up the building. You see, foundations have to be strong, reliable, and durable. Everybody needs to be able to trust it's made with the highest quality because the quality of the final product depends on what they use to make

1:32 it. Now, Germany is known for their precision and perfectionism. They're raised with this idea that things should be done right, even if it takes longer. They've always focused on doing fewer things exceptionally well. No other country saw the value of competing at their level. it would take too long and cost too much money and they already had a reliable partner that they could count on. So why rock that boat? Now in addition to their advanced machinery and automotive industries, they also have strong chemicals and pharmaceutical industries. Think industrial chemicals for ingredients used in food processing, fertilizers, electronics, cosmetics, construction materials, and medicine. For these things to be made well, the things that go into them have to be of the highest quality. And the rest of the

2:19 world knows that they can trust Germany to do this. They're known for their long-term thinking and their companies don't chase quarterly earnings. They would rather focus on legacy and durability. They take pride in their engineering. It's not just a job. It's an identity. And look, if you've been to Germany, you know they live by their rules and structure. There's a psychological comfort to following processes and schedules. People even joke about how regiment they are about being on time. And there's a German phrase translated in English that says punctual like the brick layers. Now, not many countries hold that much global trust. So, Germany essentially monopolized these markets. And if they didn't monopolize it, well, they sure did dominate them. This domination kept

3:04 their economy strong and growing steadily. Even post 2008 financial crisis, they rebounded faster than most Western countries. Others had housing bubbles, but because Germany's economy and regulations were more conservative and rigid, they didn't get hit as hard. At the time, the government had a budget surplus, and their exports actually skyrocketed because the euro was weaker. From 2010 to 2017, they had a great run. They were the world's top exporter for six consecutive years. And even when China overtook them in 2009, their workforce and productions were so strong it looked like they would dominate global markets for decades to come. To fully understand how quick and surprising this fall is, we have to look at how they created this strength.

3:51 Because it shows that despite their tunnel vision focus on their economy, something still went wrong. In the early 2000s, their economy was stagnating. And one of the reasons put forth for this was their social welfare program that was costing the country a lot of money. Over 4.5 million people, which was more than 10% of their labor force, were unemployed and had been on benefits for years. They were spending over 30% of their GDP on social welfare. So, the chancellor at the time pushed for labor reforms with an agenda that gave a much lower welfare benefit to long-term unemployed people, formed new part-time mini jobs, and took away benefits if people turned down a job. Now, you can

4:36 imagine this wasn't very popular with their citizens, but it did push people to get to work. Unemployment fell and business boomed. As this was happening, China and globalization loved Germany. China's economy was booming and they couldn't get enough of German machines and cars. And also 12 countries in Eastern and Central Europe joined the European Union which allowed Germany to outsource productions to countries where wages were cheaper but skill levels were still high. And these two things culminated in Germany being seen as stable with a surplus. Their strategy might have seemed boring but it was safe. Investors trusted it. Unemployment was low and their public debt shrank and then it all cracked.

5:22 Season two, the decline begins. Now, this decline wasn't some kind of major explosive crash. It started slowly, like little leaks letting drops of water in. China was one of Germany's best customers. So, when their economy took a hit from Trump era tariffs in 2018, they had to cut down on their spending. In 2016, Germany exported goods worth about 76 billion euro to China. There was a massive 13% growth in 2017, then a drop to 8%, then 3% and the latest data shows a decline of 15%. So, in this decline, losing the top customer, check. All they need now is a scandal that affects the reputation they

6:08 spent so long building. and Volkswagen, their star student in their top industry. Well, it delivered that in what we now call Dieselgate. Now, you know, these kinds of stories make headlines and most people will glance or even read it for a moment and then forget about it, right? But the smartest people know that moments like these ripple far beyond headlines, okay? They shift entire industries, economies, and ultimately affect your pocket and future earnings. You have to really dig below the surface level knowledge to understand this. And well, you're focused on building your fortune. So, you don't always have time to follow the impact. But we do, okay, that is what we do. And to put all of this knowledge into one neat little package delivered straight to your notifications, we built

6:54 the Alux app, okay, where we help wealth builders decode trends that will shape the next decade. Building and protecting your money means that you have to know what moves markets and what disrupts trends. And the knowledge and insights you get inside the app will help give you that protective edge. So, here's what you do, okay? Download the Alux app from your app store and scan this QR code and you'll get a 25% off discount. We're giving you this discount because just by watching this video, we know you're committed to understanding the whole picture of how your money moves and benefits the wider world. But back to this Volkswagen scandal. Okay, now you can just imagine the ripple effect of dieselgate, right? It was one of the biggest corporate frauds in modern history. Turns out the beloved and

7:40 reliable car maker had been cheating on their carbon emissions tests for years. They went as far as installing defeat devices in 11 million diesel cars that were shipped worldwide. Now, these devices could actually tell when a car was being tested for their emissions and temporarily reduce them just for the test. In normal driving, the same cars emitted up to 40 times more nitrogen oxide than the legal limit. This was a company that put itself at the forefront of clean diesel. They ran ads praising their own performance and environmental responsibility, and it was all a total lie. Engineers programmed the cars to cheat and executives approved it. You can rebound from economic issues, okay?

8:26 You can recover from mistakes. But when your reputation is built on trust and reliability, and you've been shown to cheat, well, that kind of knocks you down for a long time. Volkswagen had to pay over 30 billion euro in fines, settlements, and recalls. Their executives were arrested and charged, and the brand lost trust and billions in market value. and it was a global embarrassment for Germany. It also highlighted that Germany was lagging behind in green innovation and electric vehicles. So, I mean, now we've got losing your top customer, check. A scandal that damages your reputation and causes you to lose billions, check. And everyone realizing you're outdated and not able to progress with the times,

9:12 check. Germany came very close to a recession in 2019. Looking at this graph, you can see they avoided it only by a tenth of a percent. And that, well, it was just the start. Season 3, it gets worse. So, Germany was going into 2020 with a fragile economy, and this was not the year that anyone was going to be making their comeback. In fact, the pandemic exposed just how messy the country's global supply chains were. Now, okay, every country struggled with supply chains when the world was locked down. But that very precision and punctuality that made Germany so reliable was useless during a time when the only way to get stuff done was to

9:58 have flexibility and backup plans. They had built a lean, just in time manufacturing model. Their model relied on minimal inventory because holding inventory is expensive. It ties up cash and takes up warehouse space. It relied on parts being shipped precisely on time and we know that definitely did not happen during co and most of their suppliers were in China and Southeast Asia. So shipments had to come a long way from countries that were dealing with much bigger issues at the time. All of this meant their hyperefficient model collapsed. Their factories just couldn't build cars or machines. They also had to deal with the issues that most other countries were facing like declining tourism and massive government spending.

10:44 Then in 2022, just as they were seeing some flicker of light at the end of the tunnel, they had to cut ties with Russia almost overnight. It triggered one of the biggest economic shocks to postwar Germany because almost their entire energy model rested on cheap Russian gas. For decades, they'd had this deal with Russia where they would get an abundance of cheap pipeline gas that they used to power their factories and heat their homes. They had Nordstream 1, a pipeline that had a direct route for gas from Russia to Germany under the Baltic Sea. 55% of their gas came from Russia. So, it was a big part of what made them Europe's industrial engine. This gas was used for heating, electricity, and especially for powering heavy industries like automotive, chemicals, steel, glass, and ceramics.

11:32 After Russia invaded Ukraine, Germany halted the 10 billion euro construction of Nordstream 2, and Russia retaliated by cutting off pipeline gas supplies. And then Nordstream 1 was sabotaged. We still don't know who did it, but it permanently ended the pipeline flow. Germany had no backup or stockpiles, which meant they had no time either. They had to import liqufied natural gas at a much higher cost. It's like having an emergency and needing to fly across the world at the last minute, and you just have to close your eyes and click buy on that ridiculously expensive flight. They also had to build their own LNG terminals in record time with the first one costing them over€6 billion

12:18 euro. and their citizens and companies couldn't afford these massive price hikes. They were still reeling from that near recession period. So, the government had to spend over 200 billion euro to subsidize households and industries. Even during the most difficult economic times, Germany's budget surplus made them a stable, reliable economy. But these sudden expenses, they were eating away at that. And it was scaring businesses away, too. BASF, one of the world's biggest chemical companies, paused its production in Germany and invested 10 billion euro in China, where energy was more reliable and predictable. Companies from many other sectors followed suit. Fertilizer plants paused production and steel and aluminum output dropped and

13:04 small manufacturers had to close or downsize. It really just seems like they were taking hit after hit after hit. They were facing many of the same issues as other countries, but a series of unfortunate events and tunnel vision decisions meant they were way more affected. It's like a snowball, okay? And once these things come together, it can be really difficult to deal with the fallout, which brings us to season 4, where we are right now. Now, most of the Western world right now is facing some kind of cost of living crisis. And if you compare Germany's numbers to other major cities, you would think it's an all much to do about nothing kind of situation. Sure, rent is increased by almost 20% in Berlin, Munich, and

13:50 Frankfurt, but it's still only about €1,400 for a one-bedroom apartment. That's child's play compared to Amsterdam's €2500. Even Lispen, where the average salary in Portugal is much lower, is more expensive. And if you live in New York where you're paying $4,200, about $3,700, those rental prices sound like what dreams are made of. But this, you know, this is about more than just rent or gas prices increasing and the unemployment rate going up. You see, the traits that made Germany strong have turned into liabilities. If they also had a strong finance or tech industry, which uses less energy and more adaptable, then they would be in a stronger position. But every part of the system that their key industries in their economy rely on

14:37 have been disrupted. They lost the two key things that kept them competitive in the world market. Cheap energy and their reputation. How do you come back from that? Well, imagine you spent your whole life perfecting one specific skill or talent and becoming the leading expert on that. And then one day, many years down the line, once you've put in all of this work, that skill becomes obsolete. You can scramble, pivot, and try something new, but it's going to take a lifetime for you to build up this new expertise. And maybe your family has grown and more people depend on you now. And in Germany's case, that focus on long-term vision that's been embedded in their culture just doesn't work with our current fastmoving, high-risk, innovative world. It's not a superficial

15:25 problem that you can fix with some subsidies and riding the wave for a few years. The world now seems to reward speed, flexibility, and independence. And Germany spent their best years too focused on the wrong things. With an aging infrastructure that's delaying those formerly famous ontime trains, poor broadband and 5G coverage, low birth rates, and a rising retirement age, we might just be seeing the tip of the iceberg with all of this. Even their strict regulations that were meant to convey trust are actually holding it back. Like in 2023 when a constitutional court blocked a 60 billion euro investment in green energy because it violated a self-imposed debt break that

16:12 froze any future investments in infrastructure, defense, and energy. It's like an engine that's sputtering, but it's not out of the game. It's still moving. And everyone loves a good comeback story, right? It's not like Germany is bankrupt. And they've got strong, fair, and well functioning systems, highquality industries, and a trade surplus. So, of course, there is hope. And look, okay, you can bet they're going to put up a damn good fight. Season five, where do we go from here? Well, the agenda 2010 brought Germany's economy back to life all those years ago, and now the agenda 2030 is being rolled out with the same goal, but that is sweet talk companies into getting

16:57 back together or starting a whole new relationship with you. Well, Germany's plan is to lure them in with a lower corporate tax rate, going from 40% to 25%. They're reducing all that pesky red tape with a rule that every time they want to introduce a new regulation, they have to eliminate two existing ones. The strict regulations and high fines kept a lot of companies away. One of them was this strict data protection rule that meant sensitive patient information had to be faxed. So, a lot of places that deal with patients were still using them up until just a few years ago. They've also streamlined approval processes for building projects, so they take two to three years now instead of 5 to seven.

17:43 So, they've covered increasing profits for companies, check. Taking away some of the hoops they had to jump through, check. And accelerated the time to get things done, check. Now they just well they need a workforce because at the moment the two workers per retiree is down from the 4:1 ratio in the 1960s and the current birth rate is well below replacement levels. So who's going to keep the economy moving in the future? They're incentivizing pensioners and retirees. Pensioners will now be able to earn money from working and get their full pension at the same time. Those who work past retirement age, which is currently 67 years old, will get tax breaks if they continue to work past

18:29 that age. They'll also get bonuses or a higher future pension if they delay retirement outright. And companies will get subsidies for hiring older workers, too. Now, their last hurdle is that focus and investment into other sectors. Remember that 60 billion euro we mentioned earlier? the fund that was meant for green investment that was blocked by the regulations around their debt break. Well, they've blown that out of the water with a new 500 billion euro fund. They amended the debt break. So now, if they spend more than 1% of their GDP on defense and military, that extra spending bypasses their budget limit. The same goes for investments in roads, railways, energy, schools, and hospitals. They're basically saying,

19:15 "We'll follow the debt rules for everyday spending, but for the things that build our future, we'll borrow whatever we need." If you follow Germany's economic story in real time, or with us right now, you'll know that these changes are like a total 180 personality shift. Imagine your slightly uptight, very responsible, tiewearing uncle suddenly comes to the family dinner with a new haircut and decked out in the latest Ralph Lauren. It looks fresh, promising, but will it stick? Can you undo decades, generations even, of teachings and living by a certain ideal to change with the times? You're trying to move a culture and a value system that was based on stability to one that's more flexible, risk tolerant,

20:01 even a little bit chaotic. It's not going to happen overnight. Okay? But if the Berlin nightclub and technos scene has shown us one thing, it's that we cannot underestimate what's hiding beneath the surface. That surface might look rigid and rulebound, but actually there's chaos, creativity, and reinvention just below it. Germany isn't loud about transformation, but when it turns, it turns with force. This whole journey continues inside the Alux app. So, here's that QR code again for the discount. I'll see you on the inside. Until next time, my friend.