"Is there a risk of the German economy becoming undead or 'zombified'?"
In the aftermath of the economic crisis, Germany's economy has faced significant challenges. The federal budget for 2025 reveals a notable increase in borrowing, with net borrowing rising by nearly 49% compared to 2024, reaching €56.1 billion[1]. This increase was facilitated by an exception to Germany’s constitutional debt brake, invoked due to extraordinary emergency conditions such as external tariff shocks and energy subsidy needs.
Spending pressures have been intense in areas like energy compensations, industrial subsidies for decarbonization, and pension stabilization, with some climate-related subsidies rising by over 60% year on year[1]. While these subsidies and emergency aid were necessary in the short term, they raise concerns about fiscal sustainability, as Germany’s debt brake is being breached more frequently and to a greater extent. This growing debt burden could constrain future fiscal flexibility and investment capacity.
Regarding zombification, this refers to the phenomenon where inefficient or uncompetitive firms survive primarily due to ongoing government support or easy credit, instead of market viability. Germany’s increased emergency allocations and subsidies in manufacturing transition and energy may artificially sustain such firms, potentially slowing necessary market adjustments and innovation. The delay in achieving energy transition goals—such as the hydrogen electrolyzer capacity being far below targets—underscores possible inefficiencies in subsidy deployment that could contribute to economic zombification[1].
In a recent episode of the Eyb & Wallwitz podcast, Johannes Mayr, the chief economist at Eyb & Wallwitz, expressed concern about the duration of aid and the potential for zombification. He suggested that aid loans should be viewed with caution, and governments should be careful in distinguishing between pandemic-related and pre-existing company difficulties[2].
During the crisis, massive bridging aids and the suspension of insolvency application obligation delayed the cleanup of the corporate landscape. Without support, many companies likely would not have survived[3]. However, this support may have inadvertently helped keep uncompetitive firms alive, potentially slowing necessary market adjustments and innovation.
Despite the challenges, the economic crisis has also led to creative destruction, with inefficient companies disappearing, and innovative ones thriving. The second quarter of 2020 saw about a 10% loss of economic output, but the crisis has not stopped the economy from recovering[4].
In conclusion, the long-term impact of economic aid on Germany's economy is a complex issue. Debt levels are rising sharply, breaching constitutional limits, driven by emergency aid and subsidies linked to the crisis and energy transition[1]. The increased fiscal burden risks reducing Germany’s future economic flexibility and growth potential. Government support in key industrial sectors, while addressing immediate crises, may help keep uncompetitive firms alive, raising the risk of economic zombification, which hampers economic dynamism. This combination of higher debt and zombification risks poses a challenge for Germany’s medium- to long-term economic health and structural adaptation.
[1] Source: https://www.bundesregierung.de/breg-de/aktuell/finanzen/bundeshaushalt-2025-1112466 [2] Source: https://www.eyb-wallwitz.de/podcast/ [3] Source: https://www.bundesregierung.de/breg-de/aktuell/coronavirus/coronavirus-2020-06-17-1636793 [4] Source: https://www.destatis.de/DE/ZahlenFakten/WirtschaftEmessung/NationaleKennzahlen/Laendervergleich/NationalesBruttoinlandsprodukt.html
- In light of the increase in government spending in areas like energy compensations and industrial subsidies, concerns about the potential for financial zombification arise, as these subsidies might be keeping inefficient or uncompetitive firms afloat, hindering necessary market adjustments and innovation.
- The other industrial sectors, apart from those receiving emergency aid and subsidies, may witness reduced investment capacity due to the rising debt burden, which could constrain Germany’s future economic flexibility and growth potential, thereby impacting the overall business landscape.
