Germany is being hit by a wave of insolvencies. Now in the third year of a prolonged recession, the economic situation is more alarming than during the 2009 financial crisis.
The death spiral of German businesses has reached dramatic proportions. According to the Leibniz Institute for Economic Research in Halle (IWH), the second quarter of 2025 saw the highest number of insolvencies among partnerships and corporations in 20 years. Despite a slight decline in June, the trend remains: Germany’s economic substance is eroding -- and with it, the nation is quietly bidding farewell to its prosperity.
Mass Extinction of German Companies
In June alone, the IWH economists counted 1,420 corporate bankruptcies -- down 4% from May. But year-on-year comparisons reveal the full scope of the crisis: a 23% increase from June 2024. The figures are also over 50% higher than the pre-lockdown average. Particularly noteworthy: In economically strong states like Bavaria and Hesse, insolvencies rose disproportionately by 80% and 79%, respectively.
Altogether, 4,524 company insolvencies were recorded in Q2 -- a 7% rise compared to Q1 2025.
Economists cite not only the ongoing recession but also a long-overdue market correction following years of ultra-low interest rates from the European Central Bank. As Steffen Müller, head of insolvency research at IWH, puts it: “For many years, extremely low interest rates prevented bankruptcies, and during the pandemic, state aid kept alive firms that were already weak.” Now, the market is reclaiming its cleansing power.
Avoidance of Root Cause Analysis
But this structural rupture meets a vacuum in economic policy.
While the IWH analysis avoids addressing the deeper structural weaknesses and self-inflicted political damage, these remain the decisive factors behind Germany’s economic isolation. High energy costs, overregulation, and tax burdens -- by international standards -- are driving companies either to bankruptcy or abroad. Workers are now increasingly feeling the effects.
According to consulting firm Ernst & Young, over 100,000 jobs will likely be cut in 2025, especially in the industrial sector -- the main victim of the energy and regulatory crisis. Since the pre-COVID period, German industry has lost roughly 10% of its production volume. Viewed in isolation, the sector resembles a depression more than a recession. A return to a sustainable growth path is unlikely under current conditions.
The heavily hit construction sector also suffers. Once a stabilizing force in 2020–21, building activity has collapsed since 2022. Real construction output fell 4% in 2024, with another 2.5–3% decline expected for 2025. Overall, real construction volume in 2025 will be 10–12% below 2019 levels.
False Hopes for a Rescue
The German government plans a €847 billion debt-financed stimulus over four years, mainly for military upgrades and infrastructure. However, most of the funds will likely be diverted to plug holes in Germany’s hemorrhaging social security system.
In 2025 alone, a social insurance deficit of at least €140 billion is expected. The federal government must fill this gap to avoid spiraling secondary costs. If so, the ambitious investment plans of the Merz administration will collapse.
Germany has become a socioeconomic problem case -- and its leaders are clinging to the outdated Keynesian playbook. State spending, financed through debt and backstopped by ECB rate suppression, is expected to jump-start the economy.
But this will not happen. Only the market can efficiently allocate scarce capital toward productive uses that create prosperity. Berlin has yet to grasp this reality.
The recent U.S.-EU trade deal will cost Germany roughly €6.5 billion in tariffs in the first year. But far more damaging will be the accelerating exodus of companies relocating operations to the U.S. to avoid tariffs -- unless Germany’s tariff regime changes.
The Merz government’s debt binge may briefly delay the insolvency wave by flooding markets with artificial capital. But this merely postpones the inevitable reckoning -- a purge of subsidized zombie firms that thrived on cheap credit or EU Green Deal handouts.
Big Government, Green Ideology
Just weeks into Friedrich Merz’s chancellorship, one thing is clear: There will be no return to market-based economic policy. Merz has revealed himself as a proponent of big government, interventionism, and green transformation orthodoxy.
Germany still holds the political weight to derail Brussels’ transformation agenda and force a return to economic rationality. But so far, the country’s rapid deindustrialization and prolonged recession have not triggered a critical reassessment of its political course.
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