Germany muscled its way through the Covid-19 pandemic and managed to avoid a devastating industrial shutdown after Russia cut off its gas supplies. Still, it never fully allayed concerns that economic trouble might lie ahead. The past two weeks provided dramatic evidence that these fears were justified. 

Elections in the eastern German states of Thuringia and Saxony at the beginning of the month saw support for populist parties surge, dealing a fresh blow to the governing coalition in Berlin and creating further uncertainty over Germany’s ability to attract investment. 

Just a day later, Volkswagen AG, the country’s largest automaker, dropped the bombshell that it wanted to end a decades-old labor agreement and possibly close domestic factories due to lagging demand. 

Then, BMW cut its full-year earnings guidance and UniCredit SpA surprised investors with news that it had amassed a 9% stake in Commerzbank, catching the government off-guard.

“There is no point in sugar-coating: Germany keeps falling behind internationally,” Tanja Gönner, chairwoman of industry lobby group BDI, wrote in a report that urged immediate action to improve the country’s competitiveness and overhaul its industry-heavy economy. Germany’s transformation “will cost all of us — economy, politics and society — but no transformation would cost all of us a whole lot more,” the former lawmaker added. 

Economic headwinds had been intensifying for quite some time. Germany’s manufacturing industry, the backbone of its economy, has been hit hard by waning demand from consumers in China — a key export destination for the country’s sleek luxury cars and sophisticated machinery. Last year, rising inflation took a toll on households and helped fuel the rise of the far-right and far-left.

Among the manufacturers most affected by slowing demand in China is Volkswagen, which has for decades relied on the Asian country as a key source of sales and profits. While China remains an important sales region, the company’s market share has eroded in recent years due to fierce competition from more nimble Chinese rivals and Tesla Inc.

Competition is also eating into VW’s domestic market in Europe, where demand for new cars hasn’t bounced back to pre-pandemic levels and the company’s electric car lineup has struggled to entice buyers. Inefficiencies and high costs have further bogged down the industrial giant, which employs more than 600,000 people worldwide. The government’s decision to abruptly end incentives for electric-car buyers — one of the many controversial concessions made in last year’s budget talks — only added to these troubles.

Still, VW shocked workers and the country’s political leadership when it announced its intent to axe a labor pact that has for the past three decades prevented the carmaker from implementing forced layoffs. It also said that, for the first time in its 87-year history, it would consider shuttering factories in Germany. 

The statement sparked an immediate outcry from the powerful labor unions that wield outsized influence at the company — even by German standards. Upcoming negotiations between management and worker representatives to try and find a way out of the crisis might turn into a bruising experience for both sides.

BMW has been more pragmatic in navigating the auto industry’s shift toward battery-powered cars, but VW’s smaller peer also contributed to this month’s cascade of bad news. The Munich-based manufacturer was forced to cut its full-year earnings guidance on account of softening demand in China and a recall of 1.5 million cars due to potentially faulty brake systems. 

Those systems were supplied by Continental AG, which enjoyed a reputation as one of Europe’s most efficient and competitive car-parts makers before years of rapid expansion took a toll. 

While some parts of Continental’s business, such as its tire operations, have continued to generate healthy profits, other divisions have faced multiple rounds of painful restructuring measures and thousands of job cuts. Last month, Continental said it is considering spinning off its automotive unit — a potentially transformative decision that previous management had resisted for years. Should that happen, it would underscore how profound the shifts within the car sector have been.

“The mood in the auto industry is rapidly deteriorating,” Anita Wölfl, an industry expert at Germany’s Ifo Institut, said in a report last week, citing “extremely pessimistic expectations for the coming six months.”

Germany’s corporate woes aren’t restricted to its core industrial sector. Early Wednesday morning, UniCredit surprised investors by announcing that it had amassed a stake of 9% in Commerzbank, making it the bank’s second-biggest shareholder.

Commerzbank received a bailout from German taxpayers in the wake of the financial crisis, and news of the UniCredit move came just a week after the government said it would reduce its 16.5% stake in the company to pave the way toward a more independent and competitive bank.

The announcement of the sale by the finance agency presented a sudden opportunity for UniCredit Chief Executive Officer Andrea Orcel. In a sophisticated transaction, Orcel scooped up a 4.49% share tranche in Commerzbank that the government sold to reduce its holding in the country’s second-largest lender. 

The purchase appeared to catch both bank management and the German government off-guard, even though Orcel insisted in an interview with Bloomberg TV that Berlin had been “well aware” of the deal.

The Italian bank will now have to find some common ground with key stakeholders in Germany, including government officials, other shareholders and labor representatives who have already voiced opposition on the basis that strong banks are key to sustaining a robust domestic economy.

“German Finance Minister Christian Lindner must now make a clear commitment toward Germany as a business location and stand against the threatening takeover of Commerzbank by Unicredit,” Frank Werneke, head of labor union Ver.di said in a statement on Wednesday. 

Lindner, his pro-business Liberal Democrats and the entire federal government have been on the receiving end of growing discontent about Germany’s economic struggles and disruption within its key industry sectors.

That came through clearly in the regional elections in Thuringia and Saxony, where support surged for the far-right AfD and a new left party that was only founded earlier this year. The AfD beat out its ruling party rivals, while BSW emerged as potential kingmaker in both states. The next elections will take place on Sept. 22 in Brandenburg, the German state that surrounds Berlin, and the AfD is projected to win or come in second. 

With assistance from Zoe Schneeweiss.

This article was generated from an automated news agency feed without modifications to text.