• The German central bank reported its largest annual loss of €19.2 billion for 2024, wiping out its reserves and preventing dividend payments to the government.
• Germany is experiencing its first two-year economic contraction since the early 2000s, with GDP declining by 0.2% in 2024 and 0.3% in 2023.
• The central bank’s financial troubles stem from the European Central Bank’s (ECB) interest rate hikes in response to inflation, exacerbated by soaring energy costs following Russia’s invasion of Ukraine.
• Germany’s economic woes are compounded by a struggling manufacturing sector, declining demand in key export markets, and challenges in its transition to green energy and aging population.
• The Bundesbank and new government led by Friedrich Merz are calling for bold economic reforms to address structural weaknesses, with a focus on competitiveness and smart economic policymaking.

Germany’s economic woes have reached a critical juncture as the Bundesbank, the nation’s central bank, reported its largest annual loss in history—a staggering €19.2 billion ($20.1 billion) deficit for 2024. This unprecedented financial blow has wiped out the bank’s reserves, leaving it unable to pay dividends to the German government for the foreseeable future. The news comes as Germany grapples with its second consecutive year of economic contraction, marking the first time in over two decades that the Eurozone’s largest economy has faced such a prolonged downturn.

The Bundesbank’s historic loss is emblematic of broader challenges facing Germany, including soaring energy costs, a manufacturing slump and a faltering export sector. As the country struggles to regain its footing, the central bank’s financial troubles underscore the fragility of Europe’s economic powerhouse and raise urgent questions about the sustainability of its economic model.

The roots of the crisis: Energy shocks and rising interest rates

The Bundesbank’s financial troubles are largely tied to the European Central Bank’s (ECB) aggressive interest rate hikes, which began in July 2022 in response to runaway inflation. The inflation spike was triggered by the energy crisis that followed Russia’s invasion of Ukraine and the subsequent sanctions imposed by the EU. As Germany shifted from affordable Russian gas to more expensive liquefied natural gas (LNG) from the U.S., energy costs skyrocketed, crippling manufacturers and small businesses.

The ECB’s rate hikes, while necessary to curb inflation, have had severe consequences for central banks across the Eurozone. Higher interest rates increased the cost of servicing deposits, while the low returns on long-dated securities—such as government and corporate bonds—purchased during years of loose monetary policy further squeezed profits.

Bundesbank President Joachim Nagel acknowledged the challenges, stating, “We expect not to be able to distribute profits for a long time.” The bank’s reserves, which stood at a mere €700 million ($733.5 million) at the start of 2024, were insufficient to cushion the blow.

A broader economic downturn

The Bundesbank’s losses are just one symptom of Germany’s broader economic malaise. Official figures show that the country’s gross domestic product (GDP) contracted by 0.2% in 2024, following a 0.3% decline in 2023. This marks the first time since the early 2000s that Germany has experienced two consecutive years of economic contraction.

The manufacturing sector, long the backbone of Germany’s economy, has been particularly hard hit. Rising energy costs, coupled with declining demand in key export markets like China and the threat of U.S. tariffs, have left German manufacturers struggling to compete. Meanwhile, the country’s transition to green energy and its aging population present additional structural challenges.

Nagel warned that Germany’s economic troubles are far from over, stating, “It is not possible to rule out a third consecutive calendar year with no growth.” His grim assessment highlights the urgent need for decisive action from policymakers.

A call for reform

As Germany prepares for a new government following recent elections, the Bundesbank’s leadership has called for bold economic reforms to revive growth and restore competitiveness. Nagel emphasized the importance of “smart, consistent and reliable economic policymaking” to address the country’s structural weaknesses.

“Germany needs to fight for its competitiveness,” Nagel said, invoking the metaphor of the Doomsday Clock to underscore the urgency of the situation. “It’s five to 12,” he warned, referencing the patriotic figure “German Michel” as a call to action for the nation to awaken from its economic slumber.

The new government, led by Friedrich Merz of the Christian Democrats, will inherit a daunting set of challenges, including a €13 billion ($13.6 billion) hole in the 2025 budget and a stagnant economy. With strict debt and deficit rules limiting its ability to borrow, the government cannot rely on transfers from the Bundesbank, which has been a significant source of revenue in the past.

A silver lining?

Despite the grim outlook, there are some signs of hope. The Bundesbank’s balance sheet remains solid, bolstered by €267 billion in gold and foreign currency reserves. The rising price of gold has significantly increased the value of these holdings, providing a buffer against future losses.

Nagel also expressed confidence that inflation would continue to decline, with a return to the ECB’s 2% target expected by 2026. “We expect a sustained return to the 2% mark in Germany in 2026,” he said.

However, the road to recovery will be long and fraught with challenges. As Germany’s economic woes deepen, the Bundesbank’s historic loss serves as a stark reminder of the need for bold leadership and innovative solutions to restore the country’s economic vitality.

For now, the clock is ticking, and Germany’s policymakers must act swiftly to avert a prolonged economic crisis. As Nagel aptly put it, “Germany needs an effective government as soon as possible.” The stakes could not be higher.

Sources include:

RT.com

Yahoo.com

NYTimes.com

Fortune.com