Can Germany overhaul its economy before AfD grows stronger?

Germany's export-led economic model faces unprecedented strain just as support for the far-right Alternative for Germany (AfD) party reaches a new peak. Chinese rivals are steadily eroding market share of major German industrial players, while persistently high energy prices, elevated labor costs and excessive red tape compound structural challenges.

After two years of contraction, real GDP edged up only 0.2% last year, according to the Federal Statistical Office, Destatis. Exports to China fell 9.7% in 2025, with German vehicle and part shipments plunging by a third. The government's latest forecast of 1.3% growth in 2026 remains modest compared to pre-COVID boom years.

The AfD currently polls ahead of all other political parties in Germany, with economic challenges being a major factor in the right-wing populists' rise. Germany's domestic intelligence agency sees reliable indications that the AfD is right-wing extremist in its entirety.

Tech Agenda

As Chancellor Friedrich Merz's coalition searches for a fresh growth strategy to fend off populist politics, the government has outlined a high-tech agenda focusing on six priority sectors: artificial intelligence (AI), quantum computing, microelectronics, biotechnology, clean energy and climate-neutral mobility.

A report by the Made for Germany initiative—representing 147 companies and investors—estimates these technologies could attract up to €4.1 trillion ($4.6 trillion) in investment by 2035. However, success will depend more on innovative startups than established industrial giants.

Startup Surge

Data shows this shift is already accelerating. More than 3,000 startups were founded in Germany in the first half of 2026, up 88% from the same period last year, with one-third focusing on AI. Venture-capital investment soared 44% to €5.8 billion in the same period.

US investors are increasingly acquiring Germany's famed Mittelstand—traditional small and medium-sized enterprises—with their specialized technology. Bertschek stresses these firms should better utilize production data and collaborate with AI startups.

Economic Zones

Sven Gabor Janszky proposes creating special economic zones to help Germany catch the next wave of economic growth, following models like Silicon Valley and China's Shenzhen and Shanghai's Pudong district.

These zones would lower regulations, recruit ambitious workers and pump money into specific technologies, helping Germany position itself as a first mover in emerging fields. Janszky acknowledges EU regulations may prohibit this move but argues Germany must overcome them to grow the economy again.

Meanwhile, rising defense spending—expected to reach €120 billion in 2026 (2.6% of GDP)—will boost production of drones, sensors and dual-use technologies. The government aims to increase defense spending to 3.5% of GDP by 2029.

Competitive Edge

Despite China's cost advantages through lower energy and worker costs plus massive subsidies, Falck argues Germany can compete by focusing on specialized niches. 'Take the semiconductor industry as an example. It is probably unrealistic to aim for leadership along the entire value chain. But it is enough to lead at individual choke points,' he explained.

With first-mover advantages, decades of high-quality production data and specialized expertise, Germany can maintain its position in advanced industrial and engineering technologies despite global competition.