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 the market share of major German industrial players, while persistently high energy prices, elevated labor costs and excessive red tape are adding to the structural crisis.

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, withGerman vehicle and part shipments plunging by a third.

While there are signs the German economy is turning the corner, the government's latest forecast of 1.3% growth in 2026 is still modest compared with the pre-COVID boom years.

The AfD is currently polling ahead of all other political parties in Germany. The country's many economic challenges have been 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.

The party has vowed to put Germany back on a growth path by ending the transition to renewable energies, lowering taxes and renegotiating European Union treaties, while also reforming welfare and sharply restricting immigration.

As Chancellor Friedrich Merz's coalition searches for a fresh growth strategy to fend off the rise in populist politics, the government has set out its high-tech agenda focusing on six priority sectors.

These are artificial intelligence (AI), quantum computing, microelectronics, biotechnology, clean energy (including nuclear fusion) and climate-neutral mobility.

Irene Bertschek, head of the Digital Economy research unit at the Leibniz Center for European Economic Research (ZEW), argues that Germany's research in these "key enabling technologies is very strong, particularly in the area of climate-neutral technologies."

Yet, the results are often commercialized abroad, Bertschek told DW, with the United States leading in AI and China closing the gap quickly.

A report published Monday by the Made for Germany initiative — a group of 147 companies and investors — builds on the government's plan, estimating that these and other new technologies could attract up to €4.1 trillion ($4.6 trillion) in investment by 2035.

Realizing that potential, however, will depend less on today's industrial giants, like Volkswagen, Siemens and BASF.

"It will not primarily be the established companies that conquer these new fields, but innovative newcomers — startups," Oliver Falck, director of the ifo Center for the Economics of Innovation and Digital Transformation, told DW.

The task, Falck said, is to create the right conditions for startups to emerge, including proximity to top universities, access to private capital and enough freedom to experiment.

He argues for state financing during the early-stage "valley of death" — the risky phase between research and commercial viability when private financing is often scarce.

There are clear signs this shift is already happening. Data from Deutsche Bank and startupdetector, a German startup database and market intelligence platform, show more than 3,000 startups were founded in Germany in the first half of 2026, up 88% from the same period last year. One-third of the new ventures have an AI focus.

Venture-capital investment soared 44% to €5.8 billion in the first half of 2026, with firms such as Neura Robotics and drone manufacturers Stark and Quantum Systems benefiting.

US investors, meanwhile, are increasingly buying up Germany's famed Mittelstand — its traditional small and medium-sized enterprises (SMEs) — with an eye on their specialized technology.

"The German Mittelstand is highly innovative. Now it is essential to invest in key technologies such as artificial intelligence and to tap into the potential that arises at the intersection with established technologies," Bertschek stressed.

The expert, who is also chair of the German government's Commission of Experts for Research and Innovation (EFI), thinks SMEs should make better use of their huge amounts of production data and collaborate with AI startups to help those young firms grow.

Another idea for accelerating the shift to new high-tech sectors comes from Sven Gabor Janszky, chairman of the Leipzig-based futures-research institute 2b AHEAD. He argues that Germany needs special economic zones to help catch the next wave of economic growth.

"For a few specific technologies, you lower the regulations, you recruit ambitious workers and pump money into these zones," Janszky told DW.

This, he added, would follow the examples of Silicon Valley and Chinese mega-cities Shenzhen and Shanghai's Pudong district, and echoes the conditions that helped rebuild the German economy after World War II.

In Janszky's view, these zones would help Germany position itself as a first mover in emerging fields rather than remaining tied to older industrial strengths.

"EU regulations may try to prohibit this move, but Germany will have to overcome them so we can grow the economy again," he added.

The sharp rise in Germany's defense spending will also help several of the high-tech sectors now being prioritized.

According to the International Institute for Strategic Studies (IISS), the defense budget is expected to reach around €120 billion in 2026 — roughly 2.6% of GDP. The government wants this figure to hit 3.5% by 2029.

The resulting procurement will provide a major boost to the production of drones, sensors, communications systems and other dual-use technologies that have both civilian and military applications.

Yet, with major rival China benefiting from much lower energy and worker costs, along with huge government subsidies, Germany will continue to face similar price disadvantages when exporting its new high-end tech. But that doesn't have to spell failure, said Falck, the ifo expert.

"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 pointed out.

"And that is exactly where Germany is strong: as a supplier of equipment for state-of-the-art chip fabs and as a supplier to the world's AI gigafactories, with power semiconductors."

In other words, with a first-mover advantage, decades of high-quality production data and a focus on specialized niches, Germany can remain a major force in advanced industrial and engineering technologies.