Berlin – After years of unprecedented government spending designed to cushion the economic blow of the COVID-19 pandemic, the war in Ukraine, and global trade disruptions, Germany is poised to see state aid levels return to pre-crisis levels. However, even with this shift, the overall volume of support remains significantly higher than before 2020, reflecting a fundamentally altered economic landscape.
According to recent analysis, government spending with a promotional character is projected to fall to 5.6% of Germany’s Gross Domestic Product (GDP) by 2026. This represents a return to the levels seen before the combined impact of the pandemic and the energy crisis triggered by the conflict in Ukraine. Despite this decline from peak levels, the figure still surpasses pre-2020 benchmarks, indicating a lasting impact of these crises on the German economy and the continued need for some level of state intervention.
The Weight of Multiple Crises
The German economy has been navigating a series of interconnected crises since 2020. The initial shock of the COVID-19 pandemic in 2020 resulted in a value creation loss of approximately €185 billion. The Institute of the German Economy (IW) estimates that by the time Russia launched its full-scale invasion of Ukraine, cumulative losses, largely pandemic-related, had reached nearly €300 billion.
The Russian attack in 2022 then overlaid the lingering effects of the pandemic with a new set of economic challenges. The resulting energy price shock and heightened geopolitical uncertainty significantly hampered economic growth. In 2022 alone, losses amounted to around €85 billion. The IW study reveals that the total value creation loss since 2020 now stands at approximately €940 billion – a loss of over €20,000 per employed person in Germany, equivalent to roughly one-fifth of the average annual economic output of a worker.
Government Intervention and Support Measures
In response to these crises, the German government implemented a wide range of support measures aimed at stabilizing businesses and mitigating the economic fallout. These measures included direct financial aid, loan guarantees, and tax relief programs. The Federal Ministry for Economic Affairs and Climate Action introduced programs such as immediate assistance, bridging assistance, restart assistance, and extraordinary economic assistance (November and December aid), as well as hardship assistance.
An evaluation of these “Corona-Wirtschaftshilfen” (Corona economic aid) conducted in May 2025 drew a positive conclusion. The evaluation found that the goals of the aid – securing the existence of fundamentally sound companies, stabilizing the economy, and enabling a swift recovery after the pandemic – were achieved. The administrative costs associated with implementing these programs were deemed reasonable. The programs were particularly crucial for small and medium-sized enterprises (SMEs) and self-employed individuals who lacked sufficient liquidity reserves to absorb the revenue declines caused by the pandemic.
The Broader Fiscal Picture
The surge in government spending to address these crises has had a significant impact on Germany’s public finances. Data from the Federal Statistical Office shows that the COVID-19 pandemic, beginning in 2020, and the energy crisis of 2022 led to record deficits in the financing of public budgets. Government debt reached a new high of €2.446 trillion in 2023.
In 2023, total public expenditure in Germany – excluding payments between different levels of government – amounted to €1.952 trillion. The largest share of these expenditures went to social security (€818 billion), followed by the federal government (€614 billion), the states (€529 billion), and municipalities and associations of municipalities (€365 billion). Contributions to the European Union totaled €34 billion.
Impact on Different Sectors
While the broad economic impact has been substantial, certain sectors have been disproportionately affected. The energy-intensive manufacturing sector, for example, faced significant challenges due to soaring energy prices. Supply chain disruptions also impacted industries reliant on global trade. The tourism and hospitality sectors were particularly hard hit by travel restrictions and lockdowns during the pandemic.
The government’s support measures were designed to provide targeted assistance to these affected sectors, but the long-term consequences of the crises are still unfolding. The shift towards a more sustainable and resilient economy, driven by the need to reduce reliance on fossil fuels and diversify supply chains, will require further investment and structural adjustments.
Looking Ahead
The projected decline in state aid to 5.6% of GDP by 2026 signals a gradual normalization of fiscal policy. However, the continued presence of government support at a level higher than pre-crisis levels suggests that the German economy is still navigating a complex and uncertain environment. Factors such as geopolitical tensions, inflation, and the pace of the green transition will continue to shape the economic outlook.
The effectiveness of the government’s long-term strategy will depend on its ability to foster innovation, promote investment in future-oriented technologies, and address structural weaknesses in the economy. Maintaining a balance between fiscal responsibility and the need to support economic growth will be a key challenge in the years ahead.
The next key checkpoint for assessing the impact of these policies will be the release of the updated fiscal projections by the Federal Ministry of Finance in November 2026. Readers are encouraged to share their perspectives and engage in discussion about the challenges and opportunities facing the German economy in the comments section below.