Germany’s Trade-First Bet Helped Hollow Out Europe’s Industry, Economist Warns

Germany’s long-running faith in “change through trade” didn’t just reshape its own economy, it helped leave Europe’s industrial base more exposed, more dependent, and less able to defend itself, according to French macroeconomist Michel Santi.

In a sharply argued opinion piece, Santi pins much of Europe’s deindustrialization on Berlin’s decades-long strategy of treating global commerce as both an economic engine and a political tool, often at the expense of industrial investment, supply-chain resilience, and Europe-wide safeguards. Because the European Union sets trade policy collectively, he argues, Germany’s preferences didn’t stay German. They became Europe’s.

A German doctrine: “Wandel durch Handel”

Santi’s core target is a guiding idea in modern German economic statecraft:Wandel durch Handel, “change through trade.” The theory says deep commercial ties with authoritarian states will gradually soften them, pulling them toward stability and convergence.

Berlin, he argues, treated that concept like gospel. The payoff was access: cheap energy, huge export markets, and a powerful role for Germany as Europe’s manufacturing hub. The cost, he says, was a continent that underinvested in its own industrial capacity and left itself vulnerable when geopolitics turned ugly.

Russia was the warning shot, Nord Stream made energy a weapon

Santi points to Russia as the clearest early case. Germany’s push for energy interdependence, symbolized by the Nord Stream pipelines carrying Russian natural gas to Europe, was supposed to lock in stability through mutual dependence.

Instead, he argues, it showed how quickly energy stops being just an input for factories and becomes leverage. For European industry, energy prices aren’t a side issue; they directly shape competitiveness, jobs, and whether companies invest at home or move production elsewhere.

Then came China, and the shockwaves spread beyond Germany

Santi says Germany applied the same trade-first logic to China, betting that commercial integration would remain a net win. But as Chinese manufacturers moved up the value chain and competition intensified, Germany’s export machine started to sputter.

And because German industry sits at the center of Europe’s supply web, parts, machinery, subcontractors, the pain didn’t stay inside Germany’s borders. When German demand drops, suppliers from across the continent feel it.

To make the point vivid, Santi uses a blunt metaphor: China supplied the weapon; Germany guided its hand. The external shock was real, he argues, but Europe’s exposure was a political choice, one Berlin championed even when it increased risks for other EU countries.

Why EU trade rules magnify Germany’s choices

A key part of Santi’s case is institutional: trade policy is an exclusive power of the European Union. That means tariffs, anti-dumping measures, and other trade defenses are decided at the EU level, not by individual countries acting alone.

So when Germany slows or blocks tougher trade measures, Santi argues, it isn’t merely protecting its own exporters or avoiding retaliation. It effectively sets the level of protection, or exposure, for the entire EU single market, including countries with more fragile industrial bases.

He describes it as Europe sitting on an ejection seat every time Berlin resists tariffs. The language is harsh, but the mechanism is familiar: the biggest player’s short-term priorities, keeping market access, avoiding escalation, can narrow options for countries pushing targeted protections for vulnerable sectors.

The “moral hazard” argument: profits privatized, costs shared

Santi’s most politically charged claim is that Germany captured a disproportionate share of the gains from globalization, especially from China, while the downsides were spread across Europe through integrated supply chains and shared EU trade policy.

In his telling, Germany banked the benefits: export surpluses, market share, and stronger “national champions.” But when vulnerabilities surfaced, dependency, industrial erosion, job pressure, the fallout rippled across the continent.

He also argues Germany repeatedly leaned against tariff hikes and other defensive tools, leaving European industries more exposed to competition backed by aggressive state industrial policy outside Europe.

A “phantom limb” industrial pain, and a warning about Germany’s slowdown

Santi echoes an image used by analysts at the Centre for European Reform:Phantomschmerz, phantom limb pain. The idea is that policymakers still behave as if industrial strength is intact, even after capacity, jobs, and know-how have already slipped away. The pain hits when governments need to respond fast and discover the muscle is gone.

He doesn’t argue Germany set out to weaken Europe. He argues Berlin’s hierarchy of priorities, trade access first, industrial resilience second, produced structural side effects once embedded in EU-wide rules.

Santi also points to warnings that Germany may be sliding into a more persistent, structural slowdown, raising the stakes for a Europe that long relied on German manufacturing as its economic engine.

What comes next: energy, electrification, and targeted industrial investment

The debate, Santi suggests, turns into a policy question: how does Europe rebuild industrial sovereignty when energy costs, competitiveness, and security are now inseparable?

He points to a parallel argument made by Véronique Andrieux, head of WWF France, who says decarbonizing factories, through electrification and stable support policies, should be treated not only as climate policy but as industrial strategy. Cleaner, more predictable energy can mean less vulnerability to price shocks and foreign leverage.

Other major economies in Europe, including Germany and Italy, have already rolled out large-scale industrial support tied to energy and competitiveness, she argues. For countries like France, and by extension the EU, the risk is falling behind if investment doesn’t match the scale of the challenge.

The implication for American readers is familiar: when trade strategy, energy security, and industrial policy pull in different directions, the manufacturing base becomes the battlefield. Santi’s warning is that Europe can’t rely on old assumptions, or on Germany’s old model, if it wants to stay an industrial power in a world of sharper economic conflict.