Germans, famously, coin neologisms when a crisis hits or the culture reels in a new direction. Take die bad bank (toxic lender), kreditklemme (credit crunch), or twittern (sending a message via Twitter). Because Germany’s brewing industry has fallen on hard times, especially since the mid-1990s, you’ll now hear brauereisterben (literally, “brewery death”) muttered across the land as well. That may sound a little ridiculous, but in a country practically synonymous with beer and brewing—buxom servers in dirndls and overflowing steins, the biergarten echoing with song—the possibility of a downturn is a major buzz kill.

The facts are stark: According to German federal statistics released in late January, German brewing has dropped to less than 100 million hectoliters of production for the first time since reunification in 1990. (That’s less than half of the United States’ annual output.) The same study revealed that consumption dropped almost 3 percent last year alone, to 101.8 liters per person per year, and that it’s down about one-third overall since the previous generation. The number of breweries in the country has also dropped—by about half over the last few decades to around 1,300. (There are nearly 1,700 up and running in the U.S.) The vaunted Weihenstephan brew master degree program in Munich adopts a dour tone on its student prospectus, saying the majority of graduates don’t actually become brew masters but instead head for jobs in mechanical engineering and the chemical and pharmaceutical industries.

Further evidence of brauereisterben is depressingly easy to pile on. Berlin, which sustained some 700 breweries in the early 19th century, now counts only about a dozen firms. Amid the ruins, highly trained German brew masters are giving up and heading to the United States—even to sleepy Covington, La., where Henryk Orlik, a graduate of Munich’s prestigious Doemens Academy, settled down in 1994. “I came here for the great American craft beer industry,” the Heiner Brau founder told me recently over samples of freshly brewed pilsner in his charming little brew house just off the town square. Adding insult to injury, craft brewers in the United States have largely taken over the prestigious international-brewing awards circuit. Sierra Nevada Brewing Co., founded 30 years ago by home brewer Ken Grossman in Chico, Calif., took top honors in a hotly contested 2010 World Beer Cup category, besting 68 other brands, many of them German. The bracket? German-style pilsner.

These days, Germany’s celebrated brewing towns and atmospheric old taverns can feel like retirement homes. Visitors to the south of Germany today (where more than half the nation’s breweries are located) find few of the ardent young beer lovers that crowd craft watering holes in Copenhagen; Brussels; London; New York; Portland, Ore.; and even Rome. And while it’s true that last fall’s 200th Oktoberfest was bigger than ever, using Oktoberfest to measure the health of German beer culture is like using Disney World admissions to measure the health of American cinema. Once a decorous wedding pageant, Oktoberfest is a hot mess, with cheesy carnival rides and hordes chugging cheap lager as if it were Hawaiian Punch. Paris Hilton even showed up for the anniversary celebration.

It’s also true that there are still a lot of small German breweries that produce great beers worth seeking out, from juicy, clovey Bavarian hefeweizen and bready ungespundet-hefetrüb (unfiltered lager) to the malty altbiers of Dusseldorf and the grassy, refreshing kölsch beers of Cologne. In Bamberg (north of Munich, in the area historically known as Franconia), distinctive smoked beers called rauchbier predominate, and the most steadfast craft-beer lovers will make the pilgrimage to taste these specialties. In 1997 I spent three happy months in Germany studying ancient brewing techniques on a Thomas. J. Watson Fellowship and came away deeply impressed by the idyllic places where traditional brewing has survived the 20th century’s punishing economies of scale. But some of the same breweries I visited that year have already closed, and I can scarcely imagine the variety that would have existed had I visited just half a century earlier.

German beer-industry spokesmen are quick to blame the downturn on the nation’s declining birth rate and aging population—if there were more teenagers and twentysomethings, the logic goes, there’d be more beer drinking. But the fact is that bored young Germans are abandoning the entire alcoholic genre of beer itself. They’re flocking to mixed and energy drinks like Bacardi’s Rigo and Austria’s amped-up export, Red Bull, whose sales surged 18 percent in Germany during 2009.

A more likely culprit for the brauereisterben is the country’s very definition of beer. Germany’s brewing industry has, for nearly 500 years now, marched under the banner of the Reinheitsgebot (literally, “purity commandment”). A law enacted in 1516 to control prices and shield the baking industry from supply shortages by excluding rye and wheat from brewing, the Reinheitsgebot stipulated that beer must contain only malted barley, hops, and water (wheat and yeast were written in later). The decree—often described as a the world’s first consumer protection legislation—dried up the ancient pre-hops tradition of Gruitbier, which likely included yarrow, bog myrtle, juniper, rosemary, mugwort, and woodruff—all perfectly useful bittering and flavoring plants. It also pulled the plug on Köttbusser, an ancient brew made with oats, honey, and molasses. While the Reinheitsgebot was actually overturned in 1987 as an impediment to European free trade, many German companies adhere to it for marketing purposes, especially in Bavaria. When it comes to beer for local consumers (exports are mostly brewed without the strictures), it’s still the de facto law of the land.

Initially, the Reinheitsgebot improved the state of German (and, by extension, worldwide) beer quality immensely and helped make Germany’s brewers world famous for quality. No one wants to go back to the Dark Ages when beer was murky, dark, sour, and smoky, sometimes fattened up with roots, bone, ash, or squawking fowl.

Trouble is, the Reinheitsgebot is now working against the very industry it was supposed to preserve. For one, it puts a vise grip on innovation by demonizing flavor- or body-enhancing additions of any kind: oats, ancient grains (such as spelt, millet, and sorghum), spices, herbs, honey, flowers other than hops, and any other natural fermentable starches and sugars. This taboo rules out trying Belgian, French, and New World brewing styles, which often call for refermentation in the bottle with sugar in a manner similar to Champagne.

Technically, when the Reinheitsgebot was officially replaced in 1993 by something called the Vorläufiges Deutsches Biergesetz—Provisional Beer Laws—additions of beet sugar, pure cane sugar, and invert sugar were made legal in top-fermenting beers, a category which includes the iconic beer style of hefeweizen. But the industry has almost universally kept up the old purity routine. And while it’s feasible to stay within the Reinheitsgebot strictures while trying new combinations and new techniques, most brewers seem to think that following the spirit of the law means you have to brew to some sort of historical flavor archetype. As a result, many modern German brewers shun experimentation of any kind outside of increased mechanical automation. There are only about 20 common styles used for brewing in Germany whereas craft brewers in the United States are working ably in at least 100.

Another issue is the hypnotic marketing force of Reinheitsgebot may make Germans less sophisticated tasters by limiting their perception of what a good beer can be. When asked, many Germans—even well-traveled beer-industry professionals—tend to wrinkle their noses at beers of foreign style or origin. They would sooner drink cheap biermischgetränke or mass-produced domestic beers mocked as spülwasser (dishwater) than try anything exotic, such as Belgian ales spiced with herbs or the sort of hoppy, aromatic ales and lagers making waves in the American craft-beer market. If Germans want the taste of something new and exciting, they look to other forms of alcohol.

One exception are the cheap biermischgetränke (“beer-mix”) products such as radler (light beer mixed with lemonade, based on an old Munich-area cyclists’ tradition), or beer mixed with cola, fruit juice, and other nonalcoholic drinks, which spiked in consumption to a share of 4 percent of the total beer market in 2010—a jump up from 2.7 percent in the previous year. These are considered acceptable innovations because producers claim to “brew first, mix after”, thus preserving the tradition of Reinheitsgebot. In other words, in today’s Germany, it’s OK to sell an industrial pilsner mixed with corn-syrupy lemonade or cola flavorings (the latter is called a diesel), but the concept of carefully brewing a beer with the natural ingredients used in cola—lime, vanilla, coriander, orange peel, and caramel, for starters—remains far-fetched.

As young German consumers have rushed to embrace the latest international wines, cocktails, spirits, alco-pops, mixed drinks, and energy drinks, brewing companies have found themselves saddled with costly excess capacity, forcing them into slimmer profit margins, price wars, mergers and consolidation, and closures.

Despite all these bleak indicators, there’s a chance the brauereisterben will yield a brau-renaissance. Garrett Oliver, of the Brooklyn Brewery, who has brewed considerable quantities of beer with Belgian candy sugar, Sauvignon Blanc lees, exotic botanicals, espresso, even bacon—all to very palatable effect—says he sees signs that German culture is changing, that German brewers and drinkers alike are on the cusp of accepting modern styles.

Starting in 2007, Oliver began collaborating with German brew master Hans-Peter Drexler of Schneider (a famous Reinheitsgebot-loyal Bavarian brewery that opened in 1872) on a pair of brews, including a strong German weizenbock dry-hopped with American flowers. The beer was highly rated, especially in the United States, and the reception in Germany was more or less kind, though the brew wasn’t made widely available. “At first I think they were like, ‘Oh look, the American has come to learn how to brew from our great brewers,’” recalls Oliver. But the experiment has had a positive ripple effect. Drexler and Oliver’s second joint effort (a hefeweizen, or traditional Bavarian unfiltered wheat beer) was also dry-hopped with local German Saphir hops from Kelheim post-fermentation, imparting floral and citrusy aromas and flavors practically alien to local palates. The beer remains in Schneider’s lineup, and Oliver has been contacted by other German breweries wanting partnerships. Schneider, too, advertised its eagerness to embark on new collaborations outside Germany.

Even without American assistance, Germans are pushing the hops envelope. Wernecker Bierbrauerei in Werneck, Germany (some 40 miles West of Bamberg), released Hopfen-Fluch in 2010, a hoppy, American-style riff on the IPA (India pale ale). Wernecker brewery claims it has doubled in size over the last decade or so, and that sales accelerated 20 percent in 2007, bucking the bleak national trends.

Hopfen-Fluch and the Oliver-Schneider collaboration beers would likely pass muster under the Reinheitsgebot, but change could come with or without the purity business in tow. In Bamberg, Weyermann Malting supplies specialty roasted grains in 80 varieties for the global craft-brewing industry. The company’s small, pilot brewery has turned out cherry and pumpkin ales (definitely not Reinheitsgebot-approved) as well as barley wines (strong English ales) and even “imperial” American-style ales (which might pass inspections, if they existed, depending on carbonation and clarifying methods), all with the intention of “showing the world, and German brewers, what is possible,” says Sabine Weyermann, spokesperson for the 130-year-old family-held firm. The Weyermann family sees the Reinheitsgebot as less of a “straitjacket” than some believe it to be, because German brewers (with their excess capacity and ingredients on hand) can easily have it both ways— brewing new, rule-breaking beers and familiar recipes.

Gasthaus-BrauereiBraustelle in Cologne, a nano-brewery that opened in 2002, is also defying national and local traditions with increasing chutzpah: braumeister Peter Esser’s latest beers include a dunkel (dark) seasoned with rosemary, an American-style IPA (called Fritz IPA), a 5.8 percent ale infused with hibiscus flowers (Pink Panther) and what’s thought to be the first American-style imperial stout ever brewed in Germany (Freigeist Caulfield).

Innovation is happening, if slowly, but German brewers and the drinking public will need to truly embrace change to get the country out of its rut. Blind adherence to a centuries-old edict isn’t working anymore. The crucibles of great brewing traditions should be preserved, by all means, and the classic beer recipes and brands along with them—but there can be no doubt: It’s time for new blood in the kettles.

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