In all the data about Germany, it's the one statistic that bucks the trend. Its economy is strong, its cities are regularly cited as among the best in the world to live in – but Germany is a shrinking country. It has the lowest birthrate, just 1.36 children per woman, in Europe, and one of the lowest in the world.

According to the national statistics office, fewer babies were born in Germany last year than at any time in its history. A total of 663,000 children were born, 15,000 fewer than in 2010 and in stark contrast to 1964 when German births (east and west) peaked at just under 1.4 million. The rate for younger women in particular fell last year, though it increased for those from their mid-30s to mid-40s.

Demographics and family policy experts are divided over the reasons for the apparent reluctance to have children, as well as the ways to tackle the situation. What they generally agree on is that Germany's demographic future looks gloomy. With many more Germans dying than being born for 40 years, the obvious results will be a shrinking workforce, lower growth and a struggle to pay for a rapidly ageing population. Britain's population is forecast to exceed that of Germany by 2040.

Kerstin Schenk is a 39-year-old new mother from Munich whose experience goes some way to explaining the trend. "I had hoped to have children earlier, but I didn't finish my studies until I was 30," said the management consultant. "And then I felt I needed to get some work experience under my belt before I went off on maternity leave. When I did then have the right partner it took quite a long time for us to get pregnant."

That the government of Angela Merkel has thrown so much money at the problem is seen by many, even within her own ranks, as a mistake. "Elterngeld" or "parents' allowance" has cost well over €20bn (£16.1bn) since it was introduced five years ago and its results are questionable.

Under the scheme, considered one of the most generous family policies in Europe, parents can receive up to 65% of their salary (capped at €1,800) per month over a period of up to 14 months.

A scheme to start next year instigated by the family minister, Kristina Schröder – the first minister to have had a child in office – will guarantee every child over the age of one a childcare place. But so far similar measures have apparently done nothing to boost the birthrate.

Social scientists want a far broader approach that views the family as a whole and tries to create stronger links between the workplace and family. In many parts of Germany parents complain of a lack of access to childcare. Most schools finish earlier than elsewhere in Europe – sometimes as early as 11am – making it harder for women in particular to combine work and family. Though the phrase is used less and less, working mothers are still referred to as "rabenmütter" or raven mothers.

When Schenk returns to work she will be able to take advantage of a flexible working scheme. "But this is an exception, and what I daren't think about yet is how my employers would view it if I had a second child," she said.

What Germany needs and what France and Scandinavia have, according to Wolfgang Nowak, director of the Alfred Herrhausen Foundation, and a former adviser to Gerhard Schröder, the ex-chancellor, is an agreement between the workplace and the family that would make the two much more compatible. He said Germany's generous welfare system needed to be much simpler.

"Every new government tries to advocate social benefaction with the result that we now have a completely confusing jungle of social benefits, including no less than 150 ways of financing family life. The result is too much fragmentation of the resources available."

Yet another "family-friendly" measure, which involves paying women to stay home with their toddlers, was championed by the conservative CSU party in Bavaria, which has but has proved controversial, involves paying women to stay at home with their toddlers. Critics have called it a reinforcement of the traditionalist view of women's roles – often referred to as "Kinder, Küche, Kirche" (children, kitchen, church) – that does not fit into modern Germany.

Margot Kässmann, former head of Germany's protestant church and the mother of four daughters, said the birthrate problem had much to do with people's unwillingness to leap into the unknown. "Apart from all the factors that mean people are having children much later, many people are put off by the bind it involves. This is a society which is obsessed with having options – they want to test everything first and having children is obviously something you can't test in advance."

With signs that Germany itself might face a recession before long, there are fears that the problem of "Schrumpfnation Deutschland" (shrinking Germany) will only worsen. Statisticians say you only need to look at the Great Depression to see how childbearing is affected by economics. Demographics experts are therefore keeping a close eye on Merkel's efforts to end the euro crisis.