As a new century dawned, religious tensions between Catholic and Protestant factions continued to thrive, with protestant princes forming the Protestant Union in 1608 and the Catholic princes forming the Catholic League in 1609, led by Maximilian I, Duke of Bavaria.

At this stage Europe was a melting pot of different states vying for more power. Spain was especially powerful, given newly acquired wealth brought over the seas from colonies on the American continent. Internally, the German states continued their everlasting conflict and quarrelling. Catholic France, Protestant England and the Netherlands were all opposed to a strong Habsburg Dynasty, and both Denmark and Sweden were eying the Baltic, desirous of its control. All these states soon made Germany the stage for the lengthy European War, the Thirty Years War, which stretched from 1618 to 1648.

The Peace of Westphalia, the treaty that marked the end of the terrible war, recognized the sovereignty and independence of each state of the Holy Roman Empire. Thus this First Reich was stripped of all power. The treaty served to confirm the religious and political division (350 states) of the country. The religion of each German state was to be determined by the ruling prince of each state.

Germany was truly devastated by the Thirty Years War, not only socially but also economically. Historians believe a quarter to a third of the population to have perished due to direct consequences of the war. Many fell prey to famine and plague. What used to be Europe's trade center, gradually waned and shifted west wards towards the Atlantic, leaving Germany on the sidelines. Trade was disrupted by conflict and Germany's economy began suffering a steady decline, becoming virtually stagnant until recovery began long afterwards, in the second half of the 19th Century.