What measures are needed to recover the German economy?

For too long Germany has leaned on the success of its own classical manufacturing industry. The technological edge that Germany used to have has disappeared. The causes are diverse; from China to bureaucratization; but most importantly, the country has not responded sufficiently to digitalization and the rise of new technologies such as AI.

The traditional pillars of the German economy (exports, industrial production and technological leadership) are under severe pressure. The situation is alarming. Industrial production has fallen sharply, especially in energy-intensive sectors. More than a third of German industrial companies are cutting their own investments. Two thirds of companies report that their competitiveness is at risk.

In our opinion, a radical reorientation is needed to make Germany a leading country again. So far, measures have been mostly reactive and focused on symptoms. A change of direction is needed, and for this a comprehensive plan is needed.

To tackle this major economic crisis, we believe that a comprehensive set of strategic measures is required. We have identified ten strategic measures to recover the German economy:

1. Tax reform: Germany needs to free itself from self-imposed fiscal constraints. The country needs more financial room for essential investment, possibly by raising the structural deficit ceiling to 0.5-1% of GDP. As an incentive, consider, for example, tax incentives for investment in innovations.
2. Green energy transition: To remain competitive, Germany must accelerate the transition to renewable energy. This requires investments of about 1 trillion euros until 2035, equally divided between infrastructure upgrades and expansion of renewable energy capacity.
3. Upgrade infrastructure: After years of neglect, a catch-up is needed. About 600 billion euros of additional investment is required over the next decade for infrastructure, education, housing and green energy.
4. Strengthen labor market: To close the demographic gap, Germany must increase the labor force participation of women, the elderly and immigrants by removing barriers and providing incentives.
5. Adjust pension system: With an aging population, reforms are needed to control pension costs and encourage longer working lives.
6. Tax reform: The current system taxes labor too heavily. Reforms should focus on lowering income and corporate taxes to encourage economic participation.
7. Boost innovation: Germany must double its R&D investment to 6% of GDP to remain a leader in future technologies.
8. Reduce regulatory burden: Bureaucratic costs amount to €146 billion annually. A 25% reduction in four years and further digitalization are crucial for efficiency and competitiveness.
9. Strengthen European leadership: Germany must renew its role in the EU. Two crucial EU issues in this regard are the European debt problem and the completion of the Capital Markets Union (CMU).
10. Adjust trade relations: With declining globalization, Germany must reorient its value chains toward Europe and push for free trade agreements.