The country was once considered an excellent location, and “made in Germany” was a sign of quality. Now, creeping deindustrialization and declining competitiveness dominate the discussions. More and more companies are laying off employees.
Lausanne, this beautifully situated community on Lake Geneva with a view of the Alps, invites everyone to dream. But once a year, when the private university IMD publishes its “World Competitiveness Report”, only the hard facts are of interest. The report focuses on the competitiveness and location conditions of almost seventy countries. For Germany, this type of awarding of certificates has mostly only brought one thing in recent years: further evidence of its decline as an economic nation.
Bureaucracy, energy prices and infrastructure
In 2024, the country slipped again, from 22nd to 24th place, and also fell further behind in the four main categories: economic performance, infrastructure, government and corporate efficiency. Ten years ago, Germany was in 6th place, but now the country is behind countries such as China, Saudi Arabia, Belgium and Bahrain. Germany is particularly weak when it comes to reacting flexibly to change. Venezuela is similarly bad.
The study is just one piece of evidence of the decline in Germany’s competitiveness. Business owners and managers no longer even complain in private about the government’s failed policies over the years, and economists surveyed by the Ifo Institute gave the location a score of 3.4 in May. This result is worryingly bad for the industrial nation of Germany, said the Ifo expert responsible for the survey results.
The main points of criticism about the location are excessive bureaucracy, high energy prices, excessive taxes and levies for companies compared to other countries, a lack of digitalization, crumbling infrastructure and a general shortage of labor and skilled workers. This finding is not the result of the debt brake, which is often blamed for every economic problem in Germany, but of many years of poor economic policy and wrong priorities, mostly under a CDU/CSU-led federal government.
It was not due to a lack of money. Tax revenues rose by 40 percent, from 644 billion euros in 2014 to 916 billion in 2023. At the same time, Berlin inflated the federal budget by 60 percent, from just under 300 billion in 2014 to around 480 billion euros this year. This means that government spending has risen significantly more than prices, and has therefore also increased after adjusting for inflation.
Buoyant tax revenues and low interest rates
But after the national debt crisis, in the 2010s, when tax revenues were often high and interest rates were low, Berlin did not invest more in education and research or infrastructure, which would have benefited everyone. Instead, more money was spent on consumptive social benefits for individual groups: mothers’ pensions, parental allowance plus, temporary child building allowances, the Strong Families Act or basic pension. Mothers’ pensions I and II alone cost taxpayers around 13 billion euros last year, even though the German welfare state is already lavishly endowed.
From 2013 to 2023, the budgets of the ministries for family (+97 percent), economic cooperation and development (+92 percent) and labor and social affairs (+40 percent) increased more than those for digitalization and transport (+35 percent). Anyone who travels by train or car in Germany feels the consequences of this prioritization.
Meanwhile, the citizen’s allowance, the former social assistance, in combination with other benefits such as the housing benefit, which has just been increased again, reduces the incentive to work. You cannot earn much more money through poorly paid work than you are given almost unconditionally by the state. This exacerbates the problems of the widely complained shortage of work and skilled workers.
The serious consequences of the increasingly poor location conditions have long been apparent in many areas. The production index of the manufacturing sector has been falling since 2018, and the industry is symbolically in a permanent recession. Gross value added is also declining slightly. In the automotive industry in Germany, tens of thousands of jobs are being cut, while new factories are being built in Eastern Europe, China and other Asian countries.
The situation in the chemical industry is hardly any better due to the high energy prices caused by the botched energy transition and the Russian attack on Ukraine. Medium-sized companies are also quietly leaving the country and setting up their production across the border.
Deindustrialization and disillusioning image
The discussion about the deindustrialization of Germany – or, less dramatically, one could also speak of a profound structural change – has reached the general public and is contributing to a further deterioration of the image. Another example of the declining reputation was in the summer when many international journalists made fun of the disastrous state of Deutsche Bahn in their reports during the European Football Championship.
The potential growth of the German economy continues to decline and, according to economists, could reach a low of 0.4 percent per year by 2028. That would be only a third of the average potential growth of the previous decade. In addition, measured in terms of direct investment, massive capital has been flowing out of Germany for years. According to a survey, foreign companies view Germany even more critically than domestic ones. They often come to Germany primarily because of the subsidies, not because of the location advantages. Just think of the new semiconductor and battery factories in eastern Germany.
The only reason the economic downturn is not even more dramatic is because the mass unemployment that existed at the turn of the century is missing. The demographic shift towards low birth rates means that workers are still in high demand despite the two-year stagflation that has now lasted for over two years. Stagflation is when the economy stagnates and inflation is high.
The miserable situation is of course not only due to the often bad politics. The free trade boom, from which Germany benefited enormously, has come to an end, for example due to the increasing tensions between democratic and repressive states. Things are not going well for China, an important trading partner, either, which is affecting important sectors such as the automotive and mechanical engineering industries and putting pressure on exports. In addition, interest rates have risen significantly.
Brussels taxonomy and Frankfurt monetary policy
Berlin also no longer has much in its own hands. Part of the economic policy comes from Brussels, where the EU Commission contributes to the massive bureaucracy, for example through the administrative monster taxonomy, with which the EU has defined state requirements for sustainable investments and introduced new reporting obligations for companies. Germany has even supported the taxonomy instead of fighting it. Due to Brexit, Berlin has also lost an ally in the EU on many (trade) issues and is moving ever closer to the French, who tend towards state dirigism.
Monetary policy, in turn, is no longer made by the Bundesbank for Germany in Frankfurt, but by the ECB for the entire euro zone. However, this is very heterogeneous, so that interest rates for Germany were often too low in previous years, but are currently probably a little too high in view of the stagnation.
Given this mixed situation, it would be all the more important for Berlin to do its own homework. Instead, the traffic light government has been arguing for weeks about saving just 1.5 percent of the upcoming federal budget, which seems ridiculous in itself. And marginal issues are often discussed in public at length, such as alleged excess profits by some companies.
Ideas for improvement are all on the table
Ideas and suggestions for improving competitiveness and the attractiveness of the location are on the table. These include a real, significant reduction in bureaucracy, lowering corporate taxes, securing a cheap energy supply, no further expansion of the welfare state, more investment in digitalization and infrastructure, and organizing the immigration of skilled workers instead of uncontrolled entry of economic migrants with little training.
Germany cannot survive on its assets forever. That is why a government, regardless of its color, must tackle the issues mentioned above with courage. When the economy is doing well, people are usually doing well too. And then Germany’s performance in location rankings like the one in Lausanne improves again.
You can follow Frankfurt business correspondent Michael Rasch on the platforms X, Follow Linkedin and Xing.