Germany’s future as an industrial base in doubt

Germany lags far behind in a ranking of OECD countries – it is a disappointing finding that is also reflected in the latest country index commissioned by the Foundation for Family Businesses. Trend reversal fails to materialise. Analysts at the economic research institute ZEW call for sweeping reforms, priorities for government spending and the elimination of entire packages of laws.

Munich, xx January 2025. The new model students in a ranking of the world’s top 21 industrial countries are no longer the United States and Canada. Instead, it is Denmark and Sweden that have earned the highest marks. It is a finding that clearly demonstrates that highly attractive business location conditions can indeed be created – even within the European Union (EU) with its bureaucracy and socially balanced society models.

It is a finding that generated optimism among a team of analysts at the ZEW – Leibniz Centre for European Economic Research led by Professor Friedrich Heinemann – also in terms of a possible reform agenda that will be pursued following Germany’s upcoming parliamentary elections. As a next step,
the analysts recommended that Germany should significantly lower its effective tax rates and devise a far-reaching range of investment and innovation stimuli. Germany, like other large members of the EU, faces an uncertain future, the analysts noted. It will be unable to maintain the high standards of living it has known in the past without introducing a comprehensive series of reforms, they added.

Good performance in only one of six areas

The country index is composed of six sub-indexes. Germany continues to lead the way in the indicator “financing”, the segment that reflects public and private debt, creditworthiness and the quality of lending markets.

But Germany ranks next to last on the indicator “taxes”. Eastern European countries have moved to the forefront here, while Germany has passively sat on its hands for years. The country has also produced a disappointing score on the subindex “labour costs, productivity, human capital” (next to last): Germany’s labour costs are high, but its productivity is below average and its educational levels are low.

In terms of “regulation”, Germany slipped two places since the last index was conducted in 2022. This decline stood out in particular regarding regulation of ongoing business operations. The leaders Denmark and Sweden are increasingly applying market-oriented approaches in such areas as climate policy. The analysts recommended that Germany should develop a “zero-regulation mindset”.

Germany did manage to move up one place on the indicator “infrastructure and institution”. Nonetheless, the results of the subindexes for Germany were disparate: good in terms of corruption control and relatively poor in terms of criminality and political stability, improved in terms of information and communication infrastructure and below average to extremely poor in terms of roads and railroads.

An initial look at the business location factor “energy” offered cause for optimism as Germany jumped from 18th to eighth place. Price and currency effects contributed to this improvement. But energy prices remained a huge business location drawback for Germany, according to the analysts. Electricity rates remain more than twice as high as those in the OECD countries with the lowest rates. Germany also has much higher natural gas and fuel prices than the United States, Japan and the entire Western European average. Its energy import risk also remains high.

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