Will Germany’s new government tackle the key economic challenges?

1

Germany’s public investments in infrastructure has plummeted from 1% of GDP in the 1990s to zero. An additional €600 billion over the next decade are needed to rebuild capital stock.

2
Germany’s working-age population is projected to decline from approximately 52 million to approximately 43 million by 2050. The country needs increased workforce participation among women, older workers and immigrants to close the labor supply gap.

3
Germany’s old-age dependency ratio is expected to increase from 34% to 51% by 2050 — necessitating balanced pension policies. It also needs reforms to support growth and incentivize productivity.

4
Germany’s current tax system places a high burden on labor, with an effective personal income tax at 29% and corporate tax at 29.9% in 2023. In contrast, wealth is taxed at only 0.4%.

5
German’s R&D investments of 3.1% of GDP are heavily focused on the automotive sector and are insufficient to be a leader in future technology industries such as AI, robotics, quantum and green technologies.

6
Germany must achieve long-term sustainability in its energy transition to renewables — necessitating an estimated €1 trillion in investments by 2035, equally divided between upgrading energy infrastructure and expanding renewable capacity.

7
Germany must also reduce regulatory hurdles with bureaucratic costs amounting to €146 billion annually, with direct costs estimated at €65 billion. The goal should be to reduce these costs by 25% over four years, digitalizing procedures and streamlining EU negotiations.

8
Germany must reassess its export-led model, with exports at 43% of GDP. Declining exports to China (now at 6% of the German total) are partially offset by gains to the United States. However, trade tensions loom — which should lead to pivoting its value chains towards Europe and negotiating more free trade agreements globally.

9
Germany also must strengthen its European leadership. It should reinvigorate its role by supporting common debt mechanisms, deepening the Capital Markets Union (CMU), promoting equity market growth, incentivizing savings reorientation and simplifying regulations.

*first published in TheGlobalist.com