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How can Germany's economy grow again?


The German economy is not doing well. As clear as the analysis is, the possible ways out of the economic crisis are controversial. Which adjustment screws could be turned?

Ulrich Ueckerseifer, WDR

Economic growth – that was yesterday. But when it comes to analyzing why Germany's economy is currently doing so poorly, politicians' assessments are far apart. There is a lot of confusion when it comes to the crucial question: How can the economy in Germany grow again in the long term and thus provide scope for distribution? There are some good ideas.

The problem: The economy is not growing

The economy in Germany is only expected to grow by 0.2 percent this year – that is the forecast in the federal government's annual economic report, which Economics Minister Robert Habeck presented this week.

There are currently no growth impulses coming from either within the country or from abroad. Exports will rise again this year after a significant decline in 2023, but only slightly by 0.6 percent. And domestically, not much can be expected from private consumption and corporate investments. But the fact that things aren't going well at the moment is the smaller problem.

The big problem: Potential growth permanently low

The poor prospects for the coming years are much more serious. This becomes clear in the so-called potential growth. To put it simply, this is the probable growth rate of the economy in Germany if no special events cause higher or lower growth.

The “economists” calculated this. Result: In the next ten years the economy will grow significantly more slowly than in the past – so there will be ten economically lean years ahead. The consequence: Germany has to do a lot more to ensure that the economy grows at least as much as possible, even if that is less than in the past.

There are a number of obstacles to growth: too much bureaucracy, a lack of skilled workers, a neglected infrastructure, high taxes compared to other countries, and so on.

High in comparison Corporate taxes

Germany is a country where companies pay comparatively high taxes. This is shown by a comparison with the other large European countries and the USA: Germany with 28.5 percent and Spain with around 29 percent have the highest effective tax burden for companies.

Great Britain is in the middle at around 26 percent, while France and Italy are below at around 24 percent. With an effective tax burden of 27.5 percent, the USA is hardly cheaper than Germany.

In Germany, since the major tax reform of the then red-green federal government in the early 2000s, companies have been paying almost 30 percent corporate taxes (which essentially consists of corporate tax and trade tax). The Center for European Economic Research (ZEW) in Mannheim has calculated that the effective tax burden in Germany is currently 28.5 percent.

For many years, Germany was in the middle of the industrialized countries, while other countries such as France and the USA had significantly higher tax rates of up to 40 percent. But in recent years, many countries have significantly reduced their corporate taxes. In France and the USA, for example, companies now pay lower taxes than in Germany.

Tax cuts as Growth drivers?

Finance Minister Christian Lindner is therefore calling for the abolition of solidarity for companies – that would reduce the nominal tax rate. Among other things, Habeck wants to improve depreciation options for companies.

According to economists, both variants have a growth-increasing effect. How big it is, however, is controversial. The Union wants to significantly reduce corporate taxes to a level of 25 percent. However, according to ZEW calculations, this would lead to tax losses of 30 billion euros per year – there are currently no proposals for counter-financing.

Reducing bureaucracy is necessary

When it comes to bureaucracy, the parties are basically in agreement, but they have been that way for years. A reduction in regulations would probably have an impact in the medium term.

The effect would be twofold: In some sectors, costs would fall due to lower requirements (e.g. in the construction industry), and in many areas the effort required for processing would decrease both in companies and in the authorities involved – a regulation that does not exist also not be controlled. This also has a cost-cutting effect.

Investments in infrastructure

Politicians and economists also largely agree that Germany needs to do significantly more for its infrastructure. Government investments have also increased significantly. But it will take many years until the investment backlog that has arisen over many years is resolved.

Overall there is a shortage of workers

The shortage of skilled workers in Germany is already a shortage not only of skilled workers, but of workers as a whole – and the baby boomers are just beginning to retire. That is why the proportion of people in the typical working age of 18-67 will be significantly smaller in relation to the total population in the coming years.

From the point of view of many economists, the fight against the shortage of skilled workers is the crucial point when it comes to the question of how more growth can be achieved again. Because if there aren't enough employees, more orders won't help – someone has to process them.

At this point, however, it also becomes clear that it is difficult for the parties to consistently exploit their workforce potential because their own clientele is affected. The SPD has so far resisted the abolition of pensions at the age of 63 and the Union would like to stick to spousal splitting. If both were abolished, more people would probably be available to the labor market. Consistent economic policy cuts across party lines.

Promote new industries

Germany is a country of industry and manufacturing – this has contributed a lot to economic growth in recent decades. However, sectors such as the automotive industry, mechanical engineering and chemicals are currently under pressure. The question for economic policy is: Is it better to support “old” industries or promote “new” industries?

Economists like economist Ulrike Malmedier are calling for a stronger future orientation with a focus on young and innovative areas such as artificial intelligence, biotech or environmental technology.

What conclusion can be drawn?

It is clear that economic policy is currently being challenged much more than it was in the last decade. Due to the debt brake, government options are more limited than in most other countries. That's why it's crucial to use the available money as efficiently as possible – in such a way that the strongest impulse for lasting economic growth comes from it. The various proposals for increasing growth will be measured against this.

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