Prospects for Germany as a Business Location – Reform Proposals from Economists
The German economy is stumbling. For 2024, the European Commission (2023), IMF (2024), and OECD (2024) each forecast that Germany will be one of the laggards in terms of economic growth compared to other developed economies. The results of the Economic Experts Survey (EES) from fall 2023 show that Germany has become substantially less attractive as a business location over the past ten years. Politicians are alarmed. On April 22, 2024, the executive committee of the FDP adopted a position paper on accelerating the economic turnaround. In the 46th ifo and FAZ Economists Panel, we take this situation as an opportunity to ask German economics professors in which areas Germany is weak and which reforms are necessary. The survey, in which 180 people took part, was conducted from April 16 to April 23, 2024.
Germany Gets a School Grade of 3.4 as a Business Location
On average, professors at German universities give Germany a school grade of 3.4 as a business location in an international comparison. 22% of participants expressed a positive perception of the business location. Of these, 2% awarded the grade “very good” and 20% the grade “good.” They emphasize the good training of the workforce, Germany’s strong research base, and the continued innovative strength of companies. They also point to stable political conditions, legal certainty, and the institutional framework as reasons for a positive assessment of Germany as a business location.
In contrast, more than half of the economists gave Germany a mediocre grade. 38% of participants gave Germany the grade “satisfactory” and 17% the grade “sufficient” as a business location. They also see education and institutions as strengths. However, many in this group are concerned that the substance is increasingly eroding and that Germany is losing its attractiveness as a business location. In particular, the country’s extensive bureaucracy, lack of public investment, shortage of skilled workers, high energy prices, and inadequate digitalization cloud their assessment.
20% of participants awarded the grade “poor” and 3% the grade “unsatisfactory.” There are hardly any positives for this group. Instead, they perceive Germany as as a bundle of factors that hinder the economy, such as high bureaucracy, high taxes, high energy costs, low investment, sluggish digitalization, and worsening demographic challenges. The economists also cite the economic policy of the current coalition government as a burden for Germany as a business location. Overall, there are certain factors that are seen as positive or negative for Germany as a business location. The individual assessment of the business location depends on which factors are considered decisive. This can be understood in more detail below.
Bureaucracy, Energy, and Raw Materials as Well as Digitalization as the Greatest Weaknesses
For Germany as a business location, only four of the 13 location characteristics surveyed are rated more frequently as strengths than weaknesses in an international comparison. Political institutions are seen as a strength by 67% of economics professors, putting them in first place. They are followed by education and human capital (53%), security and geopolitical risks (43%), and access to finance (36%). These four characteristics are each seen as weaknesses by 10–15% of participants – the rest rate them neutrally. The wage level is rated as neutral overall.
For all other location characteristics, the proportion of those who rate the characteristic as a weakness for the business location is at least twice as high as the proportion of those who see the characteristic as a strength. The availability of labor and skilled workers and the consistency of economic policy are viewed critically, with 38% of economists rating each as a weakness. The same applies to infrastructure and taxes, which are seen as weaknesses by just under half. The last four characteristics achieve worrying values. 60% of participants see non-wage labor costs as a weakness for Germany as a business location. The figure is 67% for digitalization and 74% for energy and raw materials. With regard to regulation and bureaucracy, as many as 87% of economists say that these weaken the business location. In total, a feature was rated as a weakness 841 times. This contrasts with only 412 mentions of a feature as a strength.
Detailed View – Strengths and Weaknesses According to the Assessment of the Business Location
Regardless of the assessment of Germany as a business location, the same three characteristics are most frequently cited as strengths. Of the participants who gave Germany the grades “very good” and “good” as a business location, 94% cited political institutions, 88% education and human capital, and 53% security and geopolitical risks as strengths. Although the frequency of mentions is significantly lower among those economists who were more critical of Germany as a business location, the order of the three strongest characteristics remains the same. Of the participants who gave the grades “satisfactory” and “sufficient,” 65% state that they see the political institutions as a strength, and among the participants who gave the grades “poor” and “unsatisfactory,” the figure is still 44%.
The picture is very similar for the three greatest weaknesses. However, the differences between the proportions of mentions are much less pronounced here than they were for the strengths. So, while many economists with a critical perception name hardly any strengths of Germany as a business location, there is at least agreement on the weaknesses – regardless of the overarching assessment. Of the participants who gave the grades “poor” and “unsatisfactory,” 94% cite regulation and bureaucracy, 92% energy and raw materials, and 86% digitization as weaknesses. Among economists who gave the grades “very good” and “good” as well as “satisfactory” and “sufficient,” regulation and bureaucracy are also most frequently cited as weaknesses of Germany as a business location, at 68% and 89% respectively. One difference is that for the grades “very good” and “good,” non-wage costs are the third most frequently mentioned weakness at 47%, followed closely by digitalization at 44%.
Economic Policy Reform Proposals
One key question is what economic policy reforms the professors would recommend to counter Germany’s weakness as a business location.
The economists’ economic policy reform proposals are indeed predominantly assigned to those location characteristics that are viewed most critically with regard to Germany as a business location. Most of the reform proposals relate to the three areas of regulation and bureaucracy, taxes, and energy and raw materials. In addition, the economists often suggest investments in digitalization and infrastructure.
With regard to regulation and bureaucracy, the economics professors suggest speeding up approvals for construction and investments as well as tenders. They call for new and existing laws to be examined more closely for their bureaucratic costs, and they would like to see an administration that develops a service mentality. With regard to taxes in Germany, the participants state that the location would generally benefit from tax reductions and simplifications in tax law. In view of the demographic challenge and the increasing burden of social spending on the national budget, they also suggest raising the retirement age and adjusting marginal taxes to make it less attractive to reduce working hours and more attractive to work longer hours instead. There are no uniform reform proposals for the attested weakness in the field of energy and raw materials. Some believe that the business location would benefit from an accelerated energy transition, while others would like to see a reversal or at least a slowdown in the energy transition. Overall, more market-oriented and internationally embedded measures are recommended for the energy transition.
