Senior Foresight Consultant
Foresight Intelligence
Germany
marcel.hadeed@foresightintelligence.de
The German growth model is under pressure. It has benefited more from Russia’s natural resources and China’s rise than any other EU country. Cheap energy guaranteed the cost-competitiveness of German manufactured goods, particularly in those energy-intensive industries (cars, electrical machinery, pharmaceuticals) that sit atop Germany’s export table, while China provided the sales market for them.
In a new geopolitical reality, the German economic model needs to evolve to revive flatlining growth, while becoming sustainable and digital. These external pressures are well-known. Less known are the domestic factors that challenge the foundation of any future success of the German economy. I want to highlight three of them that seem particularly conspicuous.
Lack of know-how in growth industries of the future
German companies face difficulties in filling IT jobs. This gap in needed expertise is caused by too few graduates from MINT faculties, and the failure to attract foreign talent. In spring 2024, it was estimated that the skilled labor shortage in MINT-sectors reached 240.000 employees.
In this context, Germany seems to be losing the race to build the technologies of the future. Germany has always prided itself on high tech and high-quality products. Today, it is lagging behind the US and China in key industries, such as in EV or solar. In others, such as chip making, hydrogen conversion, or artificial intelligence, there is no German footprint to begin with. Not since Wirecard, whose demise was encapsulated by a movie-worthy international manhunt, has Germany had a global champion in FinTech.
The difficulty of doing business
Germany ranks 22nd in the ease of doing business index, and 31 in the category of starting a business. One main obstacle for entrepreneurs is red tape. Companies in Germany need to navigate the challenge of its intricate multilevel governance system, where municipalities, states, the federal government, and sometimes the EU are relevant regulators. There are vast differences in the digitalization of public services between federal states, leaving already structurally weak regions further behind. And lack of coordination between states often leads to administrative chaos. A case in point is Germany’s digital tax system. While a central software has existed for the end user since 2001, in the backend, each federal state employs its own system. As a result, cross-border tax matters are still processed analogously. Worse even, 85 percent of public service interactions involve municipalities and counties. And each of the over 11.000 municipalities and 300 counties is in charge of its own digitalization. All this complicates efficient administration and translates into real costs of doing business.
The faltering infrastructure
Lastly, German infrastructure is not up for the challenges of the so-called twin transformation of decarbonization and digitalization. One key pillar of Germany’s decarbonization strategy is its railroad network. Evermore rail traffic (of people and goods) is desired and expected. Yet, its dilapidated infrastructure is already buckling, facing an investment need of 45 billion Euros in maintenance and repair alone. “The Bahn” has become a sore subject for the supposedly punctuality-obsessed Germans: Less than two-thirds of long-distance passenger trains are on time. Cargo trains show similar numbers.
Germany’s energy infrastructure faces comparable challenges. While less battered than the railway network, its scaling challenges are also much greater. Decarbonization via electrification and green hydrogen requires a powerful and integrated smart grid system. Already, the construction of over 13.000km of new grid is planned, most of which until 2030. However, neither is the timely success of this gigantic infrastructural endeavor guaranteed, nor will it be enough to ensure the cheap and clean energy required for the envisaged dynamic and green economy of the future. Germany’s digital infrastructure shows a more differentiated picture, but the 15 percent optic fiber coverage ranks last in European comparisons.
Conclusion
New global realities force the German economy to readjust. Yet, domestic economic challenges are immense and will remain relevant for years to come. Not all could find space here. The trajectories for elderly- and childcare, downtrending educational results, and increasingly challenged (mental) healthcare systems, all of which decrease availability and productivity of workers, are worth mentioning.
Politically, mastering these challenges will test Germany’s resilience. The mainstream needs to fend off an ever more extreme – and more successful – rightwing populism, while developing a modern digital administration and welcoming integration culture.