High costs, deteriorating infrastructure, inefficient state: the German industrial location has lost ground, shows a new study by the German Economic Institute (IW). The structural change increases the pressure, politicians have no choice: Germany must pursue location policy.
Germany is in an economic slump. There are many reasons for this: on the one hand, there are the aftermath of the pandemic, and on the other hand, the war in Ukraine continues to cause global uncertainty and high energy prices. But the truth is also: The difficult situation largely has structural reasons. This is shown by new figures from the IW location index, for which the IW regularly compares the competitiveness of 45 industrialized countries. Overall, Germany comes in a reasonable fourth place, after Switzerland, Australia and Denmark. However, appearances are deceptive: the index shows alarming developments.
Germany in comparison
Germany has long been a country with high costs, and recently the situation has worsened further. Compared to 2018, the country fell from 37th to 44th place – second to last. In addition to expensive energy, this is mainly due to high corporate taxes and personnel costs.
In terms of government performance, Germany has slipped from 8th to 11th place compared to 2018. This is due to increasingly lengthy planning and approval processes. They hinder investments and drive up costs.
While Germany was world class in terms of infrastructure for a long time, the country is now losing touch with the top. Due to broken bridges, rails and roads as well as slow broadband expansion, Germany falls from second place to sixth place.
State responsible
The ongoing adaptation to climate change, digitalization and geopolitical crises is likely to further deteriorate competitiveness. On the one hand, because companies today have to bear high costs for investments from which they will only benefit once the expansion of renewable energies has actually progressed. On the other hand, because of geopolitical considerations – for example in the case of China – they have to make decisions that are not economically worthwhile. All of this obliges the state to cover at least part of the immense costs – otherwise there is a risk of deindustrialization.
Permanent subsidies are not a solution
However, it is important to take a close look at government aid. Open-ended, unconditional subsidies run the risk of preventing companies from adapting or ending in a subsidy race. If they target individual companies or industries, the state presumes to understand where the change should take place – but only the market can do that. Instead, broad support is needed that improves investment conditions – and at the same time provides companies with incentives to drive forward the transformation.
“It is questionable to what extent the high individual subsidies for the semiconductor industry contribute to improving the business location on a broad basis,” says IW director Michael Hüther. “The bridge electricity price, as proposed by the Minister of Economics, is different: it is tied to the exchange electricity price. If sun and wind make electricity cheaper, it will be phased out – this creates an incentive to invest in renewables. To achieve this, the electricity tax must also be reduced to EU level, network fees must be reformed and an EU internal energy market must be promoted.”