The Changing Landscape of the German Economy: Stagnation and the Need for Investment

The latest figures confirm the trend: the economy in Germany is stagnating. This is only partly due to a sluggish global economy; the USA is currently experiencing fairly dynamic growth and parts of the EU are also noticeably improving. The bigger problem for Germany at the moment is domestic demand or parts of it. The main concerns are private consumption and investments in construction.

The former is depressed because inflation has noticeably weakened household purchasing power over the past two years. The latter have collapsed due to high interest rates, which are making loans to finance their construction unaffordable for many or at least making it unprofitable. Both add up to a weakness in domestic market demand, which is not just an economic problem, but points to a more fundamental problem in a changed world.

The certainties of the past no longer apply

The geopolitical conflicts and the distortions along global supply chains cast the role of exports as a source of prosperity for the German economy in a new light. The certainties of the past no longer apply. Ever since Russia’s invasion of Ukraine, there have been considerable doubts about the peace-making power of close trade relations. Nationalist outbursts in the USA under Trump and Brexit from Great Britain have already led to breaks in trade relations. New, unpleasant certainties emerge. The most depressing thing is: against the background of increasingly aggressive system competition, trade relationships can become weapons. The global economy has become a pretty uncertain place.

As Peter Bofinger recently did here has found far-reaching consequences for Germany’s export model. First of all, a broader diversification of our foreign trade (de-risking) is necessary in order to avoid concentrated risks. This applies in particular to trade with China and energy suppliers. The second is the intensification of the European internal market. The smooth exchange of public goods between the individual EU economies will only bring the wealth-increasing power of an optimal European division of labor to its full potential. However, there are still many hurdles to this exchange of fundamental goods such as energy supply or mobility in rail transport. The development of European networks should be promoted quickly here. This benefits prosperity in the EU on all sides.

For an era of high investment

With the riskier global environment and the development of a more efficient EU internal market, European economic policy must be reoriented. An era of high investment should begin in the EU. This applies to private and public investments. In the presence of global risks, domestic demand needs to be elevated to a higher expansion path. Such a change, which is fraught with high levels of uncertainty, should be initiated and supported through economic policy. Financial policy is primarily required here. It must drive and support investment dynamics through tax incentives, discounted loans and grants.

Higher burdens on public budgets due to higher spending are inevitable if this dynamic is to develop. There is certainly considerable scope for higher taxes on wealth. However, its use is difficult due to high political resistance and the expected revenue is probably far from sufficient. Therefore, higher national debt cannot be avoided in the coming years if one does not want to miss the necessary adjustments and burden future generations with the burden of economic backwardness and the associated loss of prosperity.

So far, such an offensive economic policy has been opposed by European and especially German fiscal rules. Their reform, which must necessarily be linked to an opening to investment, should be the beginning of an investment era. This would also benefit the currently weakening economy.