## MAKING GERMANY GROW AGAIN ## Source details **Canonical URL:** [MAKING GERMANY GROW AGAIN](https://www.imf.org/-/media/files/publications/fandd/article/2025/06/malmendier.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fandd/article/2025/06/malmendier.pdf.md) - [Structured JSON version](/-/media/files/publications/fandd/article/2025/06/malmendier.pdf.json) --- ### Current performance and trajectory - Over the past five years, Germany’s economy has been stagnant, growing by just 0.1 percent since 2019. - By comparison, over the same period the US economy has grown by 12 percent and the euro area as a whole by 4 percent. - The German Council of Economic Experts expects growth to remain sluggish for the next two years, with potential output increasing by only 0.4 percent per year. - Manufacturing has been in continuous decline since 2018. - Output in energy-intensive industries has been declining almost continuously since the start of 2022. ### Structural drivers of stagnation - Legacy technologies - Germany’s leadership in automotive, mechanical engineering, and chemical sectors has left the economy focused on existing technologies and made diversification into high-tech sectors like IT and biotechnology difficult. - Private R&D spending remains relatively strong but is concentrated in “mid-tech” sectors that can no longer deliver the desired growth. - Financial structure and capital markets - Under the traditional German financial system, too much capital is allocated by the banking sector and too little flows to innovative and higher-risk businesses. - Venture capital volume grew from an average of 0.02 percent of GDP in 2011–13 to almost 0.09 percent in 2021–23, but remains insufficient, particularly for late-stage financing. - There are fewer and smaller venture capital funds in Europe than in the US or Asia, constraining multiple large financing rounds and encouraging scale-ups to relocate to the US for deeper capital markets and better exit options such as IPOs. - One important reason is a lack of large institutional investors willing to invest in European venture capital; they prefer less risky assets or larger and established US funds. - Labor market and demographics - The economy does not lack jobs; it lacks workers. - In the next 10 years, 20 million workers are expected to retire while only 12.5 million enter the labor market. - Older workers are less likely to work, and those who do, will work fewer hours, worsening the labor crunch and driving up labor costs. - High employment stability (e.g., “short-time work”) has slowed structural change and reallocation to more productive sectors. - Sluggish productivity growth combined with rising wages has led to a deterioration in unit labor costs relative to other major European economies such as France and Spain. - Energy costs and infrastructure - High energy costs have made Germany less attractive for new energy-intensive industries (for example, artificial intelligence data centers). - International Energy Agency estimates point to a potential doubling of global electricity demand from data centers between 2022 and 2026, which Germany is not ready to provide at low cost. ### European integration as a growth lever - Rationale - No single European country can match the US or Chinese domestic markets; large integrated markets allow businesses to scale up. - The single market offers almost 500 million consumers. - Barriers and priorities - Nontrade barriers persist: complex or burdensome procedures for permits and licenses, and lack of tax harmonization. - The EU Commission should prioritize removing barriers to trade in goods and services and coordinate harmonization of national regulation. - A coordinated build-out of national electricity systems across Europe would reduce system costs and increase efficiency of energy trading; a European perspective is necessary rather than a purely domestic focus. - Capital market integration - Germany should lead efforts to improve and harmonize national insolvency regimes to make it easier to value assets across EU borders. - The EU should strengthen and reform the European Securities and Markets Authority. - Increasing venture capital funding at the European level can be achieved by channeling resources to the European Investment Fund or the European Tech Champions Initiative. - German households need to shift saving vehicles away from savings accounts toward broadly diversified stock market investment to enhance returns and encourage long-term investment. ### Domestic policy priorities and fiscal framework - Labor supply measures - Increase workforce participation and attract foreign-born workers. - Supply high-quality and reliable childcare to increase hours worked by mothers, as about one in two women now work part-time. - Improve incentives for older people to continue working, include restricting early retirement and linking the standard retirement age to longer life expectancy. - Speed up administrative immigration processes and extend the Western Balkans Regulation to additional countries to attract more skilled foreign workers. - Public investment and fiscal rules - Germany has neglected future-oriented public investment in infrastructure, defense, and education. - Parliament has passed a financial package creating a special fund for infrastructure and exempting defense spending above 1 percent of GDP from the “debt brake.” - Two major shortcomings of current reform: - It does not address design flaws of the debt brake, such as the lack of transition phases; after a crisis year the debt brake is reinstated immediately the following year, risking stifling recovery. A more effective approach would allow for a gradual and orderly reduction of the structural deficit. - The rules do not account for the overall debt-to-GDP ratio and apply the same constraints regardless of broader fiscal sustainability. - The reform also fails to tackle political bias favoring short-term benefits for the current electorate over long-term gains for future generations. - The special fund is designated to cover only “additional” infrastructure investment, but practical implementation is unclear. - Redefining what constitutes defense spending may create short-term fiscal space by excluding it from the debt brake, risking consumptive expenditure rather than structural reform; if Germany is committed to reaching the 2 percent NATO defense spending target in the long term, defense spending should come from the core budget. - Any available fiscal space must be used strategically, prioritizing future-oriented investments that strengthen long-term competitiveness rather than masking deeper structural weaknesses. ### Policy summary: steps to revive growth - Pursue deeper European market integration in goods, services, capital, and energy to allow firms to scale. - Harmonize regulations, insolvency regimes, and tax rules to reduce nontrade barriers and improve cross-border asset valuation. - Strengthen European-level institutions (for example, the European Securities and Markets Authority) and channel resources to pan-European venture capital initiatives (European Investment Fund; European Tech Champions Initiative). - Build stronger domestic capital markets and encourage households to shift savings toward diversified equity investments. - Use fiscal space to finance future-oriented investments in infrastructure, defense (from the core budget if meeting 2 percent NATO target), education, and digitalization rather than short-term consumptive spending. - Reform the debt brake to include transition phases after crises and to account for the overall debt-to-GDP ratio, allowing gradual reduction of structural deficits. - Expand labor supply via childcare, incentives for older workers, immigration reforms (including speeded administrative processes and extension of the Western Balkans Regulation), and restrictions on early retirement linked to life expectancy. _Authors: Ulrike Malmendier and Claudia Schaffranka. F&D, JUNE 2025._ --- _Source: https://www.imf.org/-/media/files/publications/fandd/article/2025/06/malmendier.pdf_