{
  "title": "Making Germany Grow Again",
  "sourceUrl": "https://www.imf.org/en/publications/fandd/issues/2025/06/making-germany-grow-again-ulrike-malmendier",
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  "summary": "Long-term, future-focused investment can rescue Europe’s largest economy from stagnation",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Long-term, future-focused investment can rescue Europe’s largest economy from stagnation.\n- The new government’s fiscal plan to fund infrastructure investment and increased defense spending is a start but must be complemented by opening the economy to future-oriented technologies, greater market integration in Europe, and stronger domestic capital markets.\n- Opinions expressed are those of the authors and do not necessarily reflect IMF policy."
    },
    {
      "heading": "Diagnosis: recent performance and outlook",
      "content": "- Germany’s economy has been stagnant for the past five years, growing by just 0.1 percent since 2019.\n- Over the same period, the US economy grew by 12 percent and the euro area as a whole grew by 4 percent.\n- 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.\n- Manufacturing has been in continuous decline since 2018.\n- Output in energy-intensive industries has been declining almost continuously since the start of 2022.\n- Demographics: in the next 10 years, 20 million workers are expected to retire while only 12.5 million enter the labor market.\n- Labor market structure: about one in two women now work part-time."
    },
    {
      "heading": "Key drivers of stagnation",
      "content": "- Labor costs and competitiveness\n  - Labor costs are the main driver of the decline in German price competitiveness, exceeding the effect of rising energy costs.\n  - Sluggish productivity growth combined with rising wages has deteriorated unit labor costs relative to peers such as France and Spain.\n  - A high degree of employment stability and policies such as “short-time work” have slowed structural change and reallocation to more productive sectors.\n- Manufacturing and external environment\n  - Even as foreign demand (especially from China) recovered after COVID, manufacturing and core industries did not benefit and exports failed to rise accordingly.\n  - Rising trade fragmentation, the threat of US tariffs, and increasing competition from China compound the challenge.\n- Energy costs and capacity for high-energy industries\n  - Energy prices remain elevated historically, relative to the US, and relative to many neighboring European countries, reducing attractiveness for energy-intensive industries such as data centers.\n  - 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.\n- Legacy technologies and sectoral concentration\n  - Germany’s leadership in automotive, mechanical engineering, and chemical sectors has led to focus on existing technologies, hindering diversification into high-tech sectors like IT and biotechnology.\n  - Private R&D spending is relatively strong but concentrated in “mid-tech” sectors.\n- Financial system and capital allocation\n  - 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.\n  - Venture capital volume rose from an average of 0.02 percent of GDP in 2011–13 to almost 0.09 percent in 2021–23, but remains insufficient, especially for late-stage financing.\n  - Fewer and smaller venture capital funds in Europe make it hard for start-ups to secure multiple large financing rounds; many larger European scale-ups move to the US for deeper capital markets and better exit options."
    },
    {
      "heading": "Policy recommendations and reforms",
      "content": "- European market integration\n  - Actively push for greater European integration in goods, services, capital, and energy markets to enable firms to scale within a single market of almost 500 million consumers.\n  - EU Commission should prioritize removing remaining nontrade barriers (complex procedures for permits and licenses, lack of tax harmonization) and coordinate harmonization of national regulation.\n  - Coordinate a European build-out of national electricity systems to reduce system costs and increase the efficiency of energy trading; adopt a European perspective rather than focusing exclusively on domestic needs.\n  - Lead efforts to improve and harmonize national insolvency regimes to make it easier to value assets across EU borders.\n  - Strengthen and reform the European Securities and Markets Authority.\n  - Increase venture capital funding at the European level by channeling resources to the European Investment Fund or the European Tech Champions Initiative.\n  - Encourage German households to shift saving vehicles away from savings accounts toward broadly diversified stock market investment to enhance returns and encourage long-term investment.\n- Strengthening domestic capital markets\n  - Build deeper and more liquid capital markets to channel financial capital to productive and innovative companies, especially young and innovative firms and scale-ups.\n- Labor force and participation\n  - Increase domestic labor force by improving workforce participation and attracting foreign-born workers.\n  - Supply high-quality and reliable childcare to increase hours worked by mothers.\n  - Improve incentives for older people to continue working by restricting early retirement and linking the standard retirement age to longer life expectancy.\n  - Speed up administrative immigration processes and extend the Western Balkans Regulation to additional countries to attract more skilled foreign workers.\n- Fiscal strategy and public investment\n  - Use any available fiscal space strategically, prioritizing future-oriented investments that strengthen long-term competitiveness rather than masking structural weaknesses.\n  - The new financial package creates a special fund for infrastructure and exempts defense spending above 1 percent of GDP from the “debt brake.”\n  - Address design flaws of the current debt brake: allow transition phases after crisis years to permit gradual reduction of the structural deficit and consider rules that account for the overall debt-to-GDP ratio.\n  - Tackle political biases favoring short-term benefits over long-term gains; ensure the special fund truly finances additional infrastructure investment and avoid redefining defense spending in ways that encourage consumptive expenditure.\n  - If Germany aims to reach the 2 percent NATO defense spending target in the long term, defense spending should come from the core budget."
    },
    {
      "heading": "Key statistics and exact figures cited",
      "content": "- Growth since 2019: 0.1 percent (Germany)\n- Comparative growth since 2019: 12 percent (US); 4 percent (euro area)\n- Expected potential output growth: 0.4 percent per year (next two years, German Council of Economic Experts)\n- Demographic flows next 10 years: 20 million expected to retire; 12.5 million expected to enter the labor market\n- Venture capital: average 0.02 percent of GDP in 2011–13; almost 0.09 percent in 2021–23\n- Data center electricity demand: potential doubling between 2022 and 2026 (IEA estimate)\n- Energy-intensive industry output decline: almost continuous decline since the start of 2022\n- Manufacturing decline: continuous decline since 2018\n- Defense spending exclusion threshold from debt brake: above 1 percent of GDP\n- NATO defense spending target: 2 percent\n- Female part-time work: about one in two women work part-time\n\nSource: Making Germany Grow Again — ULRIKE MALMENDIER, CLAUDIA SCHAFFRANKA, June 2025.\n\n---\n\n Content in this bundle\n\n- Malmendier\n  - Malmendier (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Malmendier (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/fandd/issues/2025/06/making-germany-grow-again-ulrike-malmendier"
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    "Authors: ULRIKE MALMENDIER, CLAUDIA SCHAFFRANKA",
    "Published: June 2, 2025",
    "Long-term, future-focused investment can rescue Europe’s largest economy from stagnation.",
    "The new government’s fiscal plan to fund infrastructure investment and increased defense spending is a start but must be complemented by opening the economy to future-oriented technologies, greater market integration in Europe, and stronger domestic capital markets.",
    "Opinions expressed are those of the authors and do not necessarily reflect IMF policy.",
    "Germany’s economy has been stagnant for the past five years, growing by just 0.1 percent since 2019.",
    "Over the same period, the US economy grew by 12 percent and the euro area as a whole grew 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.",
    "Demographics: in the next 10 years, 20 million workers are expected to retire while only 12.5 million enter the labor market.",
    "Labor market structure: about one in two women now work part-time.",
    "Labor costs and competitiveness",
    "Manufacturing and external environment",
    "Energy costs and capacity for high-energy industries",
    "Legacy technologies and sectoral concentration",
    "Financial system and capital allocation",
    "European market integration",
    "Strengthening domestic capital markets",
    "Labor force and participation",
    "Fiscal strategy and public investment",
    "Growth since 2019: 0.1 percent (Germany)",
    "Comparative growth since 2019: 12 percent (US); 4 percent (euro area)",
    "Expected potential output growth: 0.4 percent per year (next two years, German Council of Economic Experts)",
    "Demographic flows next 10 years: 20 million expected to retire; 12.5 million expected to enter the labor market",
    "Venture capital: average 0.02 percent of GDP in 2011–13; almost 0.09 percent in 2021–23",
    "Data center electricity demand: potential doubling between 2022 and 2026 (IEA estimate)",
    "Energy-intensive industry output decline: almost continuous decline since the start of 2022",
    "Manufacturing decline: continuous decline since 2018",
    "Defense spending exclusion threshold from debt brake: above 1 percent of GDP",
    "NATO defense spending target: 2 percent",
    "Female part-time work: about one in two women work part-time",
    "**Malmendier**"
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