## Making Germany Grow Again ## Source details **Canonical URL:** [Making Germany Grow Again](https://www.imf.org/en/publications/fandd/issues/2025/06/making-germany-grow-again-ulrike-malmendier) ## Other formats - [Markdown version](/en/publications/fandd/issues/2025/06/making-germany-grow-again-ulrike-malmendier/index.md) - [Structured JSON version](/en/publications/fandd/issues/2025/06/making-germany-grow-again-ulrike-malmendier/index.json) - [Bundle manifest](/en/publications/fandd/issues/2025/06/making-germany-grow-again-ulrike-malmendier/bundle-manifest.json) ## Bibliographic details - Authors: ULRIKE MALMENDIER, CLAUDIA SCHAFFRANKA - Published: June 2, 2025 --- ### Overview - 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. ### Diagnosis: recent performance and outlook - 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. ### Key drivers of stagnation - Labor costs and competitiveness - Labor costs are the main driver of the decline in German price competitiveness, exceeding the effect of rising energy costs. - Sluggish productivity growth combined with rising wages has deteriorated unit labor costs relative to peers such as France and Spain. - A high degree of employment stability and policies such as “short-time work” have slowed structural change and reallocation to more productive sectors. - Manufacturing and external environment - Even as foreign demand (especially from China) recovered after COVID, manufacturing and core industries did not benefit and exports failed to rise accordingly. - Rising trade fragmentation, the threat of US tariffs, and increasing competition from China compound the challenge. - Energy costs and capacity for high-energy industries - 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. - 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. - Legacy technologies and sectoral concentration - 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. - Private R&D spending is relatively strong but concentrated in “mid-tech” sectors. - Financial system and capital allocation - 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 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. - 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. ### Policy recommendations and reforms - European market integration - 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. - EU Commission should prioritize removing remaining nontrade barriers (complex procedures for permits and licenses, lack of tax harmonization) and coordinate harmonization of national regulation. - 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. - Lead efforts to improve and harmonize national insolvency regimes to make it easier to value assets across EU borders. - Strengthen and reform the European Securities and Markets Authority. - Increase venture capital funding at the European level by channeling resources to the European Investment Fund or the European Tech Champions Initiative. - 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. - Strengthening domestic capital markets - Build deeper and more liquid capital markets to channel financial capital to productive and innovative companies, especially young and innovative firms and scale-ups. - Labor force and participation - Increase domestic labor force by improving workforce participation and attracting foreign-born workers. - Supply high-quality and reliable childcare to increase hours worked by mothers. - Improve incentives for older people to continue working by 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. - Fiscal strategy and public investment - Use any available fiscal space strategically, prioritizing future-oriented investments that strengthen long-term competitiveness rather than masking structural weaknesses. - The new financial package creates a special fund for infrastructure and exempts defense spending above 1 percent of GDP from the “debt brake.” - 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. - 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. - If Germany aims to reach the 2 percent NATO defense spending target in the long term, defense spending should come from the core budget. ### Key statistics and exact figures cited - 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 *Source: Making Germany Grow Again — ULRIKE MALMENDIER, CLAUDIA SCHAFFRANKA, June 2025.* --- ## Content in this bundle - **Malmendier** - [Malmendier (Markdown version)](/-/media/files/publications/fandd/article/2025/06/malmendier.pdf.md){rel="alternate" type="text/markdown"} - [Malmendier (PDF)](/-/media/files/publications/fandd/article/2025/06/malmendier.pdf){rel="external" type="application/pdf"} --- _Source: https://www.imf.org/en/publications/fandd/issues/2025/06/making-germany-grow-again-ulrike-malmendier_