The economic prosperity of recent decades is under pressure from geopolitical and technological paradigm changes. The golden years of globalization are over, and increasingly rough winds in global trade are exposing Germany's structural weaknesses.
Last year the German economy posted the lowest growth rate among the G7 industrial nations. A recovery is not yet in sight, especially as global headwinds are threatening to become even stronger under the new US administration. In short, the German economy is facing secular stagnation.
It is perhaps the last chance to set the course for growth again. The top priority of the next federal government should be a policy agenda to preserve Germany's prosperity and security for future generations. Maintaining the status quo would lead not only to a progressive loss of competitiveness and jobs but also to even greater political fragmentation. This could have grave consequences by the 2029 federal election at the latest. With a stagnating economy, Germany also risks failing to meet its existential challenges. Without growth, the country will struggle to guarantee its national security as well as to achieve the green transformation.
An economic turnaround will not be possible without an expansion in fiscal policy. However, debt-financed investments in defense and infrastructure should be carried out strategically to create sustainable growth beyond a short-term cyclical stimulus. They should strengthen productivity growth across the German economy in the long term. Increased defense spending should contribute especially to military research and development that willreap technological spillover effects for the civilian economy. Greater investment in education and healthcare should go toward digitalization rather than serving a short-term increase in personnel. An infrastructure fund would also be better invested in strengthening electricity, transport and communication networks than in subsidizing individual sectors or companies.
A fiscal expansion should not exhaust the next government’s policy agenda. A‘pump-primed’ economic recovery should be used to implement difficult supply-side reforms. Profound changes are needed to put the economy back on a sustainable growth path. These reforms will require a political feat of strength, both in Germany and in the European Union. A reduction in bureaucracy should be a priority, and both tax cuts and deregulation are needed to unleash more private investment, not least in research and development. Private capital markets must be deepened and integrated at the European level. And finally, better work incentives are needed so that a growth recovery spurred by greater investment does not run into speed limits imposed by a growing shortage of skilled workers.
The economic starting point for the next federal government is extremely challenging. If the status quo were to persist, German economic growth would likely remain well below 1% per year until the end of the decade. By comparison, we expect the US economy to grow by an average of up to 3% per year over this period. German per capita income – already a third below that of the US in current US dollars – would thus fall further behind. Over ten years, current growth rates would leave German per-capita income at about half the US level.
