Executive Summary
Over the past 25 years, megatrends such as demographics, climate change, and artificial intelligence (AI) advancements have reshaped global economies. Poised at the crossroads of these transformations, Germany faces challenges distinct from its earlier struggles as the “sick man of Europe”, raising doubts about its economic model. To navigate these complexities, Germany requires a “2030 Leitbild” – a strategic vision that strengthens growth foundations and charts a path to future prosperity. Ten priority areas emerge as crucial to restarting Germany’s growth engine:
1 Liberation from fiscal self-restraint: Germany's federal budget shortfall, driven by rising defense and investment costs, demands a comprehensive strategy. Public investments in decarbonization, transport, education and defense require reforms such as a dynamic debt brake and "golden rule plus" based on investments. Raising the structural deficit ceiling to 0.5-1% of GDP could support critical investments, but structural reforms remain essential.
2 Transition to a green energy system to secure competitiveness: Short-sightedness has delayed Germany's energy transition, leading to higher costs, slower decarbonization, and infrastructure development that lags the growth of renewable energy. Achieving long-term sustainability requires EUR1tr in investments by 2035, equally divided between upgrading energy infrastructure and expanding renewable capacity.
3 Rebuilding public infrastructure after years of neglect: German public investments have plummeted from 1% of GDP in the 1990s to zero. Rebuilding capital stock will require an additional EUR600bn over the next decade. Critical priorities include infrastructure, education, housing, and green energy while fostering public-private partnerships to enhance financing and job creation.
4 Unleashing labor supply to close the demographic gap: Germany’s working-age population is projected to decline from 52mn to 43mn by 2050. Proactive labor market policies must increase workforce participation among women, older workers, and immigrants. Strategies include removing barriers to work and reducing discrimination, while implementing incentives such as tax breaks and integration programs.
5 Ensuring generationally fair pensions: Germany's old-age dependency ratio is expected to increase from 34% to 51% by 2050, demanding balanced pension policies. Reforms should curb cost increases, incentivize later retirement and expand capital-funded options like occupational pensions, especially for low-income groups, while addressing double taxation of retirement income.
6 Reforming the tax system to boost motivation and incentivize work: Germany's current tax system places a high burden on labor, with an effective personal income tax at 29% and corporate tax at 29.9% in 2023, while taxing wealth at only 0.4%. To enhance competitiveness and encourage economic participation, reforms should focus on eliminating the solidarity surcharge, simplifying income tax brackets, and reducing corporate taxes to 25%. These changes would create a more balanced system that supports growth and incentivizes productivity.
7 Revitalizing innovation: German R&D investments of 3.1% of GDP are insufficient to stake leadership claims in future technologies industries such as AI, robotics, quantum and green technologies. Doubling R&D investment to 6% of GDP through tax breaks and strategic institutional support is critical for innovation and competitiveness.
8 Reducing regulatory hurdles: Despite progress, bureaucratic costs in Germany amount to EUR146bn annually, with direct costs estimated at EUR65bn. Reducing red tape by 25% over four years, digitalizing procedures, and streamlining EU negotiations are key to enhancing efficiency and competitiveness.
9 Strengthening European leadership: A strong Franco-German partnership is vital for the EU’s success, yet recent internal conflicts – Germany's internal coalition conflicts and French political turmoil – have weakened collaboration. A new EU Commission and German government offer a fresh start. Germany must reinvigorate its role by supporting common debt mechanisms, deepening the Capital Markets Union (CMU), promoting equity market growth, incentivizing savings reorientation, and simplifying regulations.
10 Engagement for fair trade relations: Germany's export-led model, with exports at 43% of GDP, is under strain as globalization wanes. Declining exports to China, now at 6% of the German total, are partially offset by gains to the US, but trade tensions loom. Germany must pivot its value chains towards Europe, negotiate for free trade agreements, and focus on internal growth and industrial policy standardization.