It's time to rev up Germany's economic engine

Germany’s economic strength has long rested on a formidable industrial base, a highly skilled workforce, and robust domestic institutions.

Yet for decades, its prosperity was also underpinned by a fragile trifecta: cheap Russian energy, the security umbrella of the United States, and a thriving export market in China.

Now, global shifts have dismantled these external supports, exposing deep structural frailties. An ageing workforce, chronic underinvestment, and regulatory inertia threaten to entrench stagnation.

With the elections now behind us, the urgency for reform is clearer than ever. After two years of negative growth, Germany must reinvigorate its economy.

The new government has a crucial window of opportunity to recalibrate Germany’s economic trajectory with bold, targeted reforms. At the same time, Germany must continue playing to its strengths to remain competitive in the new global economy.

First up, fiscal policy

A recalibration must begin with fiscal policy. Germany’s constitutional debt brake, which caps the federal deficit at 0.35% of GDP, has significantly constrained public investment.

Fiscal prudence is commendable, but its rigid application has starved infrastructure, digitalisation, and industrial modernisation of much-needed funds. In 2021, public investment stood at 2.6% of GDP – well below the OECD average of 3.4%.

A study from last year estimates that Germany must invest at least €600 billion over the next decade to modernise infrastructure, enhance education, and advance decarbonisation—excluding the additional resources required for increased defence spending.

Public sentiment is shifting accordingly. 55% of Germans now support reforms to the debt brake, including 55% of the CDU voters and 41% of FDP supporters.

Labour shortages present an equally pressing challenge. Germany is on course to lose seven million workers by 2035, a demographic shift that threatens to erode productivity. To lift Germany’s potential growth rate back to its long-term average of 1.1% by 2029 — matching the average from 2004 to 2023 — calculations indicate that an influx of 1.5 million working-age migrants would be required.

Yet immigration alone is insufficient. Germany must also do more to integrate skilled workers into the labour market, particularly by expanding childcare access and reforming tax policies, which currently lead to very steep marginal income tax rates for second earners.

As a result, currently 2.3 million fewer women are employed compared to men, and they are five times more likely to work part-time. Addressing these barriers would help mitigate demographic pressures and boost workforce participation.

Regulatory hurdles remain a significant brake on growth. German companies spend approximately €65 billion annually on compliance and certification, while the 120-day wait for a business licence far exceeds the OECD average.

Simplifying regulation — especially in infrastructure and industrial approvals — would enhance competitiveness. Encouragingly, targeted reforms in the energy sector offer a blueprint: streamlining approval processes for wind and solar projects and anchoring these changes in legislation has ensured faster deployment and long-term regulatory clarity.

Since 2022, Germany has outpaced its European peers in renewable capacity expansion. This model should be replicated across other high-growth sectors.

Exceptional strength is there, too

Despite these headwinds, Germany retains exceptional strengths. Its industrial base remains a global leader in engineering excellence, a vital advantage in the age of green and digital technologies.

Demand for sustainable solutions is soaring, and Germany leads advanced economies in patents for environmentally friendly innovations. It also tops the IMF’s comparative advantage index for green goods, outpacing both the US and China. Its network of highly specialised mid-sized firms, known as the Mittelstand, has long demonstrated resilience and innovation.

These "hidden champions" dominate niche markets by forging strong client relationships and developing cutting-edge technical solutions. Many are now embracing artificial intelligence to optimise production and expand their service offerings.

Germany’s startup ecosystem is also gaining momentum. In 2024 alone, over 2,700 new startups were launched—an 11% increase from the previous year. Optimism among high-tech manufacturing and digital services firms remains strong, attracting investor confidence.

Venture capital investment has surged, rising from under $5 billion annually between 2015 and 2019 to an average of $11 billion today.

The country now boasts 46 unicorns — high-growth companies valued at over $1 billion — most of which operate in tech-driven industries with backing from both domestic and international investors. This signals confidence in Germany’s innovation potential, but sustaining this trajectory requires a policy framework that incentivises long-term investment.

Germany’s capacity for reinvention remains undiminished. The country boasts world-class research institutions, a skilled workforce, and an unparalleled tradition of precision engineering. Yet these strengths must be actively harnessed through strategic reforms.

Policymakers must simplify bureaucracy, rethink outdated fiscal constraints, and invest in the future. Without decisive action, Germany risks stagnation. But with the right reforms, the country can repair and rev up its stuttering economic engine.

Alex Roth serves as Community Lead, Regional Agenda, Europe at the World Economic Forum.