German employers have sounded the alarm by presenting a study on the paths to transforming German industry in Berlin on Tuesday. According to this report, produced by the BCG firm and the Institute of German Economics in Cologne (IW) at the request of employers, around 20% of the country’s industrial added value is currently at risk. “The risk of deindustrialisation linked to the silent departures of many mid-cap companies is constantly increasing,” stressed the president of the Federation of Industry (BDI), Siegfried Russwurm.
The culprits are known. High energy prices, a lack of skilled labor, overly burdensome bureaucracy, high taxes, and decades of cut-rate investment are weighing down a sector that represents 20% of German GDP compared to 11% in the United States and 10% in France. Industry is Germany’s jewel, but it is experiencing a structural crisis. How can its future be secured?
A huge sum
To face global competition, the country should invest 1.43 trillion euros by 2030, the study says. A huge sum but not unprecedented, the authors say. 1.4 trillion in additional investments by 2030 is about 5% of German GDP on an annual basis.
Two-thirds of the spending is expected to be provided by private companies and households. That would leave the state responsible for 460 billion euros of investment. An amount equivalent to 1.6% of GDP. To give an idea of the effort, direct public aid for the reconstruction of East Germany represented 1% of GDP at the time of reunification.
An interdependence
The additional challenge is that this would have to be combined with a “debt brake” enshrined in the Constitution, which limits new borrowing to 0.35% of GDP. “Restoring our competitiveness is the most urgent task in the coming years,” argues Michael Brigl, co-author of the study and head of Central Europe at BCG.
Not investing would endanger highly interdependent industrial sectors, the authors point out. For example, the chemical industry alone generates 53.6 billion euros of added value in other industrial sectors. “Because of this interdependence, the weakness of a single sector can jeopardize large-scale value creation more quickly,” explained Michael Hüther, Director of the IW and co-author of the study.
“Now we need a big clean-up”
For Siegfried Russwurm, this call for investment is in some way a German version of the European project, presented on Monday by the former president of the BCE, Mario Draghi, calling for additional investments of 750 to 800 billion euros per year.
“Political micromanagement and the lack of will to reform the market economy are paralyzing companies,” explained the president of the Federation of Industry. “For Germany to regain its place in international competition, a major clean-up is now needed: we must unleash all the forces of innovation and growth in this country.” And the leader advocated for a “political and industrial agenda” to lead “the greatest transformation effort since the post-war period.”
The study considers it possible to restore competitiveness to German industry and cites 15 possible levers of action, ranging from investments in infrastructure to increasing the use of qualified foreign labor, including the fight against bureaucracy. For the authors, the country is particularly well placed in areas such as climate technology, industrial automation and health.
An emergency situation
But there is urgency. On Monday, machine builders, one of the country’s industrial pillars, said they expected production to fall by 8% in 2024 instead of the 4% previously anticipated.
Offshoring is coming. Chainsaw manufacturer Stihl has shelved plans for a new factory in Germany. Miele has moved operations to Poland and Kärcher to Latvia. According to a Deloitte study of 128 German companies, almost one in two companies said they had already relocated part of their production and intended to continue doing so in the future. These are quiet signals that are seriously worrying German employers.