{{else if Image}}
{{else if Image}}
{{/if}}
{{/if}}
12/6/2023
Markets & Industries
Report
Government aid required for transformation
Germany is in an economic slump and there are many reasons for this. These include the aftermath of the coronavirus pandemic and the war in Ukraine, resulting in higher energy prices. According to the German Economic Institute (IW), however, the difficult situation is primarily due to structural reasons. Politicians have no choice, says the IW: Germany must pursue a location policy.
The IW sees the latest figures from its own location index, which regularly compares the competitiveness of 45 industrialised countries, as proof of this. Germany comes in fourth place after Switzerland, Australia and Denmark. However, the index shows alarming developments: Germany has long been a high-cost country, according to the IW, and the cost situation has recently deteriorated further. Compared to 2018, Germany has fallen from 37th to 44th place - the penultimate place. In addition to expensive energy, this is primarily due to high corporate taxes and personnel costs. In terms of government performance, Germany slipped from 8th to 11th place compared to 2018.
It is important to take a close look at state aid. According to the IW, open-ended, unconditional subsidies harbour the risk of preventing companies from adapting or ending in a subsidy race. If they are aimed at individual companies or sectors, the state presumes to understand where change should take place. Instead, what is needed is broad-based aid that improves investment conditions and incentivises companies to drive the transformation forward.
Competitiveness is deteriorating
The ongoing adaptation to climate change, digitalisation and geopolitical crises is likely to further worsen competitiveness according to IW estimates. On the one hand, because companies currently have to bear high costs for investments from which they will only benefit once the expansion of renewable energies has progressed. Secondly, because geopolitical considerations - for example in the case of China - mean that they have to make decisions that are not worthwhile in microeconomic terms. All of this obliges the state to bear at least part of the costs - otherwise there is a risk of deindustrialisation.It is important to take a close look at state aid. According to the IW, open-ended, unconditional subsidies harbour the risk of preventing companies from adapting or ending in a subsidy race. If they are aimed at individual companies or sectors, the state presumes to understand where change should take place. Instead, what is needed is broad-based aid that improves investment conditions and incentivises companies to drive the transformation forward.
It is questionable to what extent the high individual subsidies for the semiconductor industry contribute to improving the business location on a broad basis. The situation is different with the bridging electricity price proposed by the Minister for Economic Affairs: it is linked to the electricity exchange price. If the sun and wind make electricity cheaper, it will expire - this will maintain the incentive to invest in renewables.
Michael Hüther, Director of the German Economic Institute
