The German industrial location did not do well last year, shows a new study by the German Economic Institute (IW). The structural change increases the pressure, politicians have no choice: Germany must pursue location policy.
Germany is currently in an economic slump. There are various reasons for this: on the one hand, the aftermath of the pandemic, on the other hand, the war in Ukraine continues to cause global uncertainty and high energy prices. However, the difficult situation also largely has structural reasons. This is shown by new figures from the IW location index, for which the IW regularly compares the competitiveness of 45 industrialized countries. Overall, Germany comes in a reasonable fourth place, after Switzerland, Australia and Denmark. However, appearances are deceptive: the index shows alarming developments.
Comparison in detail
Germany has been a country with high costs for a long time, and recently the situation has worsened further. Compared to 2018, the country fell from 37th place to 44th, the second to last place. In addition to expensive energy, this is mainly due to high corporate taxes and personnel costs. Compared to 2018, Germany has slipped from 8th to 11th place in terms of government performance. This is due to increasingly lengthy planning and approval processes. They hinder investments and drive up costs.
While Germany was world-class in terms of infrastructure for a long time, the country is now falling behind. Broken bridges, rails and roads as well as the slow expansion of broadband mean that Germany falls from second place to sixth place.
responsibility from the state
Competitiveness should not deteriorate further due to ongoing adaptation to climate change, digitalization and geopolitical crises. On the one hand, because companies today have to bear high costs for investments from which they will only benefit once the expansion of renewable energies has actually progressed. On the other hand, because of geopolitical considerations – for example in the case of China – they have to make decisions that are not economically worthwhile. All of this obliges the state to cover at least part of the immense costs - otherwise there is a risk of deindustrialization.
Permanent subsidies are not a solution
State aid must be closely examined here. Open-ended, unconditional subsidies run the risk of preventing companies from adapting or ending in a subsidy race. If they target individual companies or industries, the state presumes to understand where the change should take place - but only the market can do that. Instead, broad support is needed that improves investment conditions - and at the same time provides companies with incentives to drive forward the transformation.
“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 bridge electricity price, as proposed by the Minister of Economic Affairs: it is tied to the exchange electricity price. If sun and wind make electricity cheaper, it will be phased out - this creates an incentive to invest in renewables. To do this, the electricity tax must also be reduced to EU level, network fees must be reformed and an EU internal energy market must be promoted,” explains IW director Michael Hüther.