A new study by the Institute of the German Economy (IW) reveals alarming figures. Companies have never before withdrawn so much money from Germany as they did last year. It is mainly foreign investment in Germany that has almost completely collapsed, especially investment from European neighbors, OECD figures show.
Shortage of skilled workers, protectionism, transport turnaround
The IW has defined three main points leading to this development. First, Germany faces a massive skilled labor problem. Second, the German export model is being hampered by growing protectionism. Here, the American Inflation Reduction Act is having a negative impact on Germany's attractiveness, but money from European investment offensives such as the NextGenerationEU program is also not reaching Germany. Ultimately, the elimination of the internal combustion engine is slowing down the automotive industry. As a result, the German economy is losing an important unique selling point.
Details of the investment impact
The net outflow of capital from Germany rose sharply again from 2019 after initially weakening between 2014 and 2018. At around -132 billion USD in 2022, it now reached the highest net outflow recorded to date.
The break in the trend between 2018 and 2019 supports the analysis of economist and former Ifo president Hans-Werner Sinn, "German industry has become heartsick." According to this analysis, the automotive industry has partially lost its competitiveness as a result of excessively high exhaust emission limits, the tightening of which was decided at the end of 2018, as the limits lead to a development away from the combustion engine. As the automotive industry is a key sector in Germany, its stumbling affects the entire German industry.
Energy price increases as well as uncertainties in energy security, which were not reduced by the shutdown of nuclear power plants, are also likely to be a cause of the increased net outflows. This is evident from the higher outflows from the second quarter, which are already fully under the impact of the war from February 24.
Aging is one of the reasons for the skills shortage, which is also a cause of the low growth outlook. Further outflows will be owed to investments to secure important raw materials abroad.
However, the impact of the U.S. Inflation Reduction Act (IRA), which subsidizes investment in the U.S., could only be analyzed in more detail with 2023 data. Nevertheless, increasing protectionism appears to be a factor in Germany's declining attractiveness: Increasing trade barriers as well as subsidies make investments more attractive among trading partners.
Investments within Germany
In 2022, most investments in Germany will come from the United States. However, according to Deutsche Bundesbank data, investment from Europe has plummeted dramatically from €79 billion to €13 billion. Most jobs were announced by U.S. companies, followed by Chinese investors with around 4,600 jobs. According to IW economist Dr. Christian Rusche, the author of the study, many problems are homemade, including high corporate taxes, rampant bureaucracy and an ailing infrastructure.
"For Germany to once again become the top address for foreign investment in the future, the German government urgently needs to take countermeasures."
