Economics Update July 2023 - Economic policy needs a compass

Continued weak growth of the German economy, high inflation, threatened and actual migration of companies, a clear slipping of Germany in international competitiveness rankings and a fierce dispute about a building energy law: The negative news is piling up in Germany, and it is becoming increasingly clear that it is not just about individual issues.

If one compares Germany's economic development since the outbreak of the Corona pandemic in the first quarter of 2020 with the previous growth dynamic, the extent of the problems becomes apparent: The loss in total economic value added accumulated in three years amounts to more than 500 billion euros without taking inflation into account. With a state quota of about 50 per cent, consumers and companies and the state could therefore have used about 250 billion euros each in addition. The relevance becomes clear if one compares this figure with, for example, the 5 billion euros for the basic child allowance, which is the subject of the current dispute between the Finance Minister and the Family Minister.

Policymakers must address structural causes of economic weakness

That political projects are easier to realise in the environment of a strong economy is truly not a new insight, but it seems to be increasingly forgotten. The pandemic and the resulting loss of prosperity may have been largely unavoidable. The weak growth that has been going on for three years now, with no end in sight, is not. The reference to a supposed or actual standstill under previous governments is just as useless as the reference to the complexity of the crises. Instead, economic policy would be well advised to identify and remedy the structural causes of the weak growth. This would also greatly facilitate the prospects of success for all other political projects, from basic child security to greater defence efforts to mastering climate protection and achieving the climate targets.

Reducing bureaucracy instead of petty regulations

The prosperity achieved in the past decades was largely based on the successful development of companies in a market economy environment. The task now must be to strengthen this framework again. This means reducing bureaucratic obstacles instead of establishing more and more new regulations. The petty prescribing of concrete solutions does not create an innovation-friendly environment. The tax burden on entrepreneurial activity should be limited to what is necessary. In strategic issues such as avoiding too much dependence on China, the state must ensure clarity and not subsidise individual projects with ludicrous sums.

The structural upheavals within the "old" industry in Germany should be taken as an opportunity to make the framework conditions for innovative future fields such as climate protection or digitalisation more open. Only then will Germany still have a chance to return to a promising track in international comparison, to generate growth and thus to master the challenges ahead.