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Chancellor Angela Merkel has brought much prosperity to Germany over the past 16 years. The “sick man of Europe” was transformed into a growth diamond. The economy shot up, especially in the first years after the credit crisis of 2007-2008, often through innovative policies such as a very generous reduction of working hours, the ATV scheme, which helped to retain a lot of jobs.

Merkel also proved to be an excellent crisis manager. The vast majority of Germans are satisfied with how she handled the credit, Greece, euro, refugee and corona crises. Merkel made sure there was stability at home and abroad in troubled times.

But not everything went well. After the elections on September 26, Merkel leaves behind a country that does not seem very modern compared to other economic superpowers. As far as scientific institutes and universities are concerned, Germany has a lot to offer, but it is too fragmented. The Internet structure is feeble. Plenty of bridges, roads, railroads and electricity networks are in need of maintenance, and primary and secondary education often receive low marks when compared internationally.

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    DIW and FDI

    Marcel Fratzscher, the president of the Deutsche Institut für Wirtschaftsforschung (DIW), recently summed it up this way in an interview with German media: “The crisis management was excellent, but Merkel has not done enough to future-proof Germany.”

    Germany needs to modernize very quickly, Siegfried Russwurm, the president of the industry trade association BDI also said last week during a “Future Forward Talk” on what to expect from a new government coalition.

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    BDI president Siegfried Russwurm, Photo BDI

    With regard to climate change, Russwurm reiterates that innovation is essential. “We are going to have to live with the impacts of climate change for hundreds of years to come. That will have major consequences in the world. If Germany wants to remain a leading industrial country, we must invest in solutions that we can export abroad.”

    In his view, Germany will lose out to international competition if there is no technological innovation. Russwurm has gone through all the party programs and reaches the alarming conclusion that “none of the political parties make it clear how we can achieve these goals.”

    Clean technology and bureaucracy

    “A lot has to be done,” Veronika Grimm also says, a professor at the Friedrich-Alexander University Erlangen-Nuremberg. She cites “clean tech” and digitalization as important focal points. Moreover, a new government must not forget about immigration. “Because we need more pairs of hands in industry and in the rest of society,” she says.

    Another concern is the vast bureaucracy and slow procedures. “Companies are often several steps ahead of civil servants,” says futures lobbyist Wolfgang Gründinger. He calls for more incisiveness, courage and vision from the government.

    What he would like to see in the energy transition is a “man-to-moon mentality.” U.S. President John F. Kennedy had a plan to put a man on the moon within 10 years. He ended up taking only eight years to do it by mobilizing all the kinds of forces ranging from the government, to businesses, and science. “That’s the kind of thing we should strive for in the energy transition.”

    Grimm adds, “The technology is largely in place. We have enough bright minds. The important thing now is to have all our ducks in a row.”

    Tax reform

    Bureaucracy is also a cause for concern for DIW President Fratzscher. In addition to the frustrations it creates for individuals and businesses, he says there is a real danger that it encourages clientele politics and an excessive influence of lobbying clubs.

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    DIW president Marcel Fratzscher, Photo DIW

    Fratzscher further sees, as do many other economists, a dire need for a modernization of the tax system. Opinions differ as to which direction to take – more, or less, social. In particular, there are squabbles about the merits of a wealth tax. But not about making the tax system simpler and more favorable to business investments.

    The Munich-based Ifo Institute recently researched the value of taxing R&D spending. Lower taxes appear to work better than subsidies, also because the latter often entail a lot of bureaucracy and paperwork.

    According to Oliver Falck, head of the center for new technologies within the Ifo Institute, that fact should be factored into any discussion on tax reform.

    Start-ups

    Fiscal aid for R&D is especially important for small and medium-sized companies because R&D and product development often involve risky investments, the returns of which are uncertain.

    A survey last year of mid-sized companies found that the rate of investment among SMEs dropped by 46 percent compared to 2006. That is fairly dramatic. Falck thinks a tax incentive could reverse the downward trend.

    ING bank

    According to ING bank’s Germany expert Carsten Brzeski, the investment climate for start-ups is tenuous. By way of comparison with the US, venture capitalists there put 0.6 percent of GDP into start-ups, while in Germany the figure is only 0.06 percent.

    “Start-ups are crucial to the economic future because they have new ideas and challenge old companies and existing structures,” Brzeski says in the report ‘Germany needs to be more than just mediocre‘, published this week.

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    Economist Carsten Brzeski from ING, Photo ING

    Fortunately, the “fear of failure culture” is starting to wane a bit. Breszki names Berlin, Munich and Hamburg as examples of fast-growing start-up incubators. But it is still a long way from Silicon Valley.

    What may help is the German government’s recently launched Future Fund for funding start-ups. It’s a pot filled with 10 billion euros, which Brzeski believes is sorely needed.

    Skepticism

    Summing up, Brzeski states that he expects the next government to come up with a national investment plan that not only focuses on speeding up digitalization, climate measures and better education, but also on commitment to social inclusion and the establishment of a number of future-oriented key sectors in which Germany is able to excel over the coming decades.

    Brzeski is not very positive that it will succeed:

    “The opinion polls indicate that German voters are not really looking for change. The rise of Olaf Scholz and the SPD party suggests a preference for continuity over something new. We are worried that the next government will have to make more economic changes than most voters hope for.”

    Also read our story on how different political parties think about climate and innovation.

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    About the author

    Author profile picture Maurits Kuypers graduated as a macroeconomist from the University of Amsterdam, specialising in international work. He has been active as a journalist since 1997, first for 10 years on the editorial staff of Het Financieele Dagblad in Amsterdam, then as a freelance correspondent in Berlin and Central Europe. When it comes to technological innovations, he always has an eye for the financial feasibility of a project.