Germany’s struggle to restore reputation amid declining economic competitiveness

Various studies point to Germany’s position as a top global economic location falling under increasing pressure. Key companies like Volkswagen, Bosch, Ford, and Thyssenkrupp are announcing massive job cuts across the country.

According to an article by the German Deutschlandfunk, bankruptcies are on the rise while a growing number of investors want to withdraw their projects from Europe's economic powerhouse. However, amid the growing concern, the article has highlighted some signs of resilience and progress while offering an analysis of the main contributors to the manufacturing giant's declining economic might.

National competitiveness is based on multiple factors, including infrastructure, labour market efficiency, innovation, education, healthcare, and governance, according to the World Economic Forum (WEF). A competitive country fosters sustainable growth, job creation, and business attractiveness. The IMD World Competitiveness Ranking has been created by a Swiss institute and assesses 67 leading economies based on 333 criteria. In 2024, Germany dropped two spots to 24th place, behind China, Saudi Arabia, and Iceland. Just two years prior, it ranked 15th.

Germany's industrial sector shares this pessimism. A survey by the renowned German Ifo Institute shows the steepest decline in competitiveness since 1994. In the EU, Germany ranks among the lowest, alongside Belgium, Austria, and Finland.

The article has determined the following factors to be the main causes for Germany's declining competitiveness:

1. High Energy Costs:

Germany's energy transition, including nuclear and coal phase-outs, increased reliance on natural gas — largely from Russia. After the war in Ukraine, switching suppliers led to a rise in gas prices. Electricity costs remain high due to taxes and fees, hurting energy-intensive industries like the production of steel, chemicals, and glass.

2. Failing Infrastructure and Bureaucracy:

Germany, a country which has become synonymous around the world for high-quality construction and goods, surprisingly suffers from a crumbling infrastructure — poorly maintained roads, unreliable railways, and collapsing bridges have become a common sight. Companies also struggle with bureaucratic red tape and while official data shows a slight reduction in bureaucratic costs since 2012, businesses still face growing regulatory burdens related to climate, labour rights, and environmental protections.

3. Labor Costs and Skilled Worker Shortage:

Labor costs in Germany are above the EU average, with the average hourly wage at €41.30 compared to the EU’s €31.80. Wage increases driven by inflation and union negotiations are expected to keep costs high. Furthermore, the looming retirement of the baby boomer generation is exacerbating the skilled labour shortage which is why previous governments focused on increasing legal immigration to fill this void.

4. Political Uncertainty:

Germany’s domestic political polarization also affects investor confidence. The rise of the right-wing AfD party is seen as damaging to Germany’s image and appeal for skilled workers and international companies.

Germany’s competitiveness is clearly under strain, yet this does not discount the positive developments the country boosting its competitiveness in other areas. Germany remains one of the world’s leading innovation nations. In 2022, investments in research and development reached a record high of approximately €121 billion. Furthermore, Germany continues to play a pioneering role in green technologies within Europe: according to the TÜV Association, more than half of all relevant patents in the EU in 2022 originated from Germany.

Overall political stability and a reliable legal system are also key pillars of competitiveness. It is those strengths, together with innovation, legal reliability, and green technologies that can offer a foundation for recovery from this decline, and with the upcoming elections it remains to be seen if the right policy and investment measures are taken.

By Nazrin Sadigova