Supply-side stimulus for growth

Economic policy faces a combination of prolonged weak growth and considerable pressure to transform. Apart from the coronavirus crisis and the subsequent recovery, the economy as a whole has stagnated since 2019. Economic policy has to react and provide the necessary supply-side reform in order to promote growth.

The situation in manufacturing is even more critical. Many industries have not grown since the summer of 2018. The outlook for the current year does not suggest any improvement either. The manufacturing sector is even expected to see a further noticeable contraction. This long phase without dynamic growth prospects alone is weakening companies' optimism, willingness to take risks and willingness to invest. In addition to economic and fiscal braking effects, the deteriorating quality of the location is also having an impact. While the lead in traditional strengths such as the well-developed infrastructure is declining and other locational advantages such as the availability of well-trained employees are in danger of being lost in the face of demographic change, costs in Germany have continued to rise. Taxes are very high by international standards, unit labor costs and energy costs are no longer sufficiently offset by the advantages of the location.

Insufficient investment activity is not a recent phenomenon. Investment performance was already comparatively weak in the years of the last upswing. The reduced quality of the location and the high costs are the result of years of development. A short-term economic stimulus could not eliminate the structural causes of stagnation. What is needed instead is a systematic improvement in the supply side to make investment in Germany more attractive. Conversely, such a supply-side policy program, which is in principle effective in the medium term, can also have a short-term effect. An economic stimulus can arise if investor confidence in the location increases and deferred investments are realized.

The weak investment situation and poor investment conditions are particularly critical because the upcoming fundamental change processes require considerable investment in order to at least secure existing economic activities. Companies are facing considerable investment requirements because they have to adapt their production technologies to the climate protection requirements, which will become much stricter in the coming years. This expenditure typically goes beyond the investments that are necessary anyway if climate-neutral plants are more expensive than conventional ones or if existing plants are taken out of the production process prematurely and replaced. This increases the need for investment, while only a portion of it results in an expansion of production potential and thus, has an impact on growth. However, a stronger expansion of the capital stock would be necessary in order to at least partially offset the lower growth potential due to demographic change.

To enable transformation investments, special framework conditions are required in addition to the generally improved location conditions, which must be in place to enable investments that are not economically viable on their own. This applies, for example, to the replacement of traditi nal blast furnaces with hydrogen-compatible direct reduction plants, which are necessary for the decarbonization of industry but are not economically viable today without appropriate funding. A clear perspective on the future regulatory framework for investment in the necessary gas-fired power plants, storage facilities and other technologies is also necessary in electricity generation.

In order to overcome the current stagnation crisis, a powerful supply-side policy boost is required. Such a program must include both the improvement of the general site conditions and the specific investment conditions for the transformation tasks. The most important measures include:

• Reducing tax burdens: Germany is one of the locations with the highest tax rates, well ahead of important competitors. The general qualities of the location are no longer sufficient to compensate for the cost disadvantages. A clear signal of relief, including the abolition of the remaining solidarity surcharge, is urgently needed.
• Limiting social security contributions: The impending significant increase in social security contributions would make the already scarce factor of labor even more expensive and represent a further increase in the current excessive cost burdens. However, the expectation of rising costs in the future is already making investment in the present more difficult. The reform of pension insurance is therefore part of an economic policy growth agenda.
• Updating infrastructures: Weaknesses in infrastructure are increasingly becoming a business risk. This applies to transport infrastructure, but also to energy networks and digital infrastructure. Planning and implementation of modernization and maintenance must be significantly accelerated.
• Reducing bureaucratic burdens and regulatory density: Companies need a clear signal that economic dynamism is desired in Germany and that investments can be made possible. The high level of regulation and increasing bureaucratic burdens send the opposite signal. The Act on Corporate Due Dilligence Obligations in Supply Chains overshadows all attempts to reduce bureaucracy.
• Digitizing public administration: The lack of digitization in public administration is also becoming a location risk, as processes are unnecessarily complicated and lengthy. Different systems in the various regional authorities should be reduced as far as possible.
• AI offensive: As a cross-sectional technology, artificial intelligence will be decisive for the future development of prosperity. The riskoriented European regulatory approach must be supplemented by a broad-based development and implementation offensive in science, industry and administration.
• Investment-friendly framework for the green transformation: A stable regulatory and funding framework is essential, especially for sectors under high decarbonization pressure, in order to be able to make the necessary investment decisions in favour of Germany as a business location. Simply hoping for competitive energy prices in the future is not enough.
• Securing financing: Various measures such as reducing the tax burden, modernizing and expanding infrastructures or climate protectionrelated transformation financing must be adequately financed. To this end, efficiency potential and savings opportunities in public budgets must be realized. In addition, the existing debt regulations must be reformed appropriately. A fiscal policy that is incapable of acting due to the unwillingness to cut expenditures and tight deficit rules otherwise threatens to become a location and growth risk.