Where has Germany’s growth gone?

Thursday, 19 January 2023

The global economy has been growing fairly steadily at an average of 3 per cent for many decades. In comparison, Germany has growth rates on average of less than 2 per cent, with a downward trend. Germany is in line with the trend of many developed economies. 

There is a lot of speculation about the causes. Because little is known about them.

Two explanatory patterns could explain this trend.

One is called "technological lull". It means a period of slower technological progress. The reasons for the slowdown can be varied. It is conceivable, for example, that falling productivity in research and development is due to the increasing difficulty of the problems to be solved.  

However, the reason for the slowdown in growth could also be a political-economic one.

This second explanation goes as follows: In politically stable societies, structures become entrenched, so that new market participants cannot enter. Interest groups then manage to get politicians to pass laws that bring about regulation so that the participants of these interest groups remain in the market permanently. As a result, competition is weakening, and productivity growth is slowing down. 

In fact, empirical evidence points to a link between interest group activity and sluggish growth. 

What can be done to ignite the forces of growth?

There are crucial approaches. 

First, strengthen competition where possible. Easier said than done, of course, because interest groups are established and influential in developed economies. The challenge here is to build on the traditions of the European internal market and to create open and non-discriminatory competition in all areas of the economy.

Second, make it more attractive to invest in Germany. More attractive in term of companies means higher returns. Taxes significantly determine this return on investment. The effective average tax burden on corporate profits in Germany is 26.6 per cent. No European OECD country has a higher effective average tax burden.

Third, the burden of taxes and duties is also comparatively high for the other production factor, labour. OECD data for Germany for 2021 shows a tax and levy burden of 37.8 per cent for a childless single person with an average income. The average across OECD countries is 24.6 per cent.

As you can see, the way (back) to more growth is not easy. But necessary. Inventive resource-saving growth could be a prerequisite not least for a successful fight against climate change.

Onwards, 

The Strolling Economist

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