A Reflection on German Economic Policies from an outside-in View

Challenges in the German Economy and Industry Politics

Germany, long known for its industrial prowess and economic stability, is facing significant challenges that threaten its position as a leading global economy. Issues such as declining competitiveness in innovation, productivity stagnation, and soaring energy costs are increasingly undermining Germany’s economic strength. Understanding the root causes of these problems is essential for charting a path forward.

1. Innovation: A Decline in Competitiveness

Innovation has historically been a cornerstone of Germany’s economic success. However, in recent years, the country has fallen behind other global leaders in pioneering new technologies and commercializing groundbreaking ideas. This decline can be attributed to several key factors:

1.1 Lack of Government Incentives and Collaboration Programs

Germany’s innovation ecosystem suffers from insufficient governmental support. While other nations like the U.S. and China actively foster innovation through robust grants, subsidies, and public-private partnerships, Germany’s approach has been comparatively cautious and fragmented. The absence of large-scale collaboration programs between academia, government, and industry hampers the development of transformative technologies.

1.2 Limited Domestic Market for Commercialization

Germany’s relatively small domestic market poses challenges for scaling new innovations. Unlike countries such as the United States or China, which have large internal markets that can quickly adopt and commercialize new products, Germany’s businesses often struggle to achieve the critical mass needed for success. This limitation discourages risk-taking and hinders the growth of innovative startups.

1.3 Bureaucracy and Underdeveloped Venture Capital (VC) and Private Equity (PE) Sectors

Red tape and excessive bureaucracy slow down innovation in Germany. The process of obtaining permits, funding, and approvals is cumbersome and time-consuming. Additionally, Germany’s VC and PE industries remain underdeveloped compared to their counterparts in the U.S. This lack of agile financing options discourages entrepreneurs from pursuing ambitious, high-risk ventures.

1.4 Legacy-Focused Corporate Strategy

Many large German corporations have been overly focused on maximizing profits from legacy technologies rather than investing in genuine innovation. Companies that once led the world in engineering and manufacturing have opted for short-term gains, neglecting the long-term benefits of innovation. This shortsightedness is now catching up with them, as global competitors outpace them with new technologies.

German corporates will need to change their attitude. You cannot win a battle just by putting your head into the sand, pretending the changes happening outside in the world are not happening. Only swimming with the sharks can teach you to swim fast. We need to always assume that competitors are competent and adapt quickly to remain competitive.

2. Productivity: The Role of Work Councils and Mentality

Productivity growth in Germany has also slowed. While Germany is renowned for its high-quality output and efficiency, certain structural and cultural factors are hindering further progress.

2.1 Work Councils and Employee Mentality

Work councils, designed to protect employees’ rights, sometimes create rigid structures that make it difficult to adapt to a fast-paced global economy. While job security is important, it can sometimes lead to complacency. A question I was once asked resonates deeply: "Don’t you believe that providing job security to all employees will make them more motivated and productive?" My reflection on parenting provides a clear answer: No.

In raising my own child, I found that a balance of love and discipline is essential. Similarly, managing employees effectively requires balancing support and accountability. Relying solely on intrinsic motivation can be a flawed strategy. Many jobs, by nature, involve repetitive and mundane tasks that demand discipline and self-management. Even champions must endure routine training to achieve peak performance.

In Germany, by protecting the "downside" for the majority, we inadvertently sacrifice the "upside" for the most talented and motivated employees. This rigid system limits meritocracy and stifles productivity. To remain competitive, Germany must embrace a culture that rewards excellence and incentivizes high performance.

3. Energy Costs: A Major Competitive Disadvantage

Germany’s commitment to green energy, while admirable in principle, has led to unintended economic consequences. High energy costs are eroding the competitiveness of German industries and creating vulnerabilities in the energy supply.

3.1 The Green Energy Agenda’s Consequences

The transition to renewable energy has delivered two notable outcomes:

1. Skyrocketing Energy Prices: German industries and households face some of the highest energy costs in Europe. This increases production costs, making German goods less competitive on the global market.
2. A Booming Solar Industry in China: Much of the benefit of Germany’s green energy policies has been captured by China, which now dominates the global solar panel market.

Need for Reliable and Affordable Energy

Germany’s lack of natural resources further complicates its energy strategy. The country’s reliance on Russian gas underscored the dangers of energy dependence, especially during the recent geopolitical crisis. To achieve energy independence, Germany needs a reliable, cost-effective energy source that does not hinge on foreign suppliers.

While renewable energy remains a long-term goal, the country must address its immediate energy needs pragmatically. Striking a balance between sustainability, affordability, and reliability is crucial for maintaining Germany’s industrial strength.

5. Strategic Framework: Aligning Mega Trends with Germany’s Competitiveness

Germany’s future success lies in aligning its unique strengths with emerging global mega trends. Key trends such as AI and digitalization, the aging global population, and the balance between environmental protection and rising electricity demand provide opportunities for strategic positioning.

5.1 AI and Digitalization

Germany’s industrial heritage gives it a natural advantage in AI applications for engineering, manufacturing, and automation. Although Germany missed the early race in developing foundational AI models like large language models (LLMs), there is still vast potential in industry-specific AI solutions.

A decade ago, Siemens introduced the term Industry 4.0, envisioning a future of smart factories and AI-driven production. However, progress has been slow, and Siemens, despite its early leadership, has struggled to translate this vision into widespread, practical adoption. To fully realize the potential of Industry 4.0, the government and private sector must collaborate more effectively to accelerate innovation, reduce bureaucratic hurdles, and fund AI research tailored to industrial applications.

5.2 Healthcare and Aging Population

Germany's healthcare sector holds significant potential in cancer therapy, particularly through advancements in particle therapy and mRNA technology. Siemens Healthineers has been instrumental in developing particle therapy centers, such as the Marburg Ion-Beam Therapy Center (MIT), which utilizes protons and carbon ions for precise tumor targeting. Despite initial challenges, MIT has treated approximately 2,500 patients since 2015, with ongoing research in radiation biology and medical physics.

Additionally, BioNTech’s mRNA technology offers promising opportunities for personalized cancer treatments. The government should invest in these areas to drive innovation and improve patient outcomes.

5.3 Energy Strategy

The current discussion around subsidizing hydrogen as a primary energy source is misguided. While hydrogen, particularly green hydrogen produced from renewable resources, is seen as a clean energy solution, it comes with significant drawbacks:

1. High Costs: Hydrogen is currently the most expensive form of energy. Subsidizing hydrogen does not solve the fundamental problem of high energy costs for industries and households.
2. Insufficient Green Hydrogen Supply: Germany’s renewable energy resources are not sufficient to produce the amount of green hydrogen needed to power the economy. As a result, reliance on gray hydrogen, produced from coal and gas, becomes inevitable. This not only fails to achieve CO? reduction goals but also perpetuates dependence on resource-rich countries such as Australia and Indonesia for coal and Russia and the U.S. for gas.

A more forward-thinking approach is to invest in atomic fusion technology. Fusion offers a clean, virtually limitless, and independent energy source. Germany was once a global leader in fusion research, and it is ironic that all the energy we harness today ultimately comes from fusion in our sun. By reviving fusion research and development, Germany can achieve true energy independence and affordability while maintaining environmental sustainability.

5.4 Autonomous Driving

The German automotive industry has missed the initial race in autonomous driving due to its conservatism and arrogance. Ten years ago, major German car manufacturers laughed at Elon Musk and dismissed the idea that a "tech nerd" could succeed in building electric and autonomous vehicles. They believed that building a car was so complex that only traditional automakers could do it. Additionally, they were confident that consumers would always prefer the sound and feel of combustion engines.

When Google and Apple approached German automakers for potential collaborations on autonomous driving, the industry’s instinct was to protect their know-how rather than embrace innovation. This defensive approach hindered progress, allowing competitors to take the lead.

However, the race is not lost yet. Neither Chinese nor U.S. companies have reached Level 5 autonomous driving. German automotive companies need to speed up innovation and stop relying on the hope that Elon Musk is misleading the public. Whether or not Musk achieves Level 5 autonomy next year is irrelevant; such an attitude does nothing to help Germany. Instead, German automakers must focus on accelerating their own development and assume that their competitors are capable of achieving breakthroughs.

To catch up, Germany must foster a culture of openness to collaboration and embrace new technologies more aggressively. Automakers need to invest in autonomous driving research, collaborate with tech companies, and accelerate the integration of AI into their vehicles to remain relevant in the evolving global market.

6. Rethink Government Incentives

6.1 Strategic Focus

Stop wasting money on non-strategic industries such as shipbuilding, agriculture, hotels, and brown coal, which are not relevant for the future. Focus instead on future technologies and sectors where Germany has a distinctive advantage, such as AI, digitalization, healthcare, and energy innovation.

6.2 Rethinking Incentive Models

Move away from traditional subsidies and government-funded research programs, which tend to be bureaucratic and unproductive. Instead, the government could establish a fund-of-funds model to support innovative startups, providing a more agile and effective way to foster innovation.

6.3 Accelerated Approval Processes

Develop an accelerated approval process for innovations in future-relevant technologies. The swift approval of COVID-19 vaccines demonstrated that the government can expedite approvals when there is urgency. This model should be replicated to accelerate innovation in other critical sectors.

Conclusion: A Call for Strategic Reforms

Germany’s economic and industrial challenges are substantial but not insurmountable. Tackling the issues of innovation stagnation, productivity decline, and energy costs requires bold reforms:

1. Foster Innovation: Implement comprehensive government incentives, streamline bureaucracy, and strengthen VC and PE sectors.
2. Enhance Productivity: Promote a culture of meritocracy, balancing job security with performance incentives.
3. Secure Energy Supply: Pursue a diversified energy strategy that ensures reliable and affordable energy, with a focus on atomic fusion for long-term independence.
4. Embrace Autonomous Driving: Encourage collaboration between automakers and tech companies to regain leadership in autonomous vehicle technology.
5. Rethink Government Incentives: Refocus on strategic industries, adopt modern incentive models, and accelerate approval processes.

By addressing these root causes, Germany can reclaim its position as a global leader in innovation, productivity, and industrial efficiency.