Germany voted and Europe held its breath. Despite the bleak economic performance and outlook of Germany, the promise of ‘economy-centred election campaigns’ never materialized. Yet the list of economic policy homework for the new government is long and urgent. The possibility to form a two-party government of the Christian conservative CDU/CSU and social democratic SPD now needs to be translated into political action – in both Germany and the EU.
A new German federal government has many tasks: Mastering global upheavals, reducing uncertainty, regaining trust. Above all, it must tackle four key areas of economic policy in order to get out of the recession and back on a sustainable growth path. In these four areas, it is important to act quickly and decisively as well as to set a long-term course. There are enough constructive proposals for solutions in all areas. And green ideas and impulses will continue to play a role in all areas.
1. German economic policy must be European
European action on security and industry
In recent weeks, the democratic parties in Germany have credibly emphasised that they want to respond to the major geopolitical upheavals in the US-EU-Russia-China quadrangle with a European approach. This maxim must now be turned into concrete action. Germany must show leadership here and prove itself to be a reliable European partner. A strong European Union is and remains an absolute necessity in order to be able to respond to the increasing economic and security policy challenges in a changing world. Germany must work towards this and will ultimately benefit from it. Last year, we drafted an outline for such an orientation (Read: Strengthening the EU’s Global Capacity to Act). It shows that it is often not a lack of instruments that stands in the way of the EU's ability to act, but rather the insistence on national particular interests, an unwillingness to take decisions and a lack of will to find genuine European compromises.
The situation is similar with the EU Commission's competitiveness agenda: Germany must drive it forward and at the same time must not push through national interests with a crowbar - a balancing act. Economists at the International Monetary Fund have calculated that European industrial policy coordination offers clear advantages over national solo efforts, which must now be leveraged. A functioning European single market is also more important than ever for Germany, especially in light of growing tensions with its trading partners in China and the USA. A new study sponsored by the Heinrich-Böll-Stiftung European Union (How to build and fund a better EU green industrial policy) sets out several ideas for such a European industrial policy. The aim of this agenda must remain to combine economic competitiveness and climate protection - through a focus on green technologies (which are already growing twice as fast as the rest of the economy), lowering energy prices by expanding renewable energies and building a circular economy. The European Commission's Clean Industrial Deal announced for the coming days can build this bridge and must also be a priority for a government without green participation. In order to make this strategy effective, projects with European added value must also be backed by funds in the EU's upcoming Multiannual Financial Framework, as our analysis on the sustainability of the European budget shows (Read: Shaping the EU's Financial Architecture for the Future).
2. Create planning security for climate and energy
Climate protection means modernisation
Germany cannot afford to take a lurching course in the major industry transformations we are undergoing. Products and business models from the last century will not enable us to reverse the trend. This has actually been recognised long ago: The decarbonisation of the energy system is in full swing, the automotive industry has adapted to electrification. Almost all potential growth sectors of the future are based on green technologies (“clean tech”). The climate targets are beacon and the driving force behind this modernisation. A new government needs to make a few clear statements, not only to comply with international agreements, but also to reduce the uncertainty that has spread throughout the economy:
- Firstly, there will be no more shaking of agreements made, such as the gradual phasing out of the combustion engine and oil- and gas heating.
- Secondly, the funding framework reflects this forward-looking approach, which means that there can no longer be any sudden stops, such as with the premiums for electric cars.
- Thirdly, we are pursuing the path of clean modernisation with international partners - in such a way that both sides benefit. The USA is withdrawing from cooperation with other countries; Europe can and should fill this gap, at least in part. After all, development cooperation and climate financing are not charity. For example, studies by the International Energy Agency have shown for years how important climate partnerships are for effectively reducing emissions.
Reducing electricity prices, securing the energy transition
On the other hand, politicians must make it clear: Electricity prices are falling, and reliably so. This trend is going into the right direction – despite the concern over energy price shocks. In 2024, both the industrial electricity price and the electricity price for private households in Germany fell significantly, despite all fears in light of the nuclear phase-out. New - urgently needed - investments in grid expansion and renewable capacities will be expensive at first, but will pay off in the long term. The state must help to spread these costs and keep prices down. This also means reliability for planning and investment. Many companies and households have prepared themselves for falling electricity prices, invested accordingly and are reliant on a future German federal government to deliver on the promises of the energy transition.
The dual challenge of making large investments without overburdening consumers makes a European strategy necessary here too. A European grid expansion that is geared towards the advantages of renewable energies is more cost-effective in the long term (Read: European energy infrastructure for 100% renewables).
3. Preparing public finances for the future
A landmark budget and new debt rules
The increasing distancing of the USA from its very active role in European defence, in particular the shocking turning away from Ukraine, has led even conservative economists and austerity fans to realise that we cannot address the multiple crises of the present by saving more. At the very least, the debt rules in Germany and Europe need to be adjusted in order to establish a European defence capability and to renew the infrastructure and industrial base. Various instruments are available, but here, as with stimulating the private sector (see below), the focus must be on decisiveness, effectiveness and speed. This can mean, for example, combining various measures: quotas for future spending in general and funds for infrastructure, as proposed by the German Council of Economic Experts. Or special funds for the urgent major tasks of defence and decarbonisation as well as the creation of leeway after emergencies and with a view to the economy (Read: Financing public investment in the future following the budget ruling of the German Federal Constitutional Court). It can also mean mobilizing funds for industry and decarbonisation at EU level, while paving the way for necessary defence spending at national level with the help of exemptions.
Distribute the tax burden fairly
The objection that only new debt will not solve our structural problems is absolutely correct. That is why the appeal for courage when it comes to debt is indispensable in conjunction with reforms that lead to greater efficiency on the expenditure side. Corrections must also be introduced as quickly as possible on the revenue side of the state. On the one hand, this means reducing the burden on citizens. However, just as the state should not subsidise unintentionally, it should also not give away billions on the revenue side where it is not necessary. An analysis by the DIW clearly shows how one-sidedly many of the tax proposals in the election campaign would relieve the highest incomes, at great cost to the state.
Instead, in view of the burden of energy prices and inflation in recent years, it is necessary to provide tax relief for the working middle class. On the other hand, irrespective of ideological trench warfare, it is obvious to talk about counter-financing through higher taxation of the richest in our society - be it through higher taxes on top incomes, more consistent inheritance taxes or moderate wealth taxes. This is an imperative of fairness as well as of ensuring plausible financing of public households.
In the long term, however, immense tasks remain for public finances. The German federal budget needs more than the debt brake reform to make public budgets fit for the future. From a “future quota” to a reform of municipal financing and the introduction of double-entry accounting in the German federal budget, there are plenty of ideas - all of which require amendments to the German constitution and a willingness to rethink. This also applies to the other side, where social security contributions are also in great need of reform in addition to taxation. Demographic developments are not negotiated politically. On the one hand, there needs to be a massive increase in the number of contributors (e.g. through higher net immigration), while on the other hand, systems will have to be modernised and consolidated for better or worse in order to reduce costs. Here, too, the principle applies that as many people as possible should be involved, not just the working middle classes.
4. Improve the investment climate
Boosting private investment
At the heart of the German economy's plight are one or more of three key macro indicators, depending on the coloration and priorities of the economic researchers: (weak) productivity growth, (high) regulatory and tax burdens and (low) private investment. The first point has a lot to do with innovation and technology (an online discussion will be dedicated to this topic on 19 March 2025), the second point follows below.
The weakness in investment as the third factor stems from the first two points and the uncertainty mentioned above. However, this weakness can be addressed. A reliable financial and investment policy is central to this. Not only do central banks indicate where the journey is heading with their policies (so-called “forward guidance”), but also government action in fiscal policy sends a signal that the private sector follows (“fiscal forward guidance”, more on this in the Lage der Nation podcast, for example).
Concrete incentives are also needed. All parties have them in their programs, sometimes broadly - and therefore imprecisely - with tax relief for companies, sometimes more precisely with investment premiums. Analyses suggest that both structural relief and more favourable depreciation rules and investment premiums would help, as long as the measures come quickly, comprehensively and reliably.
Real bureaucracy reduction instead of chainsaws
Few demands are as universally supported and as little implemented as the reduction of bureaucracy. The German Federal Ministry for Economic Affairs and Climate action (BMWK) has already launched a debate on potentially superfluous or overly complicated regulations, including practical checks. A new government must go one better. This does not mean falling for populist demands for the abolition of important authorities (e.g. German Environment Agency) or significant due diligence obligations (e.g. Supply Chain Act), i.e. top-down deregulation, but rather bottom-up reduction of specific burdens if they slow down modernisation. Yes, this also means a little more willingness to take personal responsibility and trust in citizens and companies, as is evident in the proposals of Germany’s National Regulatory Control Council. Above all, however, processes must be digitalised, applications simplified and responsibilities clarified. Public administration needs a digitalisation and efficiency agenda, which will ultimately benefit everyone. It is often doubted that politicians are capable of reforming the public sector, but the electoral law reform resulting in the reduction in the size of the Bundestag is a good counter-example.
In the long term, there are two evergreens on the to-do list in order to improve the conditions for investment and attract foreign capital. The Capital Markets Union at EU level must be pushed forward by the next German government and the delicate first steps towards a better venture capital ecosystem in Germany (e.g. through the WIN initiative) must be intensified in order to create space for innovation and make it more attractive.
This article was first published in German on boell.de.
