Which lawsuits are justified?: What is really causing Germany to suffer as a business location

Which lawsuits are legitimate?
What Germany really suffers from as a business location

By Max Borowski
7/5/2023 7:07 p.m

According to some lamentations, Germany, as the “sick man of Europe”, is facing catastrophic deindustrialization. Other analyzes claim it remains one of the best business locations in the world. Make up your own mind.

Germany is slowly emerging from the winter recession. The upswing expected after the corona and energy crisis is being delayed more and more – if it comes at all. What we are experiencing is by no means a temporary economic downturn, as the former economist Bert Rürup recently analyzed. It is a structural crisis. Other economists and above all representatives of companies and business associations join in this pessimistic chorus. Germany is at risk of “de-industrialization”, it is said. The conditions for investments and thus future economic growth deteriorated. The business location is becoming increasingly unattractive. According to Rürup, Germany is in danger of becoming the “sick man of Europe”.

Is Germany really that bad as a business location?

To answer this question, a look at the many studies on the subject should help. In fact, the country index of family businesses compiled by the Center for European Economic Research confirms that Germany as a business location has slipped to 18th place out of 21 evaluated countries. Internationally, Europe’s largest economy is hardly competitive anymore, according to the conclusion of the economic researchers. However, other evaluations on the same topic come to completely different conclusions: In the current World Competiveness Ranking of the International Institute for Management Development, Germany comes in at place 22 out of 64 countries in the upper middle field. In the comprehensive Global Attractiveness Index of the Italian consulting firm Ambrosetti, Germany has been in first place for two years.

So is Germany’s economy going down the drain, or is the location – apart from economic problems – doing well? The right arguments for each position can be picked from the relevant, often interest-driven publications. So let’s take a look at the most important data ourselves to find out where the complaints about Germany as a location are coming from and which of them are justified.

record profits

First the status quo: A look at corporate profits in Germany shows that, as far as the data record it, the companies are doing very well. Last year, they were once again able to generate record profits. According to the Bundesbank survey, German corporations recorded operating profits totaling 2.4 trillion euros. After all, this corresponds to a doubling within 15 years. The statistics only take into account listed corporations, i.e. larger corporations. However, corporate tax data covering all corporations shows a similar trend.

Bureaucracy costs slightly reduced

A recurring lament about Germany as a business location is about the supposedly excessive bureaucracy. He himself can confirm this from his entrepreneurial practice, says Peter Adrian, head of the German Chamber of Industry and Commerce. “Dealing with regulations, applications, notifications and reporting obligations is what takes up most of my time.” In his company, he has to use considerable capacity to work through complex processes. The Federal Statistical Office has been recording the costs of these processes in its bureaucracy cost index for several years. And that does not confirm the perception of business representatives at all. According to the statisticians, the burden of “paperwork” has actually fallen slightly over the past ten years. This refutes the argument of the bureaucracy as a reason for a deterioration in the location conditions. But that doesn’t mean that resources aren’t wasted on bureaucracy. Real estate entrepreneur Adrian says he could use his time better to “work creatively on new solutions and entrepreneurial concepts”.

High labor costs, high productivity

Another point that is often heard – especially in times of high inflation and corresponding wage demands – are labor costs. In international comparison, they are actually high in Germany. In the EU, Germany ranks sixth in terms of costs per hour worked, according to the Institute for Macroeconomics and Economic Research (IMK), which is close to the trade unions. Unit labor costs, i.e. labor costs of companies taking into account the increasing productivity of employees, have developed in Germany in recent years in line with the EU average. At the beginning of the Corona crisis, they even fell at times. There is no sign of a deterioration in competitiveness here. Due to inflation and the shortage of skilled workers, labor costs are likely to rise more sharply again this year. However, this is a development that cannot only be observed in Germany. There are currently no comparable locations with an oversupply of qualified specialists.

Fierce tax competition

Germany is a high tax country. This applies to private individuals as well as companies. At just under 30 percent, according to the OECD, the corresponding tax rates in Germany are higher than in almost any other industrialized country. Although the federal government has not increased corporation tax in recent years, in other countries – especially in the USA – they have been lowered, in some cases significantly, which makes Germany less attractive as a location for some investors. It should be noted that companies in the Federal Republic not only pay the uniform corporation tax, but also the municipal trade tax. Their survey varies so much that companies in some communities bear a comparatively moderate tax burden of less than 23 percent, even internationally, while other communities charge up to almost 37 percent.

Electricity price shock shakes the industry

Complaints from companies about energy prices are not new either. Even if industrial customers get electricity much cheaper than private households or small businesses, Germany has been one of the most expensive locations in the world for electricity, and not just since the most recent energy crisis. Last year, prices shot up from this level to previously unimaginable heights. Electricity prices for private customers and companies have fallen again this year, but by no means to the starting level. The price development for gas, which many industrial companies use both as an energy source and as a raw material, was similar. With the price brakes for electricity and gas, the federal government is cushioning part of the price shock. But for energy-intensive companies that cannot simply reduce their consumption without cutting back production, there remains a considerable additional burden. The concern that there could be price jumps like 2022 again makes Germany appear risky as an industrial location.

Last in public investment

A pound that Germany was able to capitalize on in the past year was its well-developed infrastructure. However, the world-famous autobahns are now increasingly being interrupted by dilapidated bridges, travelers and goods transport customers can hardly rely on the railways anymore, and Germany has never reached the level of many other industrialized countries in terms of mobile phone and broadband network expansion. The reason for this step backwards can be seen in the low level of public investment in Germany. Measured in terms of economic output, the German state spends significantly less money on investments in its fixed assets – i.e. transport routes, digital infrastructure, but also intangible assets such as software. In the case of net investments – if the aging of these fixed assets is taken into account by means of depreciation – the investments were even negative in some years. The value of our infrastructure is declining.

The result shows that many of the lamented problems in Germany as a business location have not worsened at all since the times when the economy was booming. The topic of energy costs stands out. They have actually developed so dramatically from an already high pre-crisis level that Germany is hardly an option as a production location for some companies.