More Growth Through Less Red Tape

Jörn Quitzau

Bergos AG

Joern Quitzau is a Geoeconomics Non-Resident Senior Fellow at AGI. He is Chief Economist at Bergos, a private bank based in Switzerland. He specializes in economic trend research and economic policy. Joern Quitzau hosts two Economics podcasts.

Prior to his position at Bergos, Joern Quitzau worked for Berenberg in Hamburg (2007-2024) and Deutsche Bank Research in Frankfurt (2000-2006) with a special focus on tax and fiscal policy.

Dr. Quitzau (PhD, University of Hamburg) was a Visiting Fellow at AGI in April 2014 and September 2022 and an American-German Situation Room Fellow in April 2018.

The United States of America is in a much better economic position than the countries of the European Union. This is not only reflected in the corporate structure, with the big tech companies based in the United States. It is also reflected in the growth rates of recent years and, above all, in the growth potential, which at around 2 percent is roughly twice as high in the United States as in the eurozone. Germany’s growth potential is currently a meager 0.3 percent.

As the Trump administration has been tripping itself up over the past few months, the economic gap between the transatlantic partner countries is likely to narrow. However, it would be better if the United States could maintain its growth potential and the economic gap between the two regions shrinks because the European Union sets a new economic policy course and thus increases growth potential. The new German government could make a contribution to this, as growth and economic efficiency were not always at the top of the political agenda for the previous government.

One reason for the weak growth in Europe is the high level of regulation. Regulation is fundamentally important to steer market processes in an orderly manner and to ensure a balance of interests between the various economic and social players. However, it is crucial that the social costs of regulation do not exceed its benefits. Regulation entails considerable bureaucratic costs, from which both companies and citizens suffer. There is sufficient evidence that these bureaucratic costs are now unreasonably high in Germany and Europe.

The situation could be improved if, firstly, the competences were located at the appropriate level (national, state, local) and, secondly, national and European regulations were better coordinated. According to the principle of subsidiarity, regulations should only be made at the EU level if the objectives pursued cannot be sufficiently achieved at the national level or if the EU level has efficiency advantages. Typically, problems that stop at national borders are the responsibility of the nation-states. Problems that do not stop at national borders (supra-regional public goods), on the other hand, are the responsibility of the EU.

In theory, the responsibilities can usually be clearly defined. In practice, however, there is often an inefficient coexistence of national and supranational allocation of competences. Here are two examples:

1. Climate policy: Global warming is a global phenomenon and therefore requires global policy measures in principle. In the absence of a global institution that could enforce a globally standardized climate policy, climate policy belongs at least at the European level, but for sure not at the level of individual nation-states. Since 2005, the EU has had a very successful climate policy instrument in the form of the European Emissions Trading System (EU ETS), which Norway, Iceland, and Liechtenstein have joined alongside the EU member states.

To date, emissions from energy-intensive facilities in particular have been covered, especially from the electricity and manufacturing industries. Intra-European aviation has also been covered since 2012 and maritime transport since 2024. From 2027, the building and transport sectors will also be subject to an emissions trading system. This trading system effectively limits CO2 emissions so that the EU’s climate policy targets can be precisely controlled. All necessary adjustments to save the desired amount of CO2 emissions will be made via the price mechanism and thus at the lowest possible cost to the economy.

The price mechanism relies on the “invisible hand of the market” (Adam Smith) and can radically simplify climate policy. Detailed political control with subsidies and small-scale regulations—keyword ‘Heating Law’—is not necessary if you rely on emissions trading as the leading instrument of climate policy.

The new German government could do a good job of reducing bureaucracy if it were to campaign at the European level to prioritize emissions trading and price mechanisms instead of detailed fine-tuning when it comes to climate protection. However, it remains to be seen whether the new German government will follow this path. Although the party of the new Federal Chancellor Friedrich Merz, the Christian Democrats (CDU/CSU), is committed to emissions trading as a key instrument, it has also agreed to Germany achieving climate neutrality by 2045. That is five years earlier than the climate neutrality target for the EU as a whole. Earlier climate neutrality is an honorable goal, but this ambitious target does not help the climate. After all, if Germany becomes climate-neutral by 2045 and therefore no longer needs emission allowances, these unused allowances will be available to all other participating countries for the remaining five years until 2050. This means that the EU’s total emissions will not fall if Germany becomes climate neutral earlier.

2. Supply Chain Act: The Supply Chain Act, which is intended to regulate companies’ due diligence obligations with regard to human rights and the environment, also threatens to create a web of national and European bureaucracy. In Germany, the law was passed in 2021 and came into force in 2023. At the EU level, a European Supply Chain Directive was adopted in 2024, which is due to come into force in 2028—one year later than originally planned. The national law and the European directive require companies to fulfill extensive documentation obligations. There is also the threat of reputational damage and fines.

The control of the global supply chain aims to strengthen the responsibility of companies for the impact of their entire international business activities. Ultimately, the aim is to increase social justice and environmental quality at the international level—particularly outside the EU. As with climate protection, responsibility for these international issues lies at the EU level. Individual member states would have too little or no impact if their companies comply with high ethical and environmental standards but are squeezed out by foreign companies for whom these high standards are not important. If Europe can have any impact at all, then it is only as a European entity. It is therefore right that the new German government wants to abolish the national supply chain law.

The coalition parties have differing views on the European Supply Chain Directive (Corporate Sustainability Due Diligence Directive, CSDDD). Federal Chancellor Friedrich Merz would also like to abolish the European directive, while Vice Chancellor Lars Klingbeil only wants to reform it, referring to the coalition agreement. In its spring report, the German Council of Economic Experts pointed out that the effectiveness of the Supply Chain Act is uncertain. Studies for the clothing industry would indicate that companies from developing countries could withdraw because the costs of complying with due diligence obligations are very high. As a result, developing countries could lose competitiveness and welfare without the improvements in human rights, environmental, and social standards intended by the Supply Chain Act actually materializing. In this respect, the question of proportionality should also be discussed.

Overall, it is clear that both Germany and the EU have recognized the extent to which high bureaucratic costs are a burden on the economy and society. The European Union is pursuing the goal of reducing information obligations for all companies by at least 25 percent by 2029. For small and medium-sized enterprises, they are even to be reduced by at least 35 percent. Germany could provide a tailwind for this goal. The new basic understanding that Chancellor Merz announced in his first government statement would also be helpful here: In the future, citizens and companies should no longer be met with mistrust, but with trust. Such cooperation and a service mentality on the part of the state could give not only Germany but also Europe a new boost.