A Seven-Point Plan for Revitalizing Germany

Roland Berger

Roland Berger Strategy Consultants

Prof. Dr. h.c. Roland Berger has seen his company grow to become one of the world's top five business consulting firms. From its foundation in 1967, he led the company as CEO, continued as the Chairman of the Supervisory Board from 2003 and is the company's Honorary Chairman from 2010 to 2020. Prior to founding his strategy consultancy, he studied business administration in Hamburg and Munich, and was employed as a consultant and ultimately a Partner at a leading American consulting firm based in Milan and Boston. He is a member of the American-German Institute Board of Trustees.

Germany is—still—the world’s third-largest economy, following the United States and China and ahead of Japan. However, the German economy has gone through a “lost decade” or at least a “lost five years” (Clemens Fuest).

Indeed, GDP growth has stagnated over the past five years (around +/- 0 percent per year). Besides the pandemic, the main culprit is a severe lack of productivity growth (around +/- 0.x percent per year), which is the key driver of economic expansion. In comparison, the United States sees productivity growth of nearly 2 percent annually.

A major issue is that Germany’s economy still relies heavily on industries and technologies developed 150 years ago (automotive and mechanical engineering) or 100 years ago (chemicals), in which the country was a global leader until about a decade ago. However, Germany has failed to transition into modern technologies like digitalization, artificial intelligence, and biotechnology. Unlike the United States (with major tech firms like Apple, Microsoft, Alphabet, Nvidia, Amazon, Meta, Tesla) or China (Tencent, Alibaba, Baidu, Didi, Huawei, etc.), Germany has not successfully fostered transformative companies or innovated existing industries. Additionally, the country has completely missed the opportunity to digitize and modernize its public administration, resulting in high costs and inefficiencies for both businesses and citizens. (Germany remains a “bureaucratic monster!”)

A major issue is that Germany’s economy still relies heavily on industries and technologies developed 150 years ago (automotive and mechanical engineering) or 100 years ago (chemicals), in which the country was a global leader until about a decade ago.

In addition, for at least fifteen years, government spending has predominantly and increasingly been directed toward consumption, especially in the expansion of the social state (Sozialstaat) into a welfare state (Wohlfahrtstaat), but the amount going into investments has been at a very below-average rate. This applies to physical infrastructure such as transport, energy, and communication as well as, particularly, intangible areas, especially education and research. This is all the more serious since private investments are also stagnating and recently declining. There are hardly any private-public partnerships, even though Germans’ private assets amount to €9.3 trillion.

Four additional factors severely undermine Germany’s global competitiveness and discourage both foreign and domestic investments:

1. One of the highest tax burdens in the world for hardworking citizens and businesses.
2. The highest energy costs—industrial electricity is three to four times more expensive than in the United States.
3. Above average labor costs due to excessive payroll taxes and social contributions.
4. Overregulation and excessive bureaucracy, costing €146 billion annually, with a €24 billion increase in 2023 alone.

Finally, the current government (the former “traffic light” coalition) has increasingly leaned toward state-controlled economic planning rather than the social market economy that once made Germany strong.

The result: Germany is in a recession and heading toward stagflation—with minimal growth, persistent inflation, and, merely because of our demography, rising unemployment coupled with a growing labor shortage.

So, what should a new government with a strong majority in both the Bundestag and Bundesrat do?

1. Appoint the Brightest Minds to Government

The German practice of filling senior government positions with party loyalists after elections must end. Not like Economy Minister Habeck who, for example, appointed 120 Green Party members instead of experienced economists. Government institutions—such as ministries, regulatory agencies, and labor offices—must be staffed with top professionals who are ideologically neutral and selected based on clear, objective criteria.

2. Shift from a Planned Economy Back to a Social Market Economy

What is crucial for Germany and its economy is a regulatory policy based on the guidelines of the social market economy, which makes competition between companies and among citizens and the support of people in social need according to the principles of “promote and require” its priority. Germany must move away from its current planned economy, which wants to steer the economy with subsidies and prescribe technologies, products, and their implementation deadlines in detail for research, companies, and consumers. This hinders our economy, slows down research and development, and disempowers our citizens.

3. Shift Government Spending from Consumption to Investments

Germany’s infrastructure is no longer efficient and is hindering the competitive strength of our economy. An efficient and reliable physical infrastructure for transport, energy, and communication as well as in the intangible areas for education and research is a prerequisite for a prosperous economy. The necessary investments require around €400 billion for physical infrastructure over the next five to ten years and around €100 million in the same period for education from daycare centers to schools and universities. In order to finance these sums, the priorities in the federal, state, and local budgets must be shifted in favor of investment spending. To finance this, the debt brake should definitely be maintained, but exceptions should be allowed for investment expenditure. In addition, private capital should also be mobilized as part of public-private partnerships or privatizations. The creation of state “special funds,” which are really “special debts,” should be considered last. It is better not to delay, but rather to introduce systematic, multi-year project and financing planning.

4. Invest in National Security

We live in extremely dangerous times. Our security and the European peace order are being actively and massively attacked. The new government must therefore live up to its responsibility to protect its citizens and raise at least €200 billion in the next few years to make the Bundeswehr capable of defending itself and fighting wars again. The same methods as mentioned in point 3 are available for financing these investments—with the exception of private funds. The Green Party’s proposal to invest 3.5 percent of GDP in our defense should be taken seriously.

5. Reduce Bureaucracy and Downsize Public Administration with Digitalization & AI

The majority of the increase in employment in Germany can be attributed to the increase in jobs in public administration. So predominantly non-productive, taxpayer-financed jobs have been created—and this has been the case for a good decade! This is due to the increase in regulations, rules, and government intervention, also at the EU level, for business and citizens. On the other hand, there are failures by the government to increase administrative productivity.

There is a lack of critical questioning of administrative tasks and their reduction. Above all, public administration in Germany is at the bottom when it comes to the application of information technology, digitalization, and AI. As a result, the speed and inefficiency of public tasks are too slow and too expensive for citizens and companies. A 20 percent increase in productivity should be possible, as well as a massive improvement in the quality of public services. Reducing bureaucracy and increasing administrative productivity are priorities for every new government.

6. Make Labor Laws More Flexible, Link Wages to Performance, and Modernize Social Security (Especially Pensions)

The knowledge economy and high-tech industries require flexible labor laws regarding working hours, job roles, and wages. Labor costs should rise in line with productivity gains by 2030 to ensure wage increases keep up with inflation. The knowledge society and its high-tech economy need more flexible labor laws regarding working hours, job roles, and pay. Increases in labor costs should be compensated for by increases in productivity by 2030 and offset inflation. In order to enable increased purchasing power for employees, what is needed above all else is high-tech driven productivity growth, effective inflation control by the ECB, and a reduction in non-wage labor costs, duties, and taxes, financed by the proposed budget shifts from consumption to investment spending. In addition, pension reform: Introduce a third pillar of retirement savings, in addition to statutory and employer-based pensions, through an investment fund to which employees and if necessary, employers contribute. Scandinavian countries such as Sweden and Denmark offer role models for this.

7. Drive Structural Change from Industrial to a High-Tech & Knowledge-Based Economy

This transformation must be achieved through market-based policies that encourage research, technology, and economic policy innovation. This is the only way Germany can regain its global competitiveness. Workers will inevitably be affected by these changes, in some cases negatively, that’s why we need proactive qualification of workers, transitional assistance from old jobs to innovative ones through a combination of incentives and requirements and a reformed welfare state, protecting citizens for emergencies rather than fostering dependency.

A Look Ahead

In 2025, Germany will not have a strong government with large majorities for one party in the Bundestag and Bundesrat. Therefore, a new German government will be a coalition, with which the radical reforms described in the first part of this essay will only be able to be implemented to a limited extent. There will mostly be compromises.

In a new government in 2025, the Christian Democrats (CDU) will hold the position of chancellor and a good third of the MPs. To govern, the CDU needs a coalition partner, which can be either the Social Democrats (SPD) or the Greens.

In a black-red coalition, the SPD will hardly support reforms that affect the welfare state and will therefore weaken or even prevent a large part of the necessary changes.

The Greens—at least their pragmatic wing—will support a significantly larger share of the proposed reforms in a black-green coalition. They are more technologically savvy and more open to change—they even demand investments in defense of 3.5 percent of GDP—and they are more willing to innovate the welfare state, which they have already shown by supporting the Agenda 2010 reforms of the Red-Green government under Chancellor Gerhard Schröder. When implementing transformations to combat climate change, as ex-members of the “traffic light,” they should have learned from their mistakes and should therefore be able to be won over to market economy-oriented programs, especially if the CO2 price increases.

By 2030, under these political conditions, Germany should achieve the following:

1. Sustainable economic growth of 2 percent+ per year.
2. Avoidance of stagflation—low unemployment and controlled inflation.
3. Initial progress in transitioning from a traditional industry-based economy to a high-tech economy.
4. A shift in government spending—stabilizing social spending while increasing investment.
5. Significant reduction in bureaucracy, the freezing of the public administration apparatus at its current level and the reduction of the state share of GDP.
6. An increase in the quantity and quality of public and private investments in infrastructure and in the capital stock of our economy.
7. An improvement in Germany’s external security through a strengthened, defense-capable Bundeswehr. Likewise, greater internal security through the stabilization and possible reduction in the number of migrants and their shift from quantity to quality and know-how as a growth driver for our economy.

Overall, this would be a positive development for our economy and society.

At the beginning of the 1990s, reunified Germany and the United States were still about equally wealthy. Today, per capita economic output in the United States is around 50 percent higher. On average, every American earns around €30,000 more per year than a German.

This clearly shows that the right policies, the willingness of companies, their employees, and the population as a whole to change and the focus of science, companies, and investors on state-of-the-art, future-oriented technologies and innovations can significantly shape an economy and society for the better.

This article appeared in German for Convoco. It was translated into English by Anthony Pancrazio.