Germany is losing competitiveness – a new low in an international comparison of locations

Berlin, Düsseldorf Angela Merkel (CDU) had to listen to criticism from business representatives right at the start. Shortly before she was elected Chancellor in November 2005, there was great anger over the coalition agreement of her first black-red alliance. “Too few reforms, too many tax increases,” complained the then DIHK boss Ludwig Georg Braun.

A good 15 years later, in Merkel’s last year in office, little has changed in this assessment. The Chancellor’s economic and political balance sheet is poor. At least this is how the result of the new “Country Index Family Businesses”, which the Leibniz Center for European Economic Research (ZEW) compiled for the Family Business Foundation and which Handelsblatt has received in advance, can be interpreted.

This international comparison of locations has been carried out every two years since 2006 and thus pretty much covers Merkel’s reign. And in this, according to the country index, Germany has continuously lost competitiveness. While the Federal Republic of Germany was in ninth place 14 years ago, in the 2020 country index it is only 17 out of 21 countries. In the meantime, the group of countries examined has been expanded. But even if you take that into account, there is still a five-place decline.

Germany as a location has now suffered “for a decade from a progressive erosion of its relative competitiveness with continuously poorer placements,” according to the study. “The results have to shake things up,” says Rainer Kirchdörfer, director of the Family Business Foundation, which commissioned the study. “Now it is urgent to make Germany more competitive,” he demands.

USA in front, Great Britain suffers from Brexit

ZEW compares the countries with regard to six location factors: “Taxes”, “Labor costs, productivity, human capital”, “Regulation”, “Financing”, “Infrastructure, institutions” and “Energy”. According to the analysis, tax policy is the main weakness. In terms of corporate taxation, Germany ranks 20th in the country ranking, followed by Japan, bottom of the list.

In the overall ranking, the USA ousted Great Britain from first place last year. The United Kingdom is still in second place, but suffered significant losses in terms of ratings. “This is where the increased financial and political uncertainties of the confusing Brexit process are reflected,” the study says. “The Brexit has so far damaged the location.”

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The Netherlands came in third, performing particularly well in the area of ​​“infrastructure and institutions”. The neighboring country has seen a steady rise in the country index in recent years. Italy is in 21st place in the new ranking, followed by Japan.

In 17th place, Germany has fallen three places compared to the last ranking in 2018. The message is clear, says the study: “In terms of economic policy, Germany has little reason for complacency.” In addition to tax policy, ZEW also attests to location weaknesses in the areas of labor costs and productivity as well as infrastructure.

Entrepreneurs warn against relocating abroad

Family entrepreneurs share the study’s assessment. According to Angelique Renkhoff-Mücke, Germany as a business location has clearly lost its attractiveness in recent years. The managing partner of the awning specialist Warema is also the negotiator of the employers’ association Gesamtmetall in Bavaria and fears that sooner or later this development will lead to “many companies turning away from Germany and looking for locations in more attractive countries”.

Thomas Fischer, head of the supervisory board of the automotive supplier Mann + Hummel, also sees a need for action in terms of competitiveness, “otherwise more and more companies will relocate more and more work abroad”. Corporate taxes should be reduced. In his view, there is a willingness to accept a higher income tax burden.

ZEW also writes in its country ranking that Germany has meanwhile “fallen behind in comparison with European and American competitors” with regard to the tax burden on companies. Economists point to corporate tax reforms in France and the US. From their point of view, Germany must follow suit in order not to be left behind. They divide them into short and long-term measures.

Great need for reform in tax policy

The ZEW experts are currently recommending expanding tax loss offsets due to the corona crisis. In this way, companies could offset past profits against current losses. For months now, trade associations have been demanding that the federal government make these funds more generous. Family entrepreneur Renkhoff-Mücke is also of the opinion that such an expansion will help very specifically companies “that have proven to be excellent taxpayers in the past and are now under pressure”. This applies regardless of whether it is about the costs of the crisis or the high transformation pressure from digitization and climate strategies.

Like ZEW, however, the entrepreneur sees further need for a fundamental tax reform in order to improve Germany’s attractiveness for companies in an international comparison: “Due to the overall tax burden of German companies, we are now increasingly losing international competitiveness, which will permanently weaken Germany as a business location will lead. “

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If you add corporation tax and trade tax together, companies in this country are burdened with an average of more than 30 percent. This puts Germany in the lead among the industrialized countries.

The ZEW therefore recommends lowering the corporate tax rate as a long-term measure. However, it should be taken into account that Germany will be confronted with considerably higher national debt after the crisis and that it may therefore be necessary to increase income. The ZEW urgently advises against plans such as the reintroduction of a wealth tax, as demanded by the SPD. Instead, it suggests closing loopholes, for example in sales taxation.

Number one in financial stability

In the analysis, the ZEW sees the good financial situation of the state and the private sector as one of Germany’s great strengths. In this category there is first place in the country ranking. “This is an asset that is particularly worthy of recognition in the corona crisis with its enormous financial burdens,” write the economists.

It was this financial stability that made a significant contribution to the fact that there was no lasting collapse in investor and consumer confidence in Germany despite the dramatic production losses in the weeks of the lockdown.

Dependent on the digital infrastructure

From the ZEW’s point of view, however, it is less positive that the state’s good financial position is no longer noticeable in the infrastructure. “The effective tax burden, which is high in an international comparison, is also being compensated less and less by an above-average quality of the infrastructure,” says the study. “In terms of the quality of its infrastructure, Germany now appears to be clearly lagging behind its competitors in Western and Northern Europe, but also in North America and Japan.”

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The entrepreneurs have probably noticed the creeping decline of Germany over the past 14 years. “Even when it comes to digital infrastructure, we cannot keep up with international standards,” says Renkhoff-Mücke. The companies could have compensated for a lot through the positive economic development of the last few years, but “the pain threshold has now been reached or, in many cases, has even been exceeded”.

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Natalie Mekelburger sees the Chancellor personally responsible. The CEO of the auto supplier Coroplast is concerned about the Chancellor’s recent cool relationship with industry. “As if society were divided into two parts, good and bad, climate victims and evil climate killers. At the last appearances in front of the industry one had the impression that they didn’t want to have anything to do with the dirty finches, ”says Mekelburger.

The chairman of the supervisory board at Mann + Hummel, Fischer, also sees the last few years of the Merkel era as “no courageous advancement”. The next candidate for Chancellor should take care of Germany as a business location and its competitiveness; this not only includes tax issues, bureaucracy and the labor market also have to become more efficient and energy costs have to fall. However, Fischer does not want to be misunderstood: “We already feel comfortable in Germany, but we have to do something to keep it that way.”

More: The Merkel era was a time of prosperity and convenience – guest contribution by Clemens Fuest

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