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The head of Germany’s central bank has urged the government to cut taxes, cut bureaucracy, boost the workforce and increase the carbon tax to boost the country’s declining attractiveness to investors.
According to Joachim Nagel, president of the Bundesbank, investors are increasingly avoiding Europe’s largest economy, which is “lagging far behind in terms of growth” in international comparisons.
While there were “some economic bright spots” for the German economy, which returned to growth in the first quarter of this year after a year of contraction, Nagel said it “still faces significant challenges” in areas such as renewable energy, which will require significant investment to address.
Speaking at a conference in Frankfurt on Monday, he cited a recent study by development bank KfW that found Germany would need around €5 trillion in investments to achieve its goal of climate neutrality by 2045.
But he said business investment had been slowing recently and there was “general concern that investors were increasingly avoiding Germany.” Structural issues deterring investors included high wage and energy costs, a shortage of skilled workers, regulatory uncertainty and a high tax burden, Nagel added.
To provide further clarity on the need to transition to a carbon-neutral economy, Nagel said the government should increase its carbon tax from the current level of €45 per tonne. “Carbon pricing should be applied as broadly, uniformly and predictably as possible,” he said.
He also proposed cutting taxes, adding that Germany’s high corporate tax rates compare unfavorably with those of its international peers. “To create an employment and investment-friendly environment, it is important to keep an eye on the tax burden on labor and capital.”
The Bundesbank president said the government must solve regulatory “traffic jams” resulting from slow and cumbersome bureaucracy, adding that this is “clearly visible in the expansion of renewable energy sources, for example in wind turbines”.
To boost labor supply in the many sectors facing skilled labor shortages, Nagel said the government needs to tap into a “hidden reserve” of about 3.2 million people who want to work but cannot because they have to care for children or don’t think they can find suitable jobs.
He warned the government against relying heavily on financial incentives, such as the tens of billions of euros it has offered to chipmakers to build new semiconductor factories in Germany, saying that “we must be careful not to get caught in the thicket of subsidies” .
Nagel said that attracting investment with subsidies “often involves bureaucracy, increasingly complex government interventions and a constant burden on public finances” and that there is a risk that companies will delay investments in the hope of winning state support.
“I am convinced that if Germany wants to move to a path of higher growth, there is no other way out than more investments,” he said. “Politics can remove obstacles in many areas, but not in all.”
Nagel said more than half of companies that cut back on investments last year cited Germany’s “poor macroeconomic climate” as a factor driving their decision in a Bundesbank survey. It also found that the share of German companies cutting back on investments was similar to the share that increased them.
A study on international competitiveness by the Swiss university IMD last month found that Germany has lost ground, dropping two places to 24th out of 67 countries ranked.
The German economy grew by 0.2 percent in the first three months of the year compared to the previous quarter. GDP fell by 0.3 percent last year, making it the worst performing major economy.
Economists expect consumer spending to pick up after rapid wage increases and a slowdown in inflation boost household purchasing power. Data released on Monday showed German inflation fell slightly more than expected, from 2.8 percent in May to 2.5 percent in June.
Inflation in the services sector remained high, with prices in the sector rising by 3.9 percent year-on-year in June – the same rate as the previous month.