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The head of Germany’s central bank has urged the government to cut taxes, reduce bureaucracy, boost the workforce and increase the carbon levy to rekindle the country’s fading attractiveness to investors.
Joachim Nagel, president of the Bundesbank, said investors were increasingly avoiding Europe’s largest economy, which “lags far behind in terms of growth” in international comparisons.
While there had been “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 was “still facing major challenges” in areas such as renewable energy that would require significant investment to address.
Addressing a conference in Frankfurt on Monday, he cited a recent study by development bank KfW that found Germany would require about €5tn of investment to achieve its goal of climate neutrality by 2045.
But he said corporate investment had been declining recently and there was “widespread concern that investors were increasingly avoiding Germany”. The structural problems deterring investors included high wage and energy costs, a shortage of skilled workers, uncertainty over regulation and a high tax burden, Nagel added.
To encourage more clarity on the need to shift to a carbon-neutral economy, Nagel said the government should increase its carbon levy from current levels of €45 a tonne. “Carbon pricing should be applied as broadly, uniformly and predictably as possible,” he said.
He also suggested reducing taxes, adding that Germany’s high corporate tax rates compared unfavourably with its international peers. “To create an employment and investment-friendly environment, it is important to keep an eye on the tax burden on labour and capital.”
The Bundesbank president said the government should clear the regulatory “traffic jams” stemming from slow and cumbersome bureaucracy, adding this was “clearly evident in the expansion of renewable energies, for example in wind turbines”.
To boost the labour supply to the many sectors suffering from shortages of skilled workers, Nagel said the government should tap into a “hidden reserve” of about 3.2mn people who want to work but cannot as they have to care for children or do not think they will find a suitable job.
Warning 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 plants in Germany, he said that “we must be careful not to get caught up in the thicket of subsidies”.
Nagel said trying to attract investment with subsidies was “often fraught with bureaucracy, increasingly complex government interventions and a constant burden on public finances” and could risk companies postponing investment in the hope of winning state handouts.
“I am convinced that if Germany is to move on to a higher growth path, there is no way around more investment,” he said. “Politics can remove hurdles in many areas, but not all of them.”
Nagel said more than half the companies cutting investment last year cited Germany’s “poor macroeconomic environment” as a factor driving their decision in a Bundesbank survey. It also found that the share of German businesses reducing investment was similar to the share that increased it.
A study of international competitiveness by Swiss university IMD last month found that Germany had lost ground, dropping two places to 24th place out of 67 countries ranked.
The German economy grew 0.2 per cent in the first three months of the year compared with the previous quarter. GDP fell 0.3 per cent last year, making it the worst-performing major economy.
Economists expect consumer spending to pick up after rapid rises in wages and a slowdown in inflation boosted household purchasing power. Data released on Monday showed German inflation fell slightly more than expected from 2.8 per cent in May to 2.5 per cent in June.
Services inflation remained high, with prices in the sector rising by 3.9 per cent year on year in June — the same rate as the previous month.
