1 Background and objectives of the study

Germany is one of the leading countries in an international comparison of business locations. However, this good position is currently under threat. This is because the global challenges of demographics, digitalization, decarbonization and de-globalization are particularly affecting Germany as a traditional industrialized country. US tech companies have almost achieved a monopoly position in key digital services. At the same time, China is rapidly catching up in areas such as digitalization and e-mobility and is putting German car manufacturers, among others, under high competitive pressure. Germany must therefore reinvent its growth model in order to maintain its leading role as an industrial nation - including with a climate-neutral economy. The successful transformation of energy systems is the central key that can give German companies a competitive edge again in the long term.

The study “Germany as an industrial location in times of decarbonization: Comparison of transformation strategies between the USA, EU and Germany” (Demary et al., 2024) examines where Germany stands today in an international comparison of industrial nations and how prosperity and competitiveness can be secured against the backdrop of the current challenges. The strengths and weaknesses of Germany as a business location are analyzed and the different transformation strategies of the EU and Germany are compared with those of the USA. In order to obtain a more comprehensive picture, eight expert interviews were conducted with representatives of large companies and key players from Germany and the USA. Based on the analysis, the report advocates comprehensive reforms in order to stimulate sufficient investment and innovation. This article summarizes the study's key findings and recommendations for action.

 

2 Key findings of the study

• Germany is in an investment and growth crisis. High energy and labor costs, a high tax burden, bureaucracy and a shortage of labor are hampering new investments. These are increasingly taking place abroad and there is a risk of value creation being relocated.
• The European Green Deal is primarily an environmental program and sets strict regulatory requirements through EU taxonomy and reporting obligations. By making EU state aid rules more flexible, the Green Deal Industrial Plan allows national subsidies for private investments. A comparison with the US Inflation Reduction Act (IRA) shows that growth and climate protection do not have to be opposites, but can promote each other. Investment premiums, such as the Investment Tax Credit and the Production Tax Credit, make investments in climate protection profitable in a simple and less bureaucratic way. They also have the advantage over subsidies that they work faster and more predictably and without the cap of a funding pot.
• Germany is lagging behind in terms of start-up activity, although disruptive investments are needed in addition to the innovations of large companies and SMEs. Too much bureaucracy in combination with an administration that is not yet sufficiently digitalized ties up resources that are needed for innovation activities. These innovations are urgently needed for successful decarbonization.
• NRW needs to invest particularly heavily in decarbonization due to its high proportion of industry: With a 21% share of Germany's gross domestic product, 30% of German CO2 emissions are generated here. Although the USA is more open to technology than the EU, the USA is significantly more dependent on fossil fuels. While the EU generates a comparably high proportion of its energy from renewables and nuclear energy, the USA relies on electricity generated from oil and gas.
• When it comes to energy supply, the focus is on renewable energies and sustainable technologies throughout the world. However, the USA and other EU countries are taking a more flexible approach compared to Germany by relying more heavily on carbon capture and storage (CCS) technologies and the integration of hydrogen as an energy source and using nuclear energy or fracking as transitional technologies and to secure energy supplies
• Germany needs a growth and investment strategy. In order to achieve the structural change required to manage the transformation to a climate-neutral economy, additional incentives and better framework conditions must be created. What is needed is both higher government investment in education and infrastructure and the creation of fair international competition for the best solutions to the challenges ahead.

 

3 Recommendations for action from the study

An investment agenda for Germany as a business location should include a combination of reforms in the areas of taxes and subsidies, research and innovation, financial markets, productivity and growth, skilled workers, energy and infrastructure. From tax investment incentives and subsidies that make investments in climate protection profitable, to a reduction in bureaucracy and an acceleration of digitalization in administration, a completion of the European Capital Markets Union, a strengthening of the skilled labour base and urgently needed investments in infrastructure.

The measures for climate protection, productivity and economic growth should be implemented simultaneously so that Germany becomes climate-neutral and remains competitive. With the IRA, the USA has made around 400 billion US dollars available for renewable energies and climate-neutral technologies over 10 years. Transferred to Germany, this corresponds to around 4 billion euros in investment premiums and 2 billion euros in subsidies.

The industry needs a reliable political framework and support when switching from gas to electricity, which is currently still more expensive, and green hydrogen, which is permanently more expensive. This requires a reliable relief perspective for grid charges and the promotion of green electricity and the development of storage systems.

In order to unleash market forces to achieve productivity, competitiveness and climate neutrality, the right framework conditions are now needed in the following fields of action:

 

Taxes and subsidies

• Germany needs impetus to stimulate investment activity. Climate protection and growth do not have to be opposites. Investment premiums based on the US model can help to increase the returns on investments in climate protection.
• Measures on the scale of the IRA would require around EUR 4 billion in investment premiums and EUR 2 billion in grants per year in Germany. This can be financed through budget reallocations. In order to achieve the climate targets, further measures are also needed that require additional financing channels.
• SMEs are an important driver of innovation. Although the funding landscape is well positioned, it is extremely complex. A reduction in the variety of programs in favour of greater flexibility within the programs can improve the fit for companies.

 

Research and innovation

• Start-ups produce the necessary disruptive innovations. The expansion of cooperation with universities in Germany and abroad should be intensified. Cooperation with medium-sized companies should also be intensified. This will make it easier for them to acquire start-ups' technologies through acquisitions and implement them innovatively in their companies. NRW still has great potential here through better networking of universities and start-up activities in order to provide investors with easier access to investment opportunities.
• In order to facilitate access to funding and to free up company resources for their core tasks, administrative services must be digitized quickly and bureaucracy reduced.

 

Financial market

• Large investment companies invest internationally and prefer a large, liquid and integrated capital market. The European Capital Markets Union should therefore be completed so that cross-border financing can be improved and its costs reduced through greater financial market integration in order to provide more equity and mezzanine financing for transformation financing.
• Equity markets support the exit of venture capital investors from their investments and enable them to reinvest the funds released. A strengthening of IPOs, in particular an easing of administrative procedures, is therefore recommended in order to strengthen growth financing.
• Transformation projects are often characterized by above-average technical and market risks as well as a lack of initial returns. This makes the risk/return ratio unfavorable for investors. Amortization accounts can compensate for the lack of initial returns. Subsidies and transformation funds should also be expanded to mitigate risks for investors.
• Liability exemptions and guarantees enable financing if transformation risks only allow financing with very high equity backing from the perspective of banking regulation.

 

Productivity and growth

• Decarbonization will only succeed if productivity and economic growth are strengthened at the same time. Germany needs a climate-neutral and competitive industry. An increase in productivity and growth requires a reduction in bureaucracy, more reliable framework conditions and planning security, a simplification of approval and planning procedures and the digitalization of administration.
• Considerable public and private financing must be mobilized against the backdrop of the necessary investments in infrastructure. Risks must be reduced and planning security created for private investors.

 

Skilled workers

• Due to demographic trends, the shortage of skilled workers is a limiting factor for a large number of projects. In order to increase the supply of labor, additional incentives are needed to take up employment and extend the working phase.
• In order to implement the transformation, Germany must become more attractive for skilled workers and managers from abroad. It is crucial, for example, that the legal framework is also effectively implemented through functioning administrative structures. Particularly in the area of integration, the federal states have a great deal of leeway when it comes to designing funding programs.
• For many professionals, it will only be possible to increase their working hours if childcare services are available. The expansion of childcare is a basic prerequisite for the availability of skilled workers

 

Energy and infrastructure

• The production costs of energy-intensive industry have risen significantly since the energy crisis. Industry needs support in switching from gas to electricity, which is currently still more expensive, and green hydrogen, which is permanently more expensive.
• The state's infrastructure investments must be comprehensively expanded so that the transformation to climate neutrality can succeed. A high degree of cooperation and coordination between the players involved is urgently required. Particularly in view of the challenges of the transformation for individual municipalities, it is advisable to strengthen cooperation between the federal, state and local governments as well as between municipalities.
• From the provision of future networks for hydrogen and CO2 to the implementation of municipal heat planning, investors must be mobilized for financing. Municipal transformation projects are often too small-scale for investors. By bundling and standardizing regional infrastructure projects, attractive batch sizes can be created for investors. This requires initiatives at state level that promote cooperation between the regions. The individual regional projects should be bundled on an infrastructure platform and transferred to an infrastructure company that is responsible for the bond issue and investor relations.