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The head of Germany’s central bank has urged the government to cut taxes, cut red tape, boost the workforce and raise a carbon tax to revive the country’s fading appeal to investors.
Joachim Nagel, president of the Bundesbank, said investors were increasingly shunning Europe’s biggest economy, which is “far behind in terms of growth” in international comparisons.
The German economy, which returned to growth in the first quarter of this year after a year of contraction, had “some economic bright spots”, but Nagel said it “still faces major challenges” in areas such as renewable energy, which would require significant investment to the solution.
At a conference in Frankfurt on Monday, he cited a recent study by the development bank KfW, which found that Germany would require around 5 billion euros in investment to reach its climate neutrality goal by 2045.
But he said business investment had been falling recently and “there is widespread concern that investors are increasingly avoiding Germany”. Structural issues deterring investors included high labor and energy costs, a shortage of skilled workers, regulatory uncertainty and a high tax burden, Nagel added.
To make the need to move to a carbon-neutral economy more clear, Nagel said the government should raise its carbon taxes from current levels of €45 per tonne. “Carbon prices should be applied as broadly, uniformly and predictably as possible,” he said.
He also proposed tax cuts, adding that Germany’s high corporate tax rates compare unfavorably with its international counterparts. “To create an environment conducive to employment and investment, it is important to monitor the tax burden on labor and capital.”
The Bundesbank president said the government should remove regulatory “traffic jams” stemming from slow and cumbersome bureaucracy, adding that this was “clearly evident in the expansion of renewable energy sources, for example in wind turbines”.
To increase labor supply in many sectors suffering from a shortage of skilled workers, Nagel said the government should tap into the “hidden reserve” of about 3.2 million people who want to work but can’t because they have children to care for or don’t think. find a suitable job.
He warned the government against relying heavily on financial incentives, such as the tens of billions of euros it has offered chipmakers to build new semiconductor factories in Germany, saying “we have to be careful not to get stuck in a thicket of subsidies”.
Nagel said efforts to attract investment with subsidies are “often fraught with red tape, increasingly complex government interventions and a constant burden on public finances” and could risk companies delaying investment in the hope of winning state grants.
“I am convinced that if Germany is to move on to a higher growth path, there is no way around further investment,” he said. “Politics can remove obstacles in many areas, but not in all.”
Nagel said more than half of the companies that cut investment last year cited the “bad macroeconomic environment” as a factor in their decision in a Bundesbank survey. It also found that the proportion of German businesses reducing investment was similar to the proportion that increased it.
Last month, a study of international competitiveness by the Swiss university IMD found that Germany had lost ground, falling two places to 24th out of 67 countries assessed.
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 fast wage growth and slowing inflation boosted 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.
Services inflation remained high, with prices in the sector rising 3.9 percent year-on-year in June – the same pace as the previous month.