Germany is facing major challenges. Smart, consistent and reliable economic policy could set out the framework and unleash the sense of change we now need, Bundesbank President Joachim Nagel commented. In a speech at the Berlin School of Economics, Mr Nagel presented twelve points that he believes are key to boosting growth in Germany. For each set of topics, he examined four points: for an increased supply of labour, for the necessary transition towards net zero, and for a more dynamic corporate sector 

Measures to increase the supply of labour

Demographic change means that workers are in ever shorter supply in Germany, said Mr Nagel. This diminishes our growth potential. In order for Germany to ensure its prosperity, it needs more people to work and more part-time employees to work longer hours, he continued.

According to Mr Nagel, part-time workers often want to work more hours per week, but many – especially women – are unable to do so, for instance due to a lack of childcare. Better care for both children and other dependents may therefore pave the way for increasing the hours worked by part-time employees.

In addition to this, Germany must encourage labour market-oriented migration. While Germany’s immigration law for skilled workers from third countries is comparatively liberal, Mr Nagel noted, some bureaucratic hurdles could be extremely difficult for immigrants to overcome. According to the Bundesbank President, visas need to be issued faster, for example. Recognition of professional qualifications needs to be easier and cheaper for applicants. Ideally, qualified people interested in migrating to Germany, as well as their families, should have access to a single point of contact to support them with the bureaucratic challenges.

In addition, Mr Nagel proposed improving incentives to work for recipients of the civic allowance in order to better integrate them into the labour market. 

On the topic of pensions, the Bundesbank President argued in favour of strengthening incentives to work amongst older people. This would include making early retirement less attractive. The Bundesbank has also long advocated for the retirement age after 2031 to be linked to life expectancy. A retirement age linked to rising life expectancy in this way would not only mitigate the labour shortage and support economic growth. It would also reduce the financial pressure on the pension insurance scheme, said Mr Nagel.

Establishing an energy sector that supports the climate and the economy

According to the Bundesbank President, in order for the energy transition to be achieved as efficiently as possible, carbon pricing must be standardised as far as possible. Only a standardised carbon price can ensure that savings are made where they are most cost-effective, he said. At present, carbon pricing differs across sectors.

According to Mr Nagel, the foundation of a successful energy transition is a reliable and coherent framework. Politicians must clearly set out how domestic renewable energy and imported energy will work together in combination in the future, the Bundesbank President said. An important component of this combination, he went on, would be a plan to expand energy infrastructure, which must be backed by appropriate incentives. At the same time, economic incentives should be created in order to achieve better alignment of supply and demand for electricity within Germany. 

Mr Nagel believes that environmentally harmful subsidies should be abolished: This is because they counteract the economic incentives of carbon pricing by encouraging the consumption of fossil fuels, whilst at the same time tying up scarce financial resources.

The Bundesbank President also called for deeper integration of European energy markets. This would help to better balance supply and demand across European borders. It would also reduce the number of reserve power plants needed. 

Increased business dynamism for longer-term growth

To get the German economy back onto a steeper growth path in the longer term, Mr Nagel argued that greater business dynamism is needed. That would require reducing bureaucracy in Germany, he said. First, the Bundesbank President argued that existing rules should be reviewed on a regular basis to determine whether they are achieving their objectives efficiently or whether better instruments might be available. Mr Nagel noted that this applies to a large number of requirements regarding documentation, reporting and notification, for example. EU rules should also be implemented as sparingly and as unbureaucratically as possible, he said, in order to limit the burden of compliance.

Second, Germany needs to make it easier to start up new businesses and to strengthen innovative power in order to unleash more business dynamism. In this context, the Bundesbank President called for a central point of contact for people looking to start a business, which would cover all of the typical issues encountered as part of that process. We should be rolling out the red carpet precisely for innovative start-ups, rather than placing any unnecessary obstacles in their way, he urged. 

The Bundesbank President argued that businesses needed tax relief. To encourage more multinational corporations to relocate to Germany, for instance, Mr Nagel proposed lowering the rate of corporation tax. At the same time, however, he pointed out that this measure would also result in large shortfalls in tax revenue. The pros and cons therefore need to be weighed up carefully.

Administrative processes should be simplified overall, for example through digitalisation, automation and standardisation. For another thing, rules on the maximum period before a decision must be issued could give applicants more planning certainty, Mr Nagel said. 

Mr Nagel welcomed the fact that the preliminary coalition talks outlined the intention to address key challenges in some important areas. Ultimately, he noted, it will come down to how specifically these measures are implemented. In this context, we need to make sure that new scope for borrowing is directed exclusively towards new, additional investment, the Bundesbank President said. 

Germany has great strengths: stable political institutions, financially sound firms that are adaptable and innovative, and, in particular, well-educated, smart and hard-working people who want to roll up their sleeves. To help move our country forwards again.

Mr Nagel concluded by saying that, by now, if not beforehand, it should be clear to every last person that Europe has to draw closer together – including economically. Europe has always made decisive strides forward whenever Germany and France have worked together towards a common cause, he commented. He therefore urged that the economic challenges be tackled together with France and other partners in Europe.