Economic Insight: Germany - Lasting economic success cannot be taken for granted

  • The extensive labor market and social reforms of Agenda 2010 have played a considerable role in the success story of the last few years. The reform package has helped to turn the German labor market around. Since the reform measures were implemented, the number of people in work has increased by more than 4 million, while unemployment has halved.

  • The current favorable situation cannot conceal the major challenges facing Germany, which pose a threat to the country’s long-term economic success. From 2020, the number of people in work is likely to increase by no more than 0.5% annually. Maintaining economic growth on a par with that seen in recent years will then require considerably faster productivity growth, necessitating high investment in education and physical capital. Such investment, however, is precisely one of the current weaknesses of the German economy.

  • To raise growth potential, the government should implement economic policies aimed at improving investment conditions for the private sector and removing bottlenecks in public investment. Ways should also be found of expanding and making better use of the potential labor supply. In this paper, we present some possible areas for action on these three issues.

The next German government should use the positive economic situation to lay the foundations for the country’s lasting economic success from a position of strength.