Germany is currently not competitive, according to Federal Minister of Economics Katherina Reiche at the Foreign Trade Day in Berlin

Economy in transition: Germany's global challenges and the search for competitiveness

Federal Economics Minister Katherina Reiche emphasized at the Foreign Trade Day that Germany is currently not competitive and is struggling with structural problems. She pointed out that excessive regulation, high energy prices, and the burden of the welfare state, in particular, are increasing labor costs and weakening businesses.

The Foreign Trade Day 2025 took place on October 28, 2025 at the House of German Business in Berlin.

Reiche observed that Germany finds itself in a global tension between open markets and geopolitical power interests, particularly in comparison to the US and China. In her view, Germany's ability to actively navigate this tension will determine whether the country remains a genuine economic power. She called on companies to diversify their supply chains and expressed her incomprehension as to why many firms have not yet done so.

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The starting position of a traditional location in international competition

At the beginning of the 2020s, Germany's economic situation is characterized by profound upheavals, systemic risks, and a growing awareness of its own vulnerability in international comparison. What for decades was considered a model of stability, technological leadership, and prosperity is now facing more fundamental criticism and external challenges than ever before. The statements made by Federal Minister for Economic Affairs Katherina Reiche at the Foreign Trade Day not only reflect the situational assessment of a political actor but also encapsulate key structural deficits and geopolitical constraints facing Europe's largest economy.

Besides reflecting on its own status, statistics and international benchmarks illustrate that Germany's economic standing is in danger of falling behind in several key indicators compared to other countries. In particular, the high density of regulations, above-average energy prices, and an extensive welfare state have created a situation in which competitiveness is not merely a theoretical economic narrative, but is increasingly becoming a matter of survival for large parts of industry and small and medium-sized enterprises (SMEs).

Traditional certainties – such as consistently stable export figures, innovation leadership in mechanical engineering, or its role as a job engine in Europe – are increasingly being shaken by disruptive technologies, the rise of new rivals, and a global economy characterized by multiple crises. In this new environment, it is not only economic acumen but also the adaptability of political and social institutions that will determine whether Germany remains a leading economic power or risks being marginalized in the international division of labor.

From export nation to innovation dead end? A closer look at the weaknesses of the German model

Historically, Germany's economic success is based on the triad of innovation, technological leadership, and international integration. For decades, German companies were considered export world champions, with products such as cars, machinery, and chemicals in demand on every continent. This achievement is closely linked to specific location factors such as efficient infrastructure, close collaboration between science and industry, and a highly skilled workforce.

But this formula for success is increasingly under pressure. Germany is losing ground in key technology sectors: US and, increasingly, Chinese providers dominate in the areas of digitalization, artificial intelligence, and cloud solutions. The once technological superiority of German machinery and vehicles is being eroded as competitors from Asia – especially China and South Korea – catch up or even overtake them with massive investments and economies of scale.

The innovation indicators paint a mixed picture: While German companies continue to invest large sums in research and development, the speed of implementation is suffering, especially in the context of digitalization. Many start-ups relocate abroad after a short time, and large companies complain about an increasingly innovation-hostile regulatory framework that hinders rapid market entry and increases bureaucratic burdens.

This puts Germany in an innovation dead end: On the one hand, enormous resources are being invested in traditional research, while on the other hand, there is a lack of risk appetite, venture capital, and flexible regulatory frameworks to roll out new business models on a large scale. This dynamic threatens to increasingly undermine the decades-long legacy of Germany as a technology leader.

The labor market cost trap: How the welfare state and regulation dampen competitiveness

A key challenge for German companies is the high cost of labor. While the welfare state, which has been growing for years, provides a high level of social security, it is accompanied by rising non-wage labor costs, a complex system of contributions, and a multitude of administrative tasks. The burden on companies results not only from labor costs but also from the aggregated effects of additional contributions to pension, health, unemployment, and long-term care insurance.

In addition, there are collective bargaining agreements, strong employee co-determination rights, and – by international standards – comprehensive protection against dismissal. While these factors were historically celebrated as the foundation of a social market economy model, in a globalized context they are increasingly becoming a competitive disadvantage.

International analyses show that targeted location decisions are being made in favor of neighboring Central and Eastern European countries or the southern states of the USA because labor costs are lower there, labor markets are more flexible, and regulations are more manageable. Particularly when it comes to investments in future-oriented industries – such as semiconductor technology, electromobility, or battery technology – German companies now have to compete against massive subsidies and more favorable conditions elsewhere.

Demographic changes are exacerbating the problem: The aging of society is leading to a shrinking potential workforce. Labor market shortages – particularly in the technical, skilled trades, and service sectors – are driving up wages and further reducing companies' flexibility. The skills shortage is thus not only becoming an economic drag but is also increasingly jeopardizing the long-term innovation and competitiveness of the region.

Energy price shock and location disadvantages: Germany caught in the wake of the deindustrialization debate

A central theme in the current debate about Germany's economic competitiveness concerns energy prices. Compared to other industrialized nations, Germany has particularly high electricity and gas costs. This situation has become entrenched as a structural problem following the cessation of Russian gas supplies and the phase-out of nuclear power. While industries in the USA can access inexpensive energy sources extracted through fracking, and China is investing heavily in its own energy production, German companies are dependent on an increasingly volatile and cost-intensive market.

High energy prices directly impact the competitiveness of energy-intensive industries. Sectors of basic materials industries—chemicals, steel, aluminum, and numerous processing companies—are facing massive cost pressures. The consequences range from lost investments and production relocations to factory closures and job losses. The intense debate about whether Germany is facing “deindustrialization” is not purely rhetorical, but is based on concrete corporate decisions to permanently relocate plants abroad.

Furthermore, the complexity of the energy transition, coupled with a multitude of new regulations for integrating renewable energy sources and CO2 pricing, restricts planning and investment certainty for businesses. Companies complain about funding programs lacking a clear path forward, lengthy approval processes, and a patchwork of differing responsibilities at the federal, state, and local levels. Uncertainty about future energy prices and levies is a key risk that significantly influences investment decisions.

Regulatory density and bureaucracy: obstacles to innovation and growth

A recurring theme in all business surveys and location analyses is the burden of excessive regulation and bureaucracy. Germany is considered a highly regulated location according to international rankings. Whether it's starting a business, obtaining a building permit, applying for energy efficiency certification, or taking advantage of government subsidies – all processes are characterized by documentation requirements, approval processes, and frequent changes in legislation.

The average time required to start a business, the sheer volume of paperwork, and the complexity of tax and social security regulations deter investors and those seeking innovation. Digital administrative processes are often stuck in the planning stage or, if they exist, are not very user-friendly and inefficient.

This regulatory density has substantial effects: companies invest significantly more resources in administration than the international average. The result is often innovation bottlenecks, longer time-to-market, and a decline in location attractiveness – especially for internationally mobile investors and startups.

The much-discussed transformation to "digital administration" is progressing slowly and threatens to become a competitive disadvantage in international comparison. The reliability, predictability, and efficiency of governmental frameworks are essential for a globalized economy; currently, however, Germany is only inadequately meeting these requirements.

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Globalization in Transition: Between New Markets and Geopolitical Risks

Germany's economic model has always relied on open markets, global supply chains, and the division of labor. The country's historically developed prosperity is inextricably linked to the success of its export industry: around 50 percent of added value is generated through foreign trade or through upstream and downstream services of the export sectors.

However, this openness is increasingly reaching its limits. The geopolitical climate – particularly the tensions between China, the US, and Europe – growing aspirations for autarky, strategic industrial policy, and increased protectionism are leading to a restructuring of global value chains. Worldwide transport costs, political uncertainties, and disruptions such as the Covid-19 pandemic or the war in Ukraine demonstrate the risks of long supply chains and the vulnerability of internationally distributed systems of labor.

The German government has recognized the need for diversification and resilience in supply chains. Companies are being strongly encouraged to broaden their sources of supply and no longer concentrate critical raw materials and components on a single market. In practice, however, this process is lengthy and expensive. Many companies have systematically reduced their vertical integration over the past few decades and relied on global just-in-time structures. Dismantling these systems and building redundant structures requires significant investment, new expertise, and a fundamental shift in business strategies.

At the same time, the restructuring of global economic relations also presents opportunities: New sales markets in Southeast Asia, Africa, and Latin America, growing infrastructure investments, and the search for alternative trading partners are opening up new perspectives for German companies. However, access to these markets is characterized by fierce competition, cultural differences, and often precarious political conditions.

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The role of geopolitical power interests: the economy in the tension between major powers

Today's global economy is largely shaped by competition between the USA, China, and the European Union. Germany, as the economic powerhouse of Europe, inevitably finds itself at the center of these global conflicts. Unlike the USA, Germany possesses neither a comparable military presence nor a global capital market. And unlike China, it lacks an independent and effective raw materials and industrial policy.

American and Chinese companies receive massive government support, benefit from strategic innovation programs, and often have access to significantly larger domestic markets. Germany, on the other hand, must position itself within an increasingly complex web of EU regulations, international agreements, and geopolitical groups.

The external economic environment for German companies is deteriorating, particularly in politically sensitive sectors. Technology transfer, export controls, and investment screening are being enforced with increasing stringency. At the same time, companies must respond to Russian sanctions, American extraterritoriality, and Chinese technological dominance.

This further narrows the scope for traditional export strategies. Companies face the challenge of finding new ways to remain globally competitive in an era of political bloc formation, deglobalized supply chains, and technonationalist tendencies.

Challenges and opportunities of transformation: digitalization, decarbonization, demographics

At the heart of current economic transformation processes lie three major thematic areas: digitalization, decarbonization (climate neutrality), and demographics. Each of these challenges is transformative in itself, but their simultaneous occurrence is potentially existential for the future viability of the location.

The sluggish pace of digitalization is an Achilles' heel for German companies and public administration alike. Despite significant investments, digital processes, platforms, and products are often underdeveloped, fragmented, or hampered by innovation. The reasons range from reluctance to invest due to uncertain returns to a lack of digital literacy across all segments of society.

The imperative to transform towards climate neutrality is politically irreversible, but highly problematic economically: Restructuring the energy sector, electrifying transport, and decarbonizing industry require massive investments, but initially lead to rising costs and altered business models. At the same time, the EU Green Deal and the development of climate-friendly technologies also offer opportunities to create internationally leading markets – provided they are not once again dominated by more agile, competitive countries.

Demographic trends – particularly the rapid aging and shrinking of the working population – limit the economy's growth potential. Productivity increases and targeted immigration of skilled workers are essential, but encounter numerous social, political, and administrative barriers.

Corporate strategies in transition: From global players to resilience champions

In response to the challenges mentioned, the fundamental strategic orientation of many German companies is changing. "Resilience" is becoming the guiding principle for the coming years: securing locations, redundancy, and flexibility are gaining in importance over short-term profit maximization. Companies are investing specifically in diversifying their supply chains, building additional warehouses, or creating parallel structures in different sales and procurement markets.

Individual industries are taking different paths: While car manufacturers are investing heavily in electromobility and battery technologies, chemical companies are searching for new raw material sources or developing alternative production processes. The mechanical engineering industry is focusing more on digital platforms and service models. However, the transformation is proving particularly difficult for medium-sized companies, as they lack the resources, market power, and scalability of large corporations.

For many companies, political lobbying and shaping regulatory processes both domestically and internationally are becoming increasingly important. At the same time, new models of cooperation are emerging between businesses, academia, and government to advance technological development and skills training.

Social acceptance and political courage: Sustainability as a shared responsibility

Overcoming the challenges described is hardly possible without societal acceptance and political will to shape policy. The necessary transformation processes bring with them uncertainty, social hardship, and short-term losses in prosperity. At the same time, a large part of the population harbors skepticism towards change – be it out of concern for jobs, fear of being overwhelmed, or a fundamental rejection of new technologies.

Policymakers face the challenge of setting ambitious yet realistic guidelines, reducing bureaucracy, and making competitiveness a societal priority. At the same time, a balance must be struck between social security and economic flexibility. Education, research, migration, infrastructure, and energy policy are closely intertwined areas that require holistic management.

Only a combination of political courage, entrepreneurial innovation and social openness can save Germany from a fall into economic insignificance.

Sobriety, courage and pragmatism as the key to renewed competitiveness

The analysis of current location factors, global upheavals, and internal obstacles leads to a sobering conclusion: Germany's decline into permanent mediocrity is not a law of nature, but neither is it an unrealistic scenario. International competition is a constant struggle for adaptation that knows no automatic processes. Only those locations whose economic systems possess sufficient adaptability, innovative spirit, and political will to shape their future will survive.

Germany must be prepared to question entrenched structures, speak uncomfortable truths, and abandon conventional certainties. It needs political and social unity, a new understanding of competitiveness and economic resilience – one that transcends short-term clientelism and sectoral special interests.

The future viability of a business location is not a given. It must be earned or squandered. Society, businesses, and the state all share the responsibility to undertake bold reforms, actively shape technological trends, and make prosperity renewable.

This will show whether Germany can continue to act as a genuine economic power in global competition, or whether the country is in danger of being overtaken by a new generation of agile, technology-driven economies.

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