Can Germany escape its economic doldrums? With Ulrike Malmendier
Mar 31, 2025
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Ulrike Malmendier, a Professor at UC Berkeley and a key member of Germany's Council of Economic Experts, discusses Germany's economic woes and potential recovery strategies. She highlights the recent loosening of debt limits aimed at revitalizing stagnant growth and the manufacturing sector. Malmendier emphasizes the need for long-term investments and structural reforms, focusing on education and innovation to improve competitiveness. She also reflects on how economic pressures influence the youth, advocating for a hopeful environment amid uncertainty.
Germany's economy is hindered by structural issues like an aging population and declining manufacturing, necessitating a shift towards innovative industries.
Increased government borrowing for infrastructure investment is crucial, but transparent policies and stakeholder involvement are essential to stimulate business confidence and growth.
Deep dives
Germany's Economic Challenges and Stagnation
The German economy faces significant challenges, which are rooted in long-standing structural issues rather than sudden misfortunes. Key industries such as manufacturing, which once drove economic success, are declining, necessitating a shift toward services and innovative technologies. Additionally, Germany is grappling with a shrinking and aging population, leading to a labor force shortage that hampers economic productivity. High labor costs combined with energy expenses have further complicated the country’s economic landscape, requiring urgent reforms to stimulate growth.
The Need for Infrastructure Investment
Investment in infrastructure is critical for revitalizing the German economy, particularly after the loosening of the constitutional debt break, which now allows for increased borrowing. There is a clear need for substantial improvements in public services such as transportation and education, which have suffered from years of neglect. The proposed infrastructure fund aims to address these issues by ensuring a commitment to long-term spending, thus providing certainty for private investments. Effective funding and strategic planning are essential to transform the current infrastructure landscape and meet future demands.
Navigating Policy Uncertainty and Future Planning
Policy uncertainty significantly impacts business investment decisions in Germany, hindering economic growth. Business leaders express concern about not knowing future regulations or policies governing their operations, prompting a cautious approach to investments. To encourage economic dynamism, it is vital for the government to involve stakeholders in the decision-making process, thereby reducing uncertainty and fostering a collaborative environment for innovation. A consistent and clear policy direction will be fundamental in attracting long-term investments, particularly in emerging sectors.
Embracing Change and Future-Oriented Growth
The economic landscape is shifting, and Germany must adapt to changes by embracing new technologies and innovative industries rather than relying on traditional sectors. Policymakers are encouraged to rethink economic strategies to foster growth in the fields of artificial intelligence, renewable energy, and climate technologies. This requires not only financial support but also a cultural shift that recognizes the importance of risk-taking and entrepreneurship in today's economy. By prioritizing education and skills development, especially for younger generations, Germany can cultivate a workforce prepared for future challenges.
For the past few years, Germany has begun to look like the ‘sick man of Europe’ again. Its economy has barely grown since 2019, while its famous manufacturing sector has shrivelled. But earlier this month, financial markets were buoyed by a vote in the German parliament to relax the constitutional limit on government borrowing, the so-called debt brake. It means that Germany’s likely new conservative-led coalition government will be free to borrow unlimited amounts to fund a defence sector build-up, and can also draw on a €500bn fund to spend on infrastructure over the next 10 years. But will more government spending be enough to address Germany’s structural economic problems? The FT’s Martin Sandbu speaks to economist Ulrike Malmendier of the University of California, Berkeley, who is a member of the German Council of Economics Experts, which evaluates the government’s economic policies.
Presented by Martin Sandbu. Produced by Laurence Knight. Manuela Saragosa is the executive producer. Audio mix and original music by Breen Turner. The FT’s head of audio is Cheryl Brumley.