Chancellor Friedrich Merz has defined a clear benchmark for evaluating his future administration’s success: whether Germany can revive private investment while stabilising state expenditure. During a recent meeting with members of his parliamentary group, he pointed to economic data showing a widening gap between government spending and business investment — a development worrying analysts across the country.
The figures, compiled by the respected ifo Institute in Munich, illustrate a trend that has shaped the German economy in recent years: public expenses have steadily increased, while companies are investing less in new facilities, machinery and innovation.
Warning signs from one of Germany’s leading economists
Clemens Fuest, President of the ifo Institute, has repeatedly warned that the current trajectory threatens long-term growth. With private investment now hovering around the same level as in 2015, economic momentum has weakened. Germany’s gross domestic product has remained largely unchanged since 2018 — aside from the temporary setbacks during the pandemic.
Lower business investment translates into reduced productivity gains and diminished competitiveness. In the long run, experts fear fewer jobs, slower wage growth and shrinking tax revenues — creating a vicious cycle for the welfare state.
A risk of prolonged stagnation
Fuest has drawn comparisons to what he describes as “Italian conditions”: prolonged periods of minimal growth that can stretch over decades. A failure to reverse these dynamics, he argues, would leave Germany struggling to maintain its living standards.
For the Chancellor, the message is clear: state spending must stop rising disproportionately, and companies must be encouraged to invest again.
Reform proposals aimed at boosting competitiveness
Economic experts are calling for a multi-layered response. The ifo Institute suggests a far-reaching reform programme that goes beyond the policies currently outlined by the governing coalition. The package should be ready, they argue, by spring 2026 at the latest.
Key recommendations include:
• Modernising social systems to ensure financial sustainability
• Reversing or restructuring pension-related benefits that drive up contributions
• Reducing administrative burdens on businesses, especially reporting obligations tied to climate, labour and supply chain regulations
According to impact assessments, streamlined bureaucracy could potentially unlock up to €146 billion of additional economic output each year.
First steps taken — but more pressure ahead
The federal government recently approved initial regulatory cuts aimed at lowering administrative costs for citizens and companies. While welcomed as progress, economists stress that these measures alone will not be enough to restore dynamic growth.
Merz has made it clear that by 2029, the direction of three core indicators — investment, economic output and state spending — will determine whether the government has succeeded. If the curves do not move closer together, he says, the verdict will be unavoidable: the mission has failed.
Germany at an economic crossroads
With geopolitical uncertainty, demographic shifts and fierce international competition already challenging Europe’s largest economy, the coming years will be decisive. Whether the next phase for Germany is renewal or stagnation depends on the reforms that follow — and how quickly they take effect.
