Economists find Germany’s inability to attract investment alarming

According to a leading institute of economics, Germany’s ability in attracting business investment has suffered an “alarming decline” last year. More than €135bn worth of foreign direct investments left the country, while only €10,5bn was brought in.

According to the German Economic Institute in Cologne, the gap between the outbound investments of German companies and the business investment into Germany was the biggest ever recorded based on OECD data.

Christian Rusche is an economist with the GEI. He said that the investment climate in Germany has recently deteriorated due to the high energy prices as well as the shortage of skilled workers.

According to the report, 70 percent of outbound investments made by German companies were in other European countries. It was noted that “the collapse of investment by European neighbors is particularly alarming”.

Germany has many problems that are “homemade”, including high corporate tax, excessive bureaucracy, and a deteriorating infrastructure, it stated.

Rusche urged the Berlin government to take measures to make the country more attractive for business. He said that the federal government must take immediate countermeasures in order to make Germany the top destination for foreign investment again.

Researchers said that the US Inflation Reduction Act has accelerated German investment outflows. The US provides large subsidies in order to entice investment by companies, such as electric vehicles and renewable energies.

It also warned that Germany received very little from the €750bn EU recovery fund. This fund was created in response to the pandemic of coronavirus to fund investments such as green energies and digitalisation. However, the fund is mainly focused on the hardest-hit economies such as Italy.

Germany has had a few notable examples of this trend. US chipmaker Intel announced last year plans to build an semiconductor fabrication plant at Magdeburg. They cited Germany’s “top talents [and] superb Infrastructure”.

The plans were delayed because the US chip manufacturer was locked in difficult negotiations with the German Government. Intel requested nearly €6bn in additional subsidies due to rising energy prices and inflation.

Berlin eventually yielded and pledged a total €10bn or about a third what Intel had committed to spend for the plant. This shows how governments are increasingly using taxpayers’ funds to attract foreign direct investments. This deal is the biggest foreign direct investment in Germany.

In recent months, Germany’s vast manufacturing sector has suffered a downturn, mainly due to the sharp rise in energy prices following Russia’s invasion of Ukraine. Other factors include falling orders, weak growth in exports, and a loss in market share of electric cars.

The report stated that “the German export model does not work as well as it used too with increased protectionism.”

The findings are similar with those released in April by Bundesbank. They also stated that the net outflows of direct investments from Germany reached a record-high last year.

According to a study published by EY in May, there were 832 greenfield investment announcements in Germany last year. This is down from the 841 announced in previous years and 930 for 2020.