SGI 2024 | Germany | Key Challenges

Key Challenges

Recent Governments Experts

SGI experts on Germany

Friedrich Heinemann

Friedrich Heinemann is head of the public finance department at the Center for European Economic Research (ZEW) in Mannheim (Germany). He received his PhD from the University of Mannheim and his Habilitation from the University of Heidelberg. His research interests include empirical public finance, and European integration and reform processes. Mr. Heinemann teaches at the University of Heidelberg, is a board member of the Arbeitskreis Europäische Integration and member of the Scientific Board of the Institut für Europäische Politik (IEP) in Berlin.

Christoph Egle

Dr. Christoph Egle is scientific director of the Bavarian Research Institute for Digital Transformation (bidt). He received his doctorate from the University of Heidelberg with a thesis on economic and social policy reforms in Germany and France and was active in political science research and teaching at the Universities of Heidelberg, Frankfurt/Main and LMU Munich. In 2010, Christoph Egle moved into scientific policy consulting. At the German Academy of Science and Engineering (acatech), he headed the office of the German government’s Innovation Dialogue until 2018. He then worked as head of department for digital future technologies at the Bavarian State Chancellery and the Bavarian State Ministry for Digital Affairs before moving to bidt as managing director in 2019.

Reimut Zohlnhöfer (Coordinator)

Reimut Zohlnhöfer holds a chair of political science at Ruprecht-Karls-University Heidelberg (Germany), where he is also the head of the political science department. He holds an MA from the University of Heidelberg, a PhD from the University of Bremen and a Habilitation from the University of Heidelberg. Previously, he worked at the Center for Social Policy Research of the University of Bremen, at the Center of European Studies at Harvard University and at the University of Bamberg. His research focuses on economic and social policies in developed democracies.

Germany is confronted with the following key challenges.

Strengthening resilient democracy:

German political elites must create a unified strategy to address both external and internal threats to democracy. Externally, this involves enhancing European and German leadership in a world where the reliability of the United States as a defender of democracy and peace is uncertain. Internally, it requires engaging with AfD voters and those migrant communities that hold autocratic and illiberal views from their countries of origin instead of embracing the human rights and democratic values of their current home.

Building a consensus on the energy transition:

While there is broad consensus on Germany’s responsibility for global climate policies and widespread support for ambitious measures, recent debates on increasing the CO2 price and technological constraints in home heating have exposed limits to this acceptance. An unfair and overly costly climate policy plays into the hands of populists, promoting unscientific narratives and climate change denial.

German energy policy must strive for more efficient and socially balanced climate prescriptions. The government’s failure to offset the rising CO2 price for vulnerable households through a “Klimageld” (Climate Allowance) and its adoption of excessively costly regulations for homeowners signal a misdirection. Environmental economists advocate for a more stringent pricing approach and increased technology neutrality to achieve a cost-effective and impactful climate policy.

Migration and integration policy challenges:

Germany’s commendable efforts to provide refuge to refugees face challenges as reception capacities approach their limits, according to local politicians in the municipalities where real integration issues materialize. Integration difficulties are particularly evident in Arab communities that openly reject Western values and hold anti-Israel stances. Additionally, the poor performance of students with migrant backgrounds in the education system underscores the constraints on integration capacity. These circumstances provide ammunition to right-wing groups like the AfD, which exploit them as signs of a loss of control.

Moreover, the labor market integration of Ukrainian refugees in Germany lags behind other European countries. Collaborative efforts with European partners to update asylum rules are underway, but further adjustments may be necessary to counter far-right populist sentiments and demonstrate political control.

Welfare state reforms:

Recent reforms in pension, old-age, unemployment insurance, and the health system have predominantly expanded welfare protection. Some Hartz measures were rolled back through the Bürgergeld, and certain pension reforms were countered by initiatives like “Rente mit 63” (entering retirement at 63) and guarantees for minimum pensions. While the social motivation behind these steps is commendable, financing constraints are increasingly evident. The pension and health systems are ill-prepared for the imminent demographic upheaval caused by the retirement wave of the baby boomer generation. Necessary reforms, such as raising the pension age or initiatives to increase working hours, face political resistance. Pension committees or reform templates provided by the German Council of Economic Experts have been blatantly rebuffed by leading politicians, creating a political taboo around the inevitable reforms.

Addressing the financial sustainability of the social security system is crucial for mobilizing resources for the impending transition needs. There is a legitimate debate about whether the constitutional Debt Brake needs to be reformed to allow for deficit-financed investment. However, if welfare spending continues to crowd out future-oriented spending in public budgets, new debt will not be the solution.

Comprehensive tax reform:

Germany needs comprehensive tax reform. The tax system still suffers from numerous unjustified exemptions, particularly in the VAT system. By OECD standards, high effective corporate tax rates and significantly elevated marginal tax rates for average earners discourage economic activities, ranging from investment to employment. The growing preference for leisure among German workers correlates with these strong disincentives. A reform aimed at revenue neutrality, while designing a more efficient tax structure, is imperative. Although the process is anticipated to be conflict-ridden, it is clear that the current tax system places an unnecessary burden on Germany’s economic activities.