A pivot for Germany: All for growth and growth for all

Key takeaways

• Economic growth is not an end in itself; rather, it is a prerequisite for individual opportunities and a stable, successful society.

• To achieve this pivot to growth, additional investments of €330 billion per year until 2035 are required, with approximately 70 percent coming from private sources and 30 percent from public sources.
• The more stakeholders are invested—literally or figuratively—in the pivot to growth, the more likely it is to succeed; if it does, everyone stands to benefit.
• Germany has the potential to substantially increase the value of its economy, potentially doubling it from around €12 trillion today to over €24 trillion by 2035.
• A dual strategy can help mobilize more capital: a stronger focus on dynamic sectors (“shift”) and enhanced productivity across all sectors (“lift”).
• Improving economic conditions can make Germany more attractive to investors. German C-level executives identify a more flexible labor market as the most important prerequisite for increased investment.

For many years, the German economy enjoyed steady expansion. From 2010 to 2019, for instance, real gross domestic product (GDP) rose by an average of 1.7 percent annually. This sustained growth drove increases in household incomes¹“Durchschnittliche Höhe des monatlichen Brutto- und Nettoeinkommens je privatem Haushalt in Deutschland von 2005 bis 2021” [Average monthly gross and net income per private household in Germany from 2005 to 2021], Statista, 2024. and afforded the government flexibility to uphold and enhance social security systems.

However, recent years have seen a marked slowdown. The German Council of Economic Experts forecasts a mere 0.6 percent in annual economic growth on average through 2030.²Wachstumsschwäche überwinden—in die Zukunft investieren, Jahresgutachten 2023/24 [Overcoming growth weakness: Investing in the future, annual report 2023–24], German Council of Economic Experts, 2023. At the same time, Germany is facing substantial challenges, ranging from the climate transition and demographic shifts to a tense geopolitical landscape with profound implications for trade, supply chains, and security. Furthermore, the German economy trails behind in numerous indicators when benchmarked against international peers (see “Fast facts on Germany’s competitiveness”). Despite these headwinds, our analyses suggest that a pivot to growth is within reach. If Germany unlocks more capital for investment and drives sustainable economic renewal, it can achieve what currently seems unattainable.

Growth benefits everyone

Imagine a future where every job posting attracts a wealth of qualified applicants, where dedication and flexibility in the workplace are met with competitive salaries and clear paths for career advancement. A future where day care spots are plentiful, affordable housing is readily available, and nursing homes have ample capacity. Schools are equipped with state-of-the-art technology, serve nutritious meals to all students, and have sufficient teaching staff. Healthcare is accessible, with quick doctor’s appointments even without private insurance, and the nation is well prepared for future pandemics. Studying at top universities and research institutions is within reach, eliminating the need to go abroad. Talented and motivated individuals—whether they are scientists, entrepreneurs, artists, or athletes—receive the support they need to thrive. Cellular dead zones, potholes, and budget deficits are relics of the past.

Is this vision achievable? Not if the German economy remains stagnant. However, with increased economic growth, the potential for improvements that benefit the country and its people expands significantly. Growth is not an end in itself; it is a prerequisite for individual opportunities and a stable society with excellent healthcare, robust infrastructure, a strong education system, and adequate reserves for times of crisis. Sustainable growth, mindful of nature and the planet’s limited resources, is essential to secure and enhance the quality of life that many have come to take for granted. And growth benefits everyone: companies, their employees, public institutions, the population—the entire nation (see sidebar “Germany from an investor’s perspective: The value of economic activity”).

The current challenge is stagnant economic growth. The German economy, despite being the world’s third largest, is currently experiencing a significant slowdown. Over the past four years (2019 to 2023), GDP growth has been negligible, with a compound annual growth rate of a mere 0.1 percent.³Volkswirtschaftliche Gesamtrechnung [National accounts], Federal Statistical Office, 2019–23. Real wages have taken a hit, declining by a compound annual rate of 1.3 percent.⁴Reallohnindex [Real wage index], Federal Statistical Office, 2019–23. Looking ahead to 2024, projections suggest that GDP growth will remain minimal.⁵World economic outlook update, International Monetary Fund, July 2024. The impact of this economic stagnation is already evident and will likely become more pronounced if this trend continues unchecked.

Unlocking growth potential

Without significant changes, the value of the German economy is projected to grow only marginally over the next decade, from €12.2 trillion in 2023 to €12.9 trillion (in current prices) by 2035, according to our baseline scenario. This sluggish growth could accelerate the departure of industrial companies to other countries. For instance, calculations by the Federation of German Industries (abbreviated BDI in German) suggest that a fifth of Germany’s industrial value creation is at risk in the medium term.⁶Transformationspfade für das Industrieland Deutschland [Transformation paths for Germany as an industrial nation], BDI, 2024. If this trend continues, the current high standard of living could be jeopardized, especially considering rising healthcare and pension costs. Without additional economic growth, employee contributions to the pension insurance system would need to increase by nearly four percentage points.⁷Jochen Pimpertz, “Rentenpaket II—eine Rechnung mit vielen Unbekannten” [Pension package II: An equation with many unknowns], IW Cologne, no. 12, March 6, 2024. Moreover, further increases to the federal subsidy for pensions would be necessary. This subsidy already constitutes more than 21 percent of the total budget and is the largest single expenditure item.⁸“Bundeshaushalt digital” [Digital federal budget], Federal Ministry of Finance, 2024.

If Germany fully harnesses its potential (our full-potential scenario), the value of its economic activity could surge to approximately €24.5 trillion by 2035 (Exhibit 1)—essentially doubling the value of the entire economy. In terms of private wealth, Germany could ascend from 17th to sixth place in international rankings, joining the likes of Australia, Denmark, and New Zealand.⁹Global Wealth Report 2024, UBS, 2024. Moreover, the government would see an additional €410 billion in annual revenue, assuming tax rates remain constant. This financial boost could empower Germany to fortify its social security systems and tackle pressing challenges, from climate change to infrastructure renewal.

1

Germany’s past shows that targeted investments can drive growth, even in challenging times. The Federal Republic of Germany has twice boosted prosperity by means of substantial private and public investments—first during postwar reconstruction and later during reunification. In the 1950s, for instance, GDP grew by an average of 8 percent annually. Similarly, in the years following reunification, Germany achieved real GDP growth, exceeding 5 percent per year, despite considerable challenges.

However, while history proves that a pivot to growth is feasible even under adverse conditions, it does not provide a blueprint for the future. The time has come for a new strategy.

Increased investment is crucial to stimulate growth in Germany. Achieving the ambitious objective of doubling the value of Germany’s economy will require annual investments of around €330 billion, predominantly from the private sector, according to our analysis. This amount, which is on top of the €950 billion already invested annually, equates to approximately 8 percent of the current GDP. Key investment areas include fighting climate change, fostering research and development, and advancing technological processes such as digitization, AI, and automation. Cumulatively, the additional investment requirement totals €3.7 trillion over the years up to 2035 (Exhibit 2). In our scenario, around 70 percent of this amount would need to come from private sources, slightly reducing the private sector’s proportional share compared with current levels, since many of the needed investments fall within the public domain.¹⁰Herausforderungen für die Schuldenbremse: Investitionsbedarfe in der Infrastruktur und für die Transformation [Challenges for the debt brake: Investment needs in infrastructure and for transformation], IW Policy Paper 2, May 14, 2024.

2

At present, Germany is underinvesting in growth. Its share of gross fixed capital formation in GDP is marginally below the average of the 38 OECD countries.¹¹“National accounts at a glance,” OECD, 2023. More critically, Germany allocates less than a quarter of funding to dynamic sectors. For instance, in the United States, about half of all gross fixed capital formation is directed to high-growth areas, including IT, communication technology, and intellectual property. In Germany, this share is less than a quarter (Exhibit 3).¹²“National accounts at a glance,” OECD, 2023. Numerous investment types were considered, including those by industrial and service companies and the public sector.

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Here, investments are primarily channeled into buildings, plant equipment, machinery, and vehicles. At the time of writing, the downward trend persists. Between 2010 and 2015, Germany’s gross fixed capital formation grew at a real annual rate of 2.2 percent. From 2015 to the present, growth has slowed to just 1.1 percent per year.¹³“National accounts at a glance,” OECD, 2023. Numerous investment types were considered, including those by industrial and service companies and the public sector. This recent pace not only lags significantly behind previous years but also trails that of the United States and high-growth European countries (Exhibit 4). Moreover, Germany has slipped behind its peer countries in terms of foreign direct investment.

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The root cause of the lack of investment in Germany is that returns are uncompetitive by international standards. For instance, returns in the United States are approximately 30 percent higher than in Germany.¹⁴“Accelerating Europe: Competitiveness for a new era,” McKinsey Global Institute, January 16, 2024. Investors—both domestic and foreign, spanning all sectors and sizes, from small and medium-size enterprises to large corporations— compare potential investments in Germany with opportunities elsewhere. Consequently, only attractive returns will enable Germany to compete globally.

As a result, substantial amounts of capital leaves Germany. In 2023, the net outflow, after accounting for foreign capital flows into Germany, reached nearly €250 billion.¹⁵Zahlungsbilanzstatistik [Balance of payments statistics], Deutsche Bundesbank, 2023. This negative capital balance mirrors Germany’s high export surplus, which exceeded €200 billion in 2023.¹⁶Zahlungsbilanzstatistik [Balance of payments statistics], Deutsche Bundesbank, 2023.

To attract more investment, Germany would benefit from the prospect of growing revenues and profits. Growth could be reignited with a dual strategy:

• Shift. Prioritize dynamic, future-oriented sectors. By leveraging Germany’s strengths to secure a strong position in dynamic high-growth sectors, it could stimulate further economic expansion.
• Lift. Enhance productivity across all sectors. Boosting overall economic productivity across all sectors is required to achieve higher returns, especially with a shrinking workforce.

With the right framework conditions, the shift-and-lift strategy could enhance return prospects for investors, thereby mobilizing the capital needed for a pivot to growth. This would benefit all stakeholders. If Germany maximizes its potential (the full-potential scenario), the value of economic activity could reach approximately €24.5 trillion by 2035 (Exhibit 1)—roughly four times the current market capitalization of the 230 companies listed on the DAX, MDAX, TecDAX, and SDAX. In this scenario, average household income would rise from the current €72,000 to around €100,000 annually by 2035.

Shift: Focusing on dynamic sectors

Unlocking new growth opportunities for the German economy will require a strategic shift in the economic portfolio toward more dynamic sectors. The selection of these sectors can be guided by two key criteria: their global growth dynamics and their alignment with the strengths and domestic demand of the German economy (Exhibit 5). For example, the three sectors in the following list—which is not exhaustive or definitive—are promising and future-oriented, and as such, fit well within the existing strengths of the German economy:

• Healthcare. With Germany’s aging population and an investment backlog of around €30 billion in its hospitals alone,¹⁷Investitionsstau in deutschen Krankenhäusern: Bund und Länder müssen endlich handeln [Investment backlog in German hospitals: Federal and state governments must finally act], German Hospital Association, 2019. the country faces a significant challenge in ensuring affordable healthcare. However, this situation also presents a unique opportunity for the German economy, which is renowned for its strengths in medical technology, biotechnology, and robotics. By harnessing digitization, AI, and existing health data, Germany could position itself as a global leader in healthcare innovation. For example, robots developed and manufactured in Germany could significantly alleviate the workload of healthcare professionals. Such technologies are in high demand globally; projections indicate that the market for humanoid robots could grow by 17 percent annually from 2024 to 2031.¹⁸Compound annual growth rate. Humanoid robot market size, share & trends report, Grand View Research, 2023.
• Battery technology. Currently, Germany plays only a minor role in producing lithium-ion batteries that prevail today in a market dominated by China, Japan, and South Korea. Attempting to catch up in this area would be costly and unlikely to succeed due to Germany’s high cost levels. However, the outlook is more promising for high-performance, sustainable alternatives to lithium-ion technology. McKinsey analyses suggest significant economic and technological growth potential for next-generation batteries, with a potential compound annual market growth rate of 40 percent through 2035.¹⁹“Battery 2030: Resilient, sustainable, and circular,” McKinsey, January 16, 2023. Germany could leverage its strengths in research and development to secure a lead in technologies such as solid-state, silicon-anode, sodium-ion, or lithium-sulfate batteries based on early engagement (“leapfrogging”). Initiatives like the NextGenBatt and FestBatt clusters, which bring together academia and industry, are already in place.²⁰FestBatt home page.
• New materials. Germany is home to many highly specialized and interdisciplinary companies focused on the research, development, and production of innovative materials.²¹For the full McKinsey Global Institute report, see Securing Europe’s competitiveness: Addressing its technology gap, McKinsey, September 22, 2022. The market for such materials offers numerous growth opportunities, including bioplastics, recyclable composites, and low-emission building materials. These materials have the potential to reduce both environmental pollution and dependence on limited resources. Additional growth areas include high-performance alloys, nanomaterials, and 3D printing. These technologies enable the production of lighter and more stable components while simplifying and accelerating production processes. Germany already provides public funding for material science projects with high application potential.²²“SME innovative: Materials research (ProMat_KMU),” Federal Ministry of Education and Research, 2024. By focusing more strongly on innovation in new materials, Germany has the opportunity to establish itself as a technology leader in rapidly growing fields.

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To capture the full potential of dynamic sectors, leading companies continually review and adjust their portfolio as needed. They pressure-test established practices and, when necessary, phase them out while ensuring higher-value substitutes. This approach applies not only to industries, technologies, and business models but also to skills and ways of working.²³Fabian Billing, Eckart Windhagen, and Graciana Petersen, “Germany 2030: creative renewal,” McKinsey, July 6, 2021. The German economy as a whole could benefit from adopting similar strategies. A pivot to growth requires Germany to shift away from low-growth sectors and toward dynamic sectors. This could be accomplished by adjusting the activities of existing companies and increasing the number of start-ups in these dynamic sectors.

The preceding list of sectors merely offers examples. Growth opportunities exist across various domains, such as finance, agriculture, and the chemicals industry. Resilient companies continually reinvent themselves, embracing self-disruption and creative destruction. They seek growth opportunities in their market environment based on their strengths.²⁴Ian Davis, “Reflections on corporate longevity,” McKinsey Quarterly, September 1, 2014. According to our analyses, several conditions are success factors:

• Flexible resource allocation. Many of the fastest-growing and most profitable companies deploy their capital, talent, and capabilities dynamically. They respond quickly and decisively to new opportunities. In a McKinsey study, companies that reallocate their investments according to need and develop new business areas are significantly more likely to have improved their earnings potential.²⁵Ezra Greenberg, Asutosh Padhi, and Sven Smit, “2024 and beyond: Will it be economic stagnation or the advent of productivity-driven abundance?” McKinsey, January 12, 2024. An as-yet unpublished McKinsey analysis indicates that industrial companies successfully integrating software products into their portfolios achieve double-digit increases in revenue growth. Besides growth dynamics, the margin strength of the respective business areas is another major consideration for resource allocation. High margins can be achieved in segments focused on high-quality goods and services. The Swiss economic model provides an instructive example. Switzerland, which has always had a strong portfolio of high-quality industries, has recently further diversified this portfolio and strengthened its position in high-quality pharmaceutical products. This sector has significantly contributed to Switzerland’s overall economic growth over the past 20 years, based on strong growth and high margins.²⁶Die Pharmaindustrie ist der Wachstumsmotor der Schweiz [The pharmaceutical industry is the growth engine of Switzerland], KOF Bulletin (ETH Zürich), 2022.
• Focus on innovation. High-growth companies outpace their competitors by investing more in research and development for new products, processes, and services. They consistently prioritize delivering high customer value and are not afraid to make fundamental changes to their value proposition when necessary. These companies attract top-tier researchers and developers and actively pursue new technologies. They cultivate a culture of creativity and risk-taking by fostering open communication and the exchange of ideas. Continuous testing and iteration ensure rapid cycles from development to commercialization. According to a McKinsey survey, innovation-focused companies are three times as likely as other companies to encourage their employees to experiment. They embed iterative processes throughout the organization and leverage technology and analytics to accelerate testing, prototyping, and the commercialization of innovations. Successful innovators employ digital tools, including AI, twice as often as their competitors. This focus on innovation yields significant benefits, increasing the likelihood of achieving technological leadership in novel products and thus driving more growth and higher margins than in existing businesses.²⁷Laura Furstenthal, Jon McClain, Brian Quinn, and Erik Roth, “Committed innovators: How masters of essentials outperform,” McKinsey, June 9, 2022.
• Willingness to form new partnerships. High-growth companies strategically expand their portfolios through acquisitions or joint ventures, divest low-growth areas, and establish an ecosystem of partners ranging from start-ups and universities to suppliers, logistics partners, and customers. Companies that do not rely solely on organic growth but strategically expand their portfolios through mergers and acquisitions tend to outperform their competitors. According to a McKinsey analysis, companies that expand their portfolios into high-growth areas through targeted acquisitions achieve an increase in total shareholder returns of more than 6 percent.²⁸Jens Giersberg, Hannes Herrmann, Alexander Maier, and Marc Augustin, “The portfolio management imperative and its M&A implications,” McKinsey, February 29, 2024. Engaging in strategic partnerships and building an ecosystem of partners can also be highly beneficial. A recent McKinsey study shows that companies actively collaborating with start-ups can boost their innovation potential by 30 percent. Such partnerships are not merely about sharing resources but also leveraging start-ups’ agility and innovative ideas to enhance a company’s competitive edge.²⁹Sean Brown, Tobias Henz, Tawanda Sibanda, and Miao Wang, “Collaborations between corporates and start-ups,” McKinsey, May 10, 2021.

However, changes within established companies alone will likely not suffice to double the value of economic activity in Germany. An increase in start-up formation beyond current levels is also crucial, given that start-ups are key innovation drivers that can generate substantial and rapidly growing value. While Germany has made notable strides in this area in the past, recent years have seen a backsliding: in 2021, 2,900 start-ups were founded in Germany, but the number declined to 2,500 by 2023. In contrast, the United States sees nearly ten times as many start-ups despite having a population only about four times that of Germany.³⁰Next generation: Startup report 2023, Startup Mitteldeutschland, 2024. Moreover, German start-ups are less likely than their US counterparts to secure additional financing rounds as their capital needs increase. Greater access to financial resources in later funding stages could significantly improve the conditions for start-up success in Germany.³¹Markus Berger-de León, Karel Dörner, Max Flötotto, and Tobias Henz, Entrepreneurship Zeitgeist 2030: Making start-ups Germany’s next economic powerhouse, McKinsey, October 26, 2021.

Lift: Boosting productivity

While “shift” concentrates on redirecting resources and investments to dynamic growth areas, “lift” aims to elevate productivity across all sectors and value chains. There is substantial room for improvement, since Germany currently trails leading countries in productivity. Its GDP per hour is approximately 30 percent lower than that of leading European countries and the United States.³²OECD productivity statistics, 2024. Furthermore, the number of employable individuals in Germany is expected to decrease by three million by 2035.³³Demografische Entwicklung lässt das Arbeitskräfteangebot stark schrumpfen. [Demographic development leads to a significant decline in the labor supply], Institute for Employment Research, 2021. Assumption: Medium scenario for migration and fertility.

Companies aiming to enhance their productivity can focus on several critical areas, including digitization, lifelong learning, lean processes, optimized supply chains, scaling, and operational excellence:

• Digitization, automation, and AI. Companies at the vanguard of comprehensive digitization, automation, and AI implementation significantly boost their productivity by reducing manual tasks, enhancing the accuracy of workflows, and optimizing decision-making processes. Analyses show that these companies achieve a 30 to 40 percent increase in productivity compared with their competitors.³⁴Global lighthouse network: Adopting AI at speed and scale, World Economic Forum, December 2023. Successful companies identify high-potential applications with lighthouse potential, where they can pilot and showcase the implementation of new technologies.³⁵“Digital transformation to achieve operational excellence,” McKinsey, March 8, 2023. A holistic approach is helpful to unlock value potential across units and locations.³⁶Industrielles IoT und führende Technologien als Treiber der digitalen Transformation in der Produktion [Industrial IoT and leading technologies as drivers of digital transformation in production], McKinsey, January 2021. Often, organizational and management adjustments are necessary to align with new, technology-based processes.³⁷“Digital transformation to achieve operational excellence,” March 8, 2023. Additionally, leading companies adapt their risk management strategies to address the specific risks associated with new technologies, such as those related to generative AI, ensuring the responsible use of innovative solutions.³⁸“Implementing generative AI with speed and safety,” McKinsey, March 13, 2024.
• Lifelong learning. Productive companies systematically identify the new skills and knowledge essential for maintaining and expanding their competitiveness. Based on this, they invest in targeted upskilling and reskilling for their workforce. A study by the McKinsey Global Institute indicates that technical and analytical skills are becoming increasingly vital for the competitiveness and productivity of companies.³⁹Eine neue Zukunft der Arbeit [A new future of work], McKinsey Global Institute, August 2024.
• Lean processes. Productive companies analyze, improve, and streamline their business processes to ensure seamless and cost-efficient operations through complete transparency, integration, and synchronization. According to an unpublished McKinsey analysis, industry-leading organizations that adopt lean processes achieve 20 to 40 percent higher labor productivity than their competitors.
• Optimized supply chains. Productive companies leverage deep analytics and holistic approaches to plan, manage, and optimize their supply chains. A McKinsey survey reveals that companies that successfully optimize their supply chains employ advanced planning systems with integrated risk management. These systems enhance the resilience, efficiency, and customer focus of their supply chains.⁴⁰McKinsey Talks Operations Blog, “Building the supply chain of tomorrow: An integrated approach,” blog entry by Kristi Naidech, Mike Raftery, and Ketan Shah, McKinsey, November 16, 2023.
• Greater company scale. Mergers and acquisitions boost company productivity by creating synergies. In Germany, only one in ten companies grows into a large enterprise, compared with one in four in the United States and Israel.⁴¹For the full McKinsey Global Institute report, see “A microscope on small businesses: Spotting opportunities to boost productivity,” McKinsey, May 2, 2024.
• Culture of operational excellence. Highly productive companies do not rely on isolated actions to increase productivity. They foster a culture of operational excellence across all areas. They utilize continuous improvement, shared objectives, lean management, and agile work methods to achieve maximum productivity. Companies that implement a culture of operational excellence can increase their labor productivity by up to 30 percent compared with their competitors.⁴²“Today’s good to great: Next-generation operational excellence,” McKinsey, January 19, 2024.

In addition to the approaches mentioned so far, the renewal of the economic portfolio (shift) through a stronger focus on innovative technologies, dynamic sectors, and novel business models can also contribute to increased productivity. This is demonstrated by a study by the McKinsey Global Institute on the strategies of particularly productive companies.⁴³For the full McKinsey Global Institute report, see “Investing in productivity growth,” McKinsey Global Institute, March 27, 2024. See also Charles Atkins, Asutosh Padhi, and Olivia White, “What the most productive companies do differently,” McKinsey, February 16, 2023 (originally published in Harvard Business Review).

Another potential approach to boosting value creation in Germany is increasing the number of working hours per capita per year. The average is around 1,800 hours in the United States, around 1,730 hours in Italy, and around 1,520 hours in the United Kingdom. Germans, in contrast, work an average of only around 1,350 hours per year.⁴⁴“Hours worked,” OECD Indicators, 2023. Reasons for this significant gap include the high share of part-time employment and the prevalence of marginal employment (mini-jobs) in Germany. Increasing the number of working hours per capita could help enhance the growth dynamics of the German economy.

To maximize the benefits of the dual shift-and-lift strategy for the country and its people, Germany could more effectively align conditions for investors and businesses with growth objectives (Exhibit 6). According to German C-level executives, the top priority is enhancing labor market flexibility to enable more investment (see sidebar “Our survey of C-level executives”). We hope the insights presented in this chapter will inspire a balanced approach between stability and dynamism in key areas. The ultimate objective: drive more growth for everyone in Germany through increased willingness to embrace change.

6

Shift-related priorities

To foster a stronger focus on dynamic sectors—both within existing companies and based on new ventures—four critical areas need attention: targeted support for technological innovation, increased labor market flexibility, mobilization of capital for investment in growth, and streamlined public administration.

Targeted support for technological innovation

Most dynamic sectors rely on technological innovation. This is why sustainable economic growth without technological leadership is next to impossible. However, Germany lags behind in many future technologies. One reason is that support for technological innovations is dispersed across various sectors and managed by multiple institutions, making it challenging to set overarching priorities.⁴⁵Bundesbericht Forschung und Innovation 2022 [Federal report on research and innovation 2022], Federal Ministry of Education and Research, 2022.

The C-level executives we surveyed identified increased innovation funding in the pre-commercial stage as one of the top five conditions for boosting investment in Germany.

One potential solution: Germany could strive for a leading role in technologies such as deep tech (e.g., humanoid robots, quantum computers, nanosatellites) through targeted support and a regulatory environment that promotes innovation. Additionally, fostering competition for innovation investments with predictable financial outlooks could enhance technological leadership. Germany could look to countries like the United States, where NASA collaborates with private-sector partners to advance space research.⁴⁶NASA’s commercial crew program press kit, NASA, 2024. Moreover, the United States has designated 31 communities as regional innovation and technology hubs to bolster competitiveness in areas such as semiconductor production and AI. These hubs unite various stakeholders, including universities, private companies, local governments, and unions.⁴⁷Fact sheet: Biden-Harris administration announces 31 regional tech hubs to spur American innovation, strengthen manufacturing, and create good-paying jobs in every region of the country, The White House, 2023. The United States also supports innovation with regulation. Austin and San Francisco, for instance, permit autonomous vehicle testing on public roads. San Francisco collaborates closely with operators of autonomous vehicle fleets to facilitate testing, thereby significantly accelerating innovation.⁴⁸“Autonomous vehicles,” California Department of Motor Vehicles, 2024.

Europe also offers examples of targeted support for technological innovation, such as the Chips Act, which is aimed at addressing the semiconductor shortage. The European Union is mobilizing €43 billion from public and private sources for three key initiatives: building technological capacity and driving innovation, promoting public and private investments in production facilities, and coordinating efforts through the European Semiconductor Board.⁴⁹Europäisches Chip-Gesetz [European Chips Act], European Commission, 2024.

Increased labor market flexibility

To unlock new business opportunities, well-trained specialists are essential for both the current and future workforce. But while the number of job vacancies in Germany has risen by nearly 70 percent over the past decade, the employable population is declining. This has led to a shortage of skilled workers, particularly in the most productive and fastest-growing sectors of the German economy. According to the respondents to our survey, a more flexible labor market (increased “flexicurity” and simplified labor market regulations) is the most important prerequisite for increased investment in Germany.

Germany could address this challenge by seeking a new balance between job security for employees and flexibility for companies, encouraging more workers to transition into growth-oriented professions. Additionally, expanded qualification and retraining programs could help meet the evolving demands of the labor market; unemployed individuals could reenter the workforce more quickly with enhanced qualifications. Denmark’s flexicurity model serves as an exemplary approach, balancing employer flexibility with employee security. The barriers to hiring new people and laying off employees are relatively low, reducing costs and avoiding legal disputes. Employees who are members of an unemployment insurance program receive support for up to two years if they lose their jobs. Moreover, the Danish government provides extensive support with its education and retraining programs along with counseling services to help the unemployed reenter the labor market quickly.⁵⁰Flexicurity, Danish Agency for Labor Market and Recruitment, 2024.

Furthermore, Germany could aim to increase the number of employable individuals who are employed. France and Sweden offer successful examples of how this can be achieved. In these countries, childcare is better aligned with the needs and working hours of employed parents.⁵¹“Sweden National Education Systems: Early childhood education and care,” Eurydice, European Commission, 2023. The result: in France, average annual working time is about 12 percent higher than in Germany; in Sweden, the lead is 7 percent.⁵²“Hours worked,” OECD Indicators, 2022. In these comparison countries, more employees work full-time, and those who work part-time work more hours per capita, partly due to better childcare options.

To ensure a sufficient supply of qualified workers for Germany’s economic transformation, those entering the country from abroad could be integrated into the labor market more swiftly. The Netherlands offers a leading example with its Civic Integration Program, which combines language courses with internships or volunteer work.⁵³“New Civic Integration Act 2021,” Government of the Netherlands, 2024. Additionally, Germany could enhance its attractiveness to highly qualified professionals by establishing a fast track to residence permits for individuals with advanced education, relevant work experience, and specialized knowledge in areas vital to domestic economic growth.

Looking ahead, continuous skill development and qualification could become an integral part of working life. Each individual could be encouraged to take greater responsibility for their professional growth. Singapore’s SkillsFuture program exemplifies this approach, providing employed individuals with a personal training budget and access to more than 7,000 courses.⁵⁴“SkillsFuture,” Singapore Ministry of Manpower, 2024. Further proposals for labor market flexibilization and activation have been developed by the Alliance of Opportunities.⁵⁵“Initiative für eine neue Arbeitswelt” [Initiative for a new world of work], Allianz der Chancen, 2024. McKinsey Germany is a knowledge partner of this alliance.

Mobilization of capital for investment in growth

Substantial capital investment is required to better align the German economy with dynamic future fields. By 2035, investments totaling approximately €680 billion will be needed for research and development in promising areas alone (in the full-potential scenario). While Germany has ample capital in principle, a significant portion of it is not currently available for growth-relevant investments. Moreover, high-risk areas such as large infrastructure projects and new technology development often receive no private funding at all.

Germany could significantly boost public spending on investments. Countries like New Zealand already facilitate this with double-entry bookkeeping in their budgets. Transitioning from cameral accounting, which Germany currently uses for public spending, to double-entry bookkeeping would allow investments to be depreciated over several years. This would make investments more manageable, since the full amount would not affect the budget all at once.⁵⁶“Accounting policies for the financial statements of the Government of New Zealand for the year ended 30 June 2022,” New Zealand Government, 2022.

Germany could more strategically direct its existing capital toward domestic growth and risk investments, following the example set by France’s Tibi Initiative for tech financing.⁵⁷“Initiative Tibi : un plan pour financer le développement des entreprises technologiques” [Initiative Tibi: A plan to finance the development of technological companies], French Ministry of Economy, Finance, and Industrial and Digital Sovereignty, 2023. The United States has found a way to activate capital more effectively: venture capital investments as a percentage of GDP are more than eight times higher there than in Germany, primarily driven by pension funds.⁵⁸Venture capital investments, OECD Structural and Demographic Business Statistics Database, 2023. In the United States, pension funds contribute 20 percent of the capital in venture capital funds, compared with a mere 8 percent in Germany.⁵⁹Berger-de León et al., “Entrepreneurship Zeitgeist 2030,” October 26, 2021. Consolidating German pension reserves could enable larger-scale investments with improved risk–return profiles. And increased investment in venture capital and private equity by German pension funds could yield higher returns and better portfolio diversification while also funneling more capital into innovative sectors. This strategy is already widely practiced in Australia.⁶⁰ASFA pre-budget submission for the 2022-23 budget, Association of Superannuation Funds of Australia, 2022. Additionally, adjusting the Solvency II regulation could unlock more capital for growth.⁶¹The future of European competitiveness—Part A: A competitiveness strategy for Europe, Europäische Kommission, 2024.

The German government is taking its first steps to address these challenges with its WIN Initiative, collaborating with powerful investors to bolster Germany’s innovation ecosystem. The initiative aims to mobilize more than €10 billion for investments in high-growth start-ups and to enhance conditions for venture capital providers.⁶²Julian Olk and Nadine Schimroszik, „WIN-Initiative“: So will die Ampel die deutsche Start-up-Branche voranbringen [“WIN Initiative”: How the traffic light coalition aims to advance the German start-up sector], Handelsblatt, 2024.

Streamlined public administration

Public administration plays a pivotal role in either impeding or accelerating economic growth. In our survey, C-level executives emphasize the need to expedite public administrative processes, with 77 percent of respondents identifying this as a critical factor in rapidly revitalizing the German economy.

Germany has the opportunity to streamline its public administration to support economic renewal. Permit applications, for example, could be processed far more efficiently and swiftly than they are today. In the Netherlands, the approval of applications for heavy-transport permits is granted in less than a week on average, versus six to 12 weeks in Germany.⁶³“So wird es keine Energiewende geben” [This will not lead to an energy transition], Tagesschau, 2023. This efficiency is achieved through centralization and complete digitization. Vehicles are registered online, and the planned route and vehicle dimensions are submitted digitally. The entire process is handled by the Dutch Vehicle Authority, which can issue permits without involving additional agencies. Portugal is also innovating in this area, where permits are automatically granted if the public administration does not process the application within a legally stipulated period.⁶⁴“Requesting a short-term exemption,” Netherlands Vehicle Authority, 2024.

In the future, Germany could prioritize user-friendliness in administrative processes. In South Korea, for example, citizens can access a wide range of public services with a single ID, eliminating the need for repeated form submissions and reducing the number of visits to government offices.⁶⁵“E-government for better civil services: How the Korean government implemented the e-registration system,” Global Delivery Initiative, 2021.

Further insights into the digitization of public administration can be found in the McKinsey article “Digital public services: How to achieve fast transformation at scale.”⁶⁶Matthias Daub, Axel Domeyer, Abdulkader Lamaa, and Frauke Renz, “Digital public services: How to achieve fast transformation at scale,” McKinsey, July 15, 2020.

Lift-related priorities

Four key areas are crucial to achieve the productivity increase targeted by the dual strategy in Germany: accelerated AI implementation at scale, future-proofing energy supply at competitive prices, the utilization of the EU internal market for scale, and strengthened and stabilized demand.

Accelerated AI implementation at scale

The digitization of the German economy, particularly the implementation of AI, offers significant potential to increase productivity and enhance the country’s attractiveness as a business location. According to a McKinsey study, AI has the potential to substantially boost labor productivity in Germany by 2040.⁶⁷“The economic potential of generative AI: The next productivity frontier,” McKinsey, June 14, 2023.

By placing a stronger emphasis on digitization and AI, Germany could significantly streamline various processes, particularly in public administration. A recent McKinsey analysis indicated that the use of generative AI and other technologies could automate tasks that currently take up about 60 to 70 percent of employees’ time in public administration. These tasks include content creation and synthesis, as well as interactions with citizens.⁶⁸Generative künstliche Intelligenz in der öffentlichen Verwaltung – sieben Erfolgsfaktoren für eine flächendeckende Nutzung [Generative artificial intelligence in public administration: Seven success factors for widespread adoption], McKinsey, September 4, 2024.

Moreover, AI can contribute to making administrative processes fairer and more transparent. For instance, if AI were employed to evaluate applications based on uniform criteria, all applicants could be assured of equal treatment under the same conditions, irrespective of the applicant or the specific caseworker involved. In the United States, this approach—specifically using AI-based natural-language processing—has expedited the processing of social-benefit applications, making it more reliable and more efficient than traditional methods.⁶⁹“The government is using AI to better serve the public,” US Government, September 1, 2023.

Small businesses stand to gain significantly from the implementation of digitization, automation, and AI. Singapore, for example, supports small and medium-size enterprises by promoting AI adoption with grants that cover the costs of acquiring AI licenses and running training programs. This initiative lowers the barrier for businesses to implement AI and boosts productivity.⁷⁰Timothy Goh, “SMEs to receive more support to adopt AI with new S’pore–Microsoft tie-up,” Straits Times, May 22, 2024.

In the education sector, AI could facilitate more effective and personalized learning. South Korea offers AI training for teachers and encourages the use of AI in classrooms, which has demonstrably improved overall learning outcomes and prepares students for the effective use of AI in other contexts.⁷¹Dongkuk Lee and Hyuksoo Kwon, “Meta-analysis on effects of artificial intelligence education in K-12 South Korean classrooms,” Education and Information Technologies, May 2024.

Success factors of implementing digitization, automation, and AI include the expansion of existing technical infrastructure, systematic development of technical skills, effective risk management, complete transparency, and societal acceptance.⁷²“Generative künstliche Intelligenz in der öffentlichen Verwaltung” [Generative artificial intelligence in public administration], September 4, 2024.

Future-proof energy supply at competitive prices

A secure supply of energy at internationally competitive prices is essential for a strong, productive, and resilient economy. According to the C-level executives we surveyed, affordable energy is one of the three most important conditions for increased investment in Germany.

Germany has the potential to secure a futureproof and competitive energy supply by advancing its energy transition strategy. This development could reduce the system costs for transforming the German energy system by up to 20 percent (a decrease of €150 billion). Key elements of this approach include constructing more modern gas power plants capable of running on hydrogen in strategic locations and aligning the expansion of wind and photovoltaic capacities more closely with demand. This strategy would necessitate less extensive grid expansion compared with current plans. Additionally, it would enable Germany to meet rising electricity demand during winter months and peak load times entirely with domestic generation capacity. This would achieve the emission reduction targets set by policymakers for 2035 (a 90 percent reduction from today’s level) while enhancing supply security and the economic viability of the energy transition. Furthermore, it would address challenges such as rising grid fees and regional bottlenecks.

Moreover, Germany could bolster the future viability of its energy system by fostering entrepreneurial activity and having scientists focus on innovative energy sources and storage solutions. These and other proposals for ensuring a secure energy supply at competitive prices are detailed in the McKinsey study “Pathway to the future of power supply.”⁷³Zukunftspfad Stromversorgung [Pathway to the future of power supply], McKinsey, January 2024.

Utilization of the EU internal market for scale

With approximately 450 million citizens, the European Union is the world’s largest multinational internal market. At around $17 trillion, the European Union’s GDP is comparable to that of the United States.⁷⁴“Nominal gross domestic product (GDP),” OECD Indicators, 2023. In our survey, C-level executives identified uniform, business-friendly regulations across Europe as one of the five most important conditions for increased investment in Germany.

A study by the McKinsey Global Institute indicated that to keep pace with their US competitors, European corporations would need to nearly double their current size while adhering to antitrust regulations—for example, through international expansion.⁷⁵Zukunftspfad Stromversorgung [Charting the future of power supply], January 2024. Currently, however, the partly inconsistent regulation across EU member states is perceived as a major obstacle to scaling business models and companies in Europe.⁷⁶The future of European competitiveness, European Commission, September 2024. From a business perspective, the integration of the EU internal market is only three-quarters complete.⁷⁷“Economic confidence among Europe’s industrial leaders cools as supply chain issues, inflation cloud the horizon,” European Round Table for Industry, November 24, 2021. Experts estimate that the current restrictions are reducing the European Union’s GDP by 5 to 10 percent.⁷⁸“Accelerating Europe: Competitiveness for a new era,” January 16, 2024.

A possible approach to advance the integration of the EU internal market is the introduction of the “28th regime.” This regime would feature simplified, EU-wide regulations, giving companies the option to adhere to this regime or to the legislation of individual member states. This kind of legal framework could cover areas such as product liability, labor protection, professional qualifications, taxation, and competition. The 28th regime would make it easier for companies to pursue cross-border contracts, mergers, and acquisitions, thereby lowering the threshold to achieve an internationally competitive scale.⁷⁹“Accelerating Europe: Competitiveness for a new era,” January 16, 2024.

In addition, barriers to the free flow of capital within the European Union could be further lowered. This could include areas such as insolvency law, financial market supervision, and deposit insurance. Lowering barriers in these areas would enable national markets to become more closely interlinked, giving companies easier access to financial resources, enhancing financial stability, and facilitating the development and implementation of financial innovations. According to a McKinsey study, more integrated capital markets could foster prosperity in Germany and contribute to an increase in international competitiveness.⁸⁰“Overcoming the European Tech IPO Challenge,” McKinsey, July 5, 2024.

A comparison of the European Economic Area with the United States and China, along with suggestions for enhancing the competitiveness of the European economy, can be found in the McKinsey Global Institute article “Accelerating Europe: Competitiveness for a new era.”⁸¹“Accelerating Europe: Competitiveness for a new era,” January 16, 2024.

Strengthened and stabilized demand

Robust demand for domestic goods and services is a crucial condition for doubling the value of economic activity in Germany. After all, consumption drives three-quarters of Germany’s GDP.⁸²“Volkswirtschaftliche Gesamtrechnung” [National accounts], Federal Statistical Office, 2023. In our survey, executives identified strong and stable demand as the second most important condition for increased investment in Germany.

Germany could implement various actions to create the conditions for stable demand, thus providing a reliable foundation for entrepreneurial decisions. For instance, adjustments to the tax and social security burden on labor income could be considered to stabilize consumer spending despite the population decline in the age group that drives the bulk of consumption.⁸³OECD-Wirtschaftsberichte: Deutschland [OECD economic surveys: Germany], OECD, 2023. In Germany, the average tax and social security burden on labor income is 48 percent; the OECD average (for 2021) is around 35 percent.⁸⁴OECD-Wirtschaftsberichte: Deutschland [OECD economic surveys: Germany], OECD, 2023.

A predictable retirement income could help ensure that employees do not have to put money aside out of fear of old-age poverty, which would increase leeway for higher consumer spending. A reform of the pension system should also be considered, since maintaining the current structures could lead to a declining level of security for statutory pensions with sharply rising contribution rates.⁸⁵“Wachstumsschwäche überwinden—in die Zukunft investieren” [Overcoming growth weakness], German Council of Economic Experts, 2023. Sweden offers a possible solution: there, the retirement age is linked to life expectancy in the long term.⁸⁶“Beschäftigung, Soziales und Integration, Schweden—Altersrente” [Employment, social affairs, and integration, Sweden—old-age pension], The European Commission, 2024. As average life expectancy increases, the retirement age automatically moves up.

Each initiative outlined in this chapter holds the promise of bolstering the German economy and pivoting to growth. However, these individual approaches would have the most impact if executed in a coordinated and harmonized manner, particularly for the development of specific future-oriented fields. A prime example is the success of the coordinated approach to securing gas supply during the winter of 2022–23.⁸⁷“Maßnahmen zur Sicherung der Erdgasversorgung” [Measures to secure natural gas supply], Federal Ministry for Economic Affairs and Climate Action, 2024.

For the growth pivot to succeed, a shift in mindset is crucial: less “Yes, but” and more “Why not?” Less “This will never work” and more “What do we need to make it happen?” Less “Count me out” and more “I’m in!” This sentiment is echoed by Germany’s C-level executives, 64 percent of whom believe that a shared vision and an openness to change would expedite the renewal of the German economy. The key word here is “shared.” If Germany achieves a pivot to growth, everyone stands to benefit; to make it happen, everyone can contribute—political decision-makers, companies, investors, banks, scientists, researchers, and citizens.

• Political decision-makers can champion the dual strategy of shift and lift by spearheading strategy development, program design, implementation planning, and communication, working closely with the private sector and academia.
• The private sector can lead the way in tackling significant future-oriented tasks by pooling resources. For example, consortia can address challenges that surpass the capabilities of individual companies.
• Investors and banks can catalyze transformation by creating innovative financial products with low initial investments, extended terms, and flexible repayment structures.
• Scientists and researchers can propel the future resilience of the German economy by engaging in more applied research, pursuing stronger industry collaboration, and fostering entrepreneurship.
• All citizens can play a role in driving the pivot to growth based on their mindsets and actions, such as embracing job changes and committing to lifelong learning.

Growth starts with recognizing that standing still is not an option; it is driven by everyone’s resolve to be part of the solution by embracing change. Each stride toward executing the dual strategy for greater growth can help put Germany on an upward trajectory. As investment returns improve through pioneering entrepreneurial decisions favoring dynamic sectors and heightened productivity, more capital is unlocked. This fuels further economic activity, boosts wages, and increases tax revenues. The amplified economic activity leads to higher earnings and higher company valuations based on current and anticipated profits. Rising earnings pave the way for further investments, setting off a virtuous cycle of higher returns, increased investments, and robust growth (Exhibit 7). This could help make the vision of growth for all a tangible reality. All it needs is someone to get the ball rolling.

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