"An Agency Dedicated to Security of Supply Would Be a Sensible Step"

The economic situation in Germany is so dire that the government must take urgent action, Achim Wambach argues in an interview with the weekly newspaper VDI nachrichten. The ZEW president identifies the reduction of bureaucracy, the lowering of the tax burden, and targeted investments in technology and infrastructure as key areas for action to revive Germany’s competitiveness.

Mr. Wambach, Germany is falling behind in the global competition between locations, whereas the US and China are pushing ahead. How do bureaucracy and a lack of investment contribute to this?

We see clearly that regulation has become the biggest barrier to innovation – even more so than the skills shortage. It is not financing that features high on companies’ lists of priorities; those that are already established generally manage to secure funding. But we are seeing start-ups moving elsewhere because they find it difficult to secure funding rounds in the venture capital sector.

Could an ‘autumn of reforms’, as recently called for by the German industry association BDI, help?

The economic situation is now so dire that the government must take urgent action. We have had three years of recession, and sentiment has deteriorated again. Many of the measures adopted by the government so far – such as the ‘mother’s pension’ and changes to VAT in the hospitality sector – did not have the effect of boosting economic activity or supporting the economy. Fundamental problems have been deferred to committees. We still have the highest corporate taxes; we still have the highest tax burden on employees. The government’s strategy must now be clearly discernible. 

What concrete steps would be needed?

Politicians might now say that the aim is to reduce taxes and levies and to make the labour market more flexible. Cutting red tape has been on the agenda for 20 years, but it has now become a new priority because the economy is not growing. Bureaucracy not only implies reporting requirements, but it also means actual regulation. Our digital companies do not suffer because of requirements like data protection reports or similar issues. For them, the problem is that there are many things they cannot do in Germany.

How can technology transfer from research to industry be accelerated?

In Germany, the academic world places the greatest emphasis on publications and teaching, not on spin-offs. By contrast, in the US, the fact that a professor has founded a company is also seen as a measure of quality. We lack this lever. In our education programmes we need to focus more on the intrinsic value of transferring scientific findings to the business world. In the Leibniz Association, of which we are a member, we are also judged by how many start-ups we produce. Therefore, we offer further training, make use of funding programmes and actively engage in knowledge transfer. Overall, more weight could be given to this in Germany.

Energy prices are putting the industry under severe pressure. Is Germany threatened by de-industrialisation?

A decline in heavy industry is inevitable, because our energy prices will not the lowest in the future either. Energy-intensive sectors with low added value are not very likely to survive. But many businesses create high added value, have patents and expertise – these companies are here to stay. That is why the term ‘de-industrialisation’ is not appropriate. I believe we spend too much money on production subsidies, but too little on research and development. That is where the real shortfall lies.

The automotive sector is particularly at risk. How do you assess the situation?

The industry is under massive pressure. This is obvious from the figures on employment and new hires, both of which are falling. These are long-term decisions, not short-term ones. New competitors such as Tesla or Chinese manufacturers brought good products to market in a short space of time. Added to this are digital players such as Google in the field of autonomous driving. Any industry would suffer under such competitive pressure. This is why policies are needed to support the industry. Instead, additional hurdles are raised, such as fleet targets or the ban on combustion engines, even though we already have an effective tool for climate action, namely emissions trading. The market will regulate itself – petrol will become more expensive, batteries cheaper, and customers will buy electric vehicles. Additional regulation is not necessary here.

How could the automotive industry be supported in practical terms?

The first step would be not to hinder or penalise manufacturers. Expanding the charging infrastructure would be important; there is much more we can do in this area. Temporary schemes or purchase incentives for electric vehicles help, but technological competitiveness is key. For this we need skilled workers and a regulatory framework that fosters innovation.

Which areas of investment are particularly important for industry?

If you look at the main part of R&D expenditure, it is concentrated in mechanical engineering, chemicals, pharmaceuticals, the automotive sector and electronics. However, new technologies such as AI, cloud computing and robotics cut across sectors. The automotive industry also uses AI, and data centres are needed in the engineering sector. These technologies must be developed in Germany and across Europe – and we need the skilled workers to do so. Another aspect is the defence sector. Countries such as the US and Israel invest a large proportion of their defence budgets in research and development, which also benefits civilian innovation. Germany is still spending too little on R&D in this area. We need to view defence more as an opportunity to develop new technologies that can also be used in the civilian sector.

Some Europeans talk about ‘strategic autonomy’ regarding key products such as semiconductors or batteries. Is that realistic?

We need to distinguish between promoting innovation and building resilience. When it comes to security of supply, we must identify where genuine vulnerabilities lie. Gas was a clear-cut case, with a risk of rationing measures being adopted. With solar technology or batteries, the situation is different. Expansion might slow down, but a basic supply is secure. Setting up a European agency dedicated to security of supply would be a sensible step. We often lack the data needed to assess dependencies correctly. Without transparency, we are flying blind. 

How can trade policy support both transformation and climate targets?

Emissions trading is a useful tool. However, the Carbon Border Adjustment Mechanism (CBAM) is not working properly: Steel imports are covered but cars with steel components are not. This puts European companies at a disadvantage. Another unresolved issue is how to provide relief for exporters who face international competition. Without a solution, there is a risk that production will move elsewhere. For the time being, the only option is to allocate allowances free of charge to keep production in Europe. But this is not a long-term solution.

This opinion piece first appeared in VDI nachrichten.