Robert Grundke
OECD Economic Surveys: Germany 2025
Abstract
Already before the pandemic and the energy crisis, economic growth had slowed down, driven by weak business dynamism and productivity growth. High administrative burden and regulatory barriers to competition have hampered the entry and growth of innovative firms and reduced competitive pressures on incumbents to innovate, invest in adopting new technologies and improve productivity. Industrial and labour market policies have tended to favour incumbents and hampered the reallocation of resources to young and innovative firms, weighing on allocative efficiency and slowing down structural change. To revive business dynamism and productivity growth, it is key to reduce the administrative burden and make regulation and public policies more competition friendly. This will require accelerating the digitalisation of the public administration and harmonising and simplifying administrative procedures and regulations across levels of government. Reducing occupational licensing requirements would help lower barriers to firm entry. Strengthening the power of the competition agency to challenge regulation that hampers competition as well as better governance of state-owned enterprises, particularly at the local level, are also needed.
Already before the pandemic and the energy crisis, economic growth in Germany had slowed down more than in other OECD countries (see Chapter 1). The slowdown in potential economic growth has been driven by weak investment, a shrinking working age population and declining productivity growth (Figure 2.1). As rapid population ageing will continue to reduce the working age population and energy prices are likely to remain above pre-crisis levels and weigh on the competitiveness of manufacturing firms, fostering investment and productivity growth is key for maintaining high living standards.
Contributions to potential output per capita growth, in percentage points
Source: OECD Economic Outlook database.
Since the mid-2010s, the decline in labour productivity growth has been increasingly driven by declining total factor productivity growth, which captures technological progress, skills of workers and managers as well as how efficiently capital and labour are allocated within and across sectors of the economy (Figure 2.1). Recent evidence shows that in manufacturing resources have been increasingly locked in firms with lower productivity hampering the growth of more productive and innovative firms and reducing average productivity growth (SVR, 2023[1]). The increase of employment in services sectors has also contributed to a decrease in average productivity growth, as employment growth has been strongest in sectors with lower average productivity, such as public services, health and social services (SVR, 2019[2]). Also within firms, productivity growth has suffered from a weak adoption of digital technologies and innovation (as discussed in the 2020 OECD Economic Survey of Germany).
The decline in allocative efficiency and firm-level productivity growth is related to the existence of barriers to entry and firm growth. If incumbent firms are less challenged by new market entries, they have lower incentives to innovate, upgrade their management skills, invest in adopting new technologies and improve productivity, particularly in high-technology sectors (Bloom and Van Reenen, 2007[3]; Bloom, Draca and Van Reenen, 2015[4]; Aghion et al., 2009[5]). Moreover, new firm entries have been found to significantly contribute to innovation, structural change and productivity growth (Dent et al., 2016[6]; Gourio, Messer and Siemer, 2016[7]). Since 2008, market entry rates of firms with at least 2 workers or owners have declined in Germany compared to a benchmark group of countries, both in manufacturing and services (Figure 2.2). Moreover, the post-entry growth of firms has been much lower than in benchmark countries, and this applies to almost all sectors of the economy. This points to the existence of important barriers to firm entry and growth, such as administrative burden, regulatory barriers to competition, market power and anti-competitive practices of incumbents or weak access to finance for new firms (Calvino, Criscuolo and Verlhac, 2020[8]). Rapid population ageing has also contributed to lower entrepreneurial activity and entry rates but cannot explain the weak post-entry growth of firms.
Note: Panel A illustrates entry rates (in percentage), computed as the number of entering firms divided by the total number of active units in the same period (i.e. incumbent and entering firms), focusing on employer businesses, i.e. firms with at least 2 workers or owners. Panel B illustrates post-entry growth of surviving entrants, computed as total employment of all surviving entrants three years after entry divided by the total employment at entry for the same firms, focusing on employer businesses. Entry is defined as the first year of activity with positive employment. Figures may differ from official statistics owing to data source and methodological differences. The benchmark includes an unweighted average of data from the following countries: Finland, France, Italy, Portugal, Slovenia, Spain, the United Kingdom (for which data was available up to 2022).
Source: OECD DynEmp (v3_2) database.
Moreover, low and declining exit rates as well as decreasing job reallocation among incumbents indicate that employment is increasingly concentrated in larger and older incumbent firms (Figure 2.3, Figure 2.4). This has likely contributed to the decline in allocative efficiency and average productivity growth, as resources were locked in less productive incumbent firms instead of fuelling the growth of younger and more productive firms (Hsieh and Klenow, 2009[9]; Adalet McGowan, Andrews and Millot, 2017[10]). Moreover, the declining job reallocation can also be associated with a lack of knowledge diffusion across the economy, which has contributed to weak digital adoption and innovation in many firms and a decrease in average productivity growth (Akcigit and Ates, 2021[11]; Andrews, Criscuolo and Gal, 2016[12]). Low and declining firm exit and job reallocation rates are likely related to policies and regulations favouring incumbent firms and hampering job mobility as well as rising market power of incumbents (Calvino, Criscuolo and Verlhac, 2020[8]; SVR, 2019[2]).
Note: : Panel A illustrates exit rates (in percentage), computed as the number of exiting firms divided by the total number of active units in the previous period (i.e. incumbent and exiting firms), focusing on employer businesses, i.e. firms with at least 2 workers or owners. Exit is defined as the last year of activity with positive employment. Panel B illustrates the job reallocation rates of incumbents (in percentage), computed as the sum of job creation rates and job destruction rates of active firms with positive employment, focusing on employer businesses and excluding entering and exiting firms. Figures may differ from official statistics owing to data source and methodological differences. The benchmark includes an unweighted average of data from the following countries: Finland, France, Italy, Portugal, Slovenia, Spain, the United Kingdom (for which data was available up to 2022).
Source: OECD DynEmp (v3_2) database.
Weak investment has been another factor for declining labour productivity and GDP per capita growth, especially in the early 2010s (Figure 2.1). This has been partly related to weak public investment since the 2000s, particularly at the local level, due to weak infrastructure planning capacity and financial difficulties in many municipalities as well as complex and lengthy planning and approval procedures (see Chapter 1 and 4 as well as the previous OECD Economic Survey of Germany). Weak public infrastructure investment has also negatively affected private investment due to spill-over effects. For example, the lack of high-quality digital connectivity has reduced incentives for firms to invest in digital technologies (see Chapter 4). Moreover, private investment has also been hampered by other factors, which have also weighed on business dynamism and innovation, such as high administrative burden or regulatory barriers to entry and firm growth. As discussed in the previous OECD Economic Survey of Germany, firms and households have invested a significant part of their savings abroad and not in the domestic economy, contributing to a record high current account surplus.
Note: Panel A illustrates the percentage of employment in young SMEs relative to total employment. Young SMEs are defined as firms with less than 250 persons engaged and less than 6 years old, focusing on employer businesses, i.e. firms with at least 2 workers or owners. Panel B illustrates the average size of incumbent firms, computed as total employment divided by the number of active firms with positive employment, focusing on employer businesses and excluding entering and exiting firms. Figures may differ from official statistics owing to data source and methodological differences. The benchmark includes an unweighted average of data from the following countries: Finland, France, Italy, Portugal, Slovenia, Spain, the United Kingdom (for which data was available up to 2022).
Source: OECD DynEmp (v3_2) database.
Administrative burdens can hinder the entry and growth of new firms and hamper business dynamism and competition. This is because young and smaller firms have more difficulties than larger incumbents to pay for fixed costs implied by regulatory requirements and administrative procedures, for example related to compliance with tax laws, environmental regulations or planning and approval procedures for investments. Moreover, regulation and the related compliance costs can directly hamper the entry and growth of new firms, for example in the case of administrative requirements for starting a company, or hamper competition, for example if technical standards, procurement design or subsidies favour certain companies over their competitors (Calligaris et al., 2024[13]).
2.2.1. Continuing to reduce the administrative burden
According to the bureaucracy cost index of the Federal Statistics Office, which measures the administrative burden for businesses due to reporting requirements, administrative burden for firms has declined since 2020 (Figure 2.5, Panel A). This is due to several measures simplifying invoicing and accounting, including the introduction of e-invoicing between firms, the increase of reporting thresholds, and the digitalisation of public services (Nationaler Normenkontrollrat, 2024[14]). However, this index does not consider other forms of administrative burden, such as costs incurred due to lengthy administrative procedures for obtaining licenses and permits, which are also influenced by the capacity of the public administration. Another index that measures broader compliance costs implied by regulation has increased significantly in recent years (Figure 2.5, Panel B). This regulatory compliance cost index is used as the basis for the federal one-in-one-out (OIOO) rule, which mandates that at the end of each legislative period, the balance of costs for firms related to all newly introduced federal legislation should be balanced or negative. However, despite an increasing index, the government has complied to the OIOO rule in recent years, which is due to discretionary exemptions of certain regulations from the OIOO rule, in particular the exclusion of all direct implementations of EU regulations. For example, the strengthening of regulation concerning investment in energy efficiency of buildings is included in the index (Figure 2.5) but was excluded from the OIOO rule as it is defined as a direct implementation of EU regulation. In addition, certain regulations have also been excluded from the regulatory compliance cost index, for example the increase of the minimum wage in 2022. Although the costs related to the excluded regulations are not necessarily related to administrative burden, discretionarily excluding certain regulations from the OIOO rule or the regulatory compliance cost index hampers transparency and credibility. Instead, the OIOO rule should be better based on the bureaucracy cost index and focus exclusively on the administrative costs of regulation, while this index should include the administrative costs related to the implementation or transposition of EU regulation as well as the costs for households and the public administration. Raising awareness on regulatory compliance costs for the public administration could help decrease administrative burden within the public administration, which is key to free scarce resources and shorten the time for administrative procedures for firms and households. Laender governments should also introduce their own one-in-one-out rule.
Note: The index on administrative burden for firms includes costs related to interactions with the public administration, such as requesting licenses and permits, filling in forms, notifying information, providing statistics or complying with reporting requirements. Costs of compliance with new regulation includes costs related to administrative burden but also all other costs implied by the regulation, e.g. due to monitoring, training or recruitment of staff, organisational adjustments, equipment or building investments or the purchase of goods or services. The minimum wage increase has been excluded from the regulatory compliance index for firms in Panel B after a decision by the federal government in September 2024.
Source: Destatis and Normenkontrollrat.
Better monitoring the administrative costs implied by regulation should be combined with strengthening qualitative approaches to improve the quality of laws and regulations. To reduce administrative burden implied by the existing stock of regulation, a workshop-based approach (Praxis Checks) has been introduced that focuses on a specific administrative procedure, for example registering a company, and engages relevant stakeholders to identify particularly cumbersome bureaucratic hurdles and potential solutions. This approach is welcome and should be expanded. While regulatory impact assessment is mandatory for all primary and secondary legislation prepared by the federal government, there is room for improvement. Although an evaluation of alternatives to the proposed regulation, which can reach the same policy objective, should be included in each assessment, this is often not the case due to weak capacities for cost-benefit analysis and a lack of enforcement. Strengthening the powers and capacities of the Normenkontrollrat to scrutinise the regulatory impact assessment of ministries, in particular the assessment of policy alternatives, and raise awareness among legislative drafters could help improve the quality of legislation and reduce regulatory costs. This should be combined with improving capacities for data analysis and policy impact evaluation, as recommended by the previous OECD Economic Survey of Germany. The Federal Statistics Office already supports ministries in calculating compliance costs of proposed regulation and conducts workshops to improve capacities for ex-post impact evaluation. Also expanding training to improve capacities for cost-benefit analysis should be a key priority to improve ex-ante regulatory impact assessment, including the assessment of alternatives. This should be combined with other measures to improve regulatory quality at early stages of the legislative process. Plans to establish a government think tank for legislative drafting, which will provide tools, training and advice for public officials involved in legislative drafting, should be implemented. Thereby, efforts should particularly focus on improving stakeholder engagement in the legislative drafting process, possibly building on the first experiences with the Praxis Checks.
To significantly reduce the administrative burden, fundamental institutional changes are necessary, which will require a cross-party consensus including Laender governments. High administrative burden for firms is in many cases related to complex regulations and administrative procedures that differ across Laender and municipalities, which act as local market entry barriers and lead to fragmented markets. For example, construction standards differ across Laender and even across municipalities, as in the case of fire protection standards or regulation on the steepness of roofs, which prevents realising returns to scale through modular construction approaches. Another example is the fragmentation of IT standards for the digitalisation of the public administration, which protects many smaller local IT firms, increases administrative burden within the administration and leads to large public spending inefficiencies (see below). Redesigning the allocation of responsibilities within the federal system and allowing for more centralisation in certain domains, such as registries and IT standards as well as the building code, is a top priority to reduce administrative burden for all stakeholders (see Chapter 4). In addition, promoting the bundling of tasks and harmonisation of administrative procedures at all levels of government could help to reduce administrative burdens and improve the capacity of the public administration, in particular given skilled labour shortages (Nationaler Normenkontrollrat, 2025[15]). This would require a joint commitment of all levels of government to the bundling of tasks and a strong steering and implementation unit at the centre of the federal government as well as including a general requirement for cooperation in the constitution and reducing legal uncertainties due to the prohibition of mixed administration (see Chapter 4).
First steps have been taken to review, simplify and harmonise existing regulations and administrative procedures across levels of government, particularly related to planning and approval procedures for transport, digital and renewable energy infrastructure, and these efforts should be expanded. The definition of specific infrastructure projects as projects of overriding public interest has accelerated planning and approval procedures, as uncertainty about possible legal challenges is reduced. The creation of a specialised senate for energy infrastructure projects at the federal administrative court has accelerated legal proceedings. Silence-is-consent rules have been introduced, for example in the context of onshore wind park projects, and should be expanded to other administrative procedures where appropriate (Nationaler Normenkontrollrat, 2024[14]). Reducing reporting and certification requirements and allowing for more self-declarations where possible, while improving enforcement through inspections and better monitoring tools, would also help reduce the administrative burden. The maintenance of existing infrastructure should be subject to fast-track approval procedures, while for new projects common environmental standards and animal-population based-approaches for protecting biodiversity should be adopted. Stakeholder involvement early in the project planning process is key to facilitate public consensus and reduce litigation. The simplification and harmonisation of approval procedures for heavy machinery transport is a pre-condition for ensuring that projects are not put on hold due to missing construction inputs. To reduce administrative burden, accelerate procurement procedures and simplify project management, the requirement to split infrastructure projects in smaller parts to favour the participation of smaller firms in tenders should be aligned with EU guidelines and made more flexible, as planned in a recent draft bill.
Accelerating the digitalisation of public administration has large potential to reduce the administrative burden and improve the capacity of the public administration. The ongoing digitalisation of public services in the context of the online access law has slightly reduced the administrative burden for starting a company (Figure 2.6). However, an online one-stop shop that integrates all different licensing and registry procedures necessary to start a firm still does not exist. This is related to the fact that different levels of government are responsible for different administrative procedures. Many registries are decentralised and not interlinked, so that for starting a limited liability company it is necessary to complete 14 different procedures with 7 different administrative bodies, which is more than in other OECD countries. A common electronic firm identifier for tax and other administrative procedures has been established in November 2024, which is a significant step forward given the decentralised nature of the tax administration (see the previous OECD Economic Survey of Germany). However, this firm identifier still does not allow to enter firm information only once for all interactions with public bodies (once-only), as many decentralised registers are not yet digitalised and legal and technical hurdles as well as heterogenous interpretation of the EU data protection regulation across Laender hamper their inter-linkage. If firms and households would need to enter their information electronically only once for all interactions with public bodies, the cost of bureaucracy could be reduced by about half for firms and households (Normenkontrollrat, 2017[16]). The potential gains for the public administration due to automation of data entry and processing are even larger, while improvements in public spending efficiency due to better policy impact analysis and targeting would further increase these benefits. Before a one-stop shop for starting a business is implemented, providing information on all licenses and permits required for running a business in a centralised online inventory and regularly updating it would help.
Accelerating the digitalisation and linkage of registries, implementing the once-only principle and digitalising administrative procedures should become a key policy priority. This will require setting mandatory common standards on design and inter-linkage of data and IT tools and further encouraging the harmonisation of administrative procedures and joint software development across levels of government (as discussed in the previous OECD Economic Survey of Germany). The recent establishment of a platform providing common IT standards and code lists for e-government projects is an important step forward. However, progress in other areas, such as digitalising public services, has been slow and financial and staff resources for the digitalisation of the public administration have been reduced due to the phase-out of pandemic-related funding (Nationaler Normenkontrollrat, 2024[14]). Core functions of already established online services, such as the possibility to reset passwords for the electronic identity card, which is necessary to access and use many public services online, have been cancelled due to funding issues. To make the modernisation of registries and the digitalisation of the public administration a top priority, the responsible bodies should be located at the centre of the federal and Laender governments or receive an independent budget line. Funding for digital infrastructure and software development should be increased and included in the medium-term budgeting to raise planning certainty but should focus on the development of open common standards, interface definitions and standardised and interoperable IT tools available to all levels of government (Nationaler Normenkontrollrat, 2024[14]). Electronic folders and data storage should become the default across levels of government. The heterogenous interpretation of the EU data protection regulation across the Laender should be harmonised to reduce legal uncertainty among decision makers in the public administration related the digitalisation of public services and the exchange and inter-linkage of data. Joint procurement of software and IT infrastructure across municipalities can help reap gains from specialisation and returns to scale, as weak procurement capacities at the local level affect tender design, selection and management of IT suppliers and contribute to weak outcomes.
OECD Indicators of Product Market Regulation (PMR), index scale of 0-6 from least to most restrictive (higher values indicate worse performance)
Note: In case specific policy domains are regulated at the sub-national level, the PMR indicators refer to one representative state, Bavaria.
Source: OECD PMR database, January 2025, https://www.oecd.org/en/topics/product-market-regulation.html
To modernise the public administration and raise its capacity, it is also crucial to improve skills development, recruitment policies and incentive structures. Centralising recruitment procedures, as currently planned at the federal level, would pool resources and raise the quality of recruitment. It would also facilitate mobility across institutions improving peer-learning, coordination and cooperation across different parts of the government. Including higher administration posts in standardised recruitment procedures and opening recruitment at higher levels to external and international candidates could improve management skills sets and organisational quality, and help make the administration more agile, client-oriented and less risk averse, notably concerning the use of digital tools. For example, the pilot project “Work for Germany”, which allows experts from the private sector to contribute with their management, organisational and digital skills to teams in the public administration, could be expanded. Improving performance incentive structures, better defining skill needs of jobs and providing sufficient training opportunities, particularly related to digital, management and language skills, would strengthen skills development and motivation of current staff. The federal Digital Academy is an important step forward, but it should be expanded and encourage similar efforts at the Laender level. Introducing more flexibility in current pay schedules to offer better conditions for specialised posts with high shortages, such as IT or infrastructure planning and procurement experts, strengthening performance-related pay and better defining career paths and job profiles would help meet recruitment needs and increase the motivation and training of current staff (Nationaler Normenkontrollrat, 2021[17]).
2.2.2. Designing regulations to foster competition and better enforcing competitive neutrality of state-owned enterprises
According to the OECD PMR indicators, barriers to competition in services, as measured by the indicators ‘involvement in business operations in services’ and ‘retail price controls and regulation’, remain much higher than the OECD average (Figure 2.6). This is related to entry barriers in many services professions, such as restrictions on who can open a business or exercise a certain occupation. While certain educational and training requirements are necessary to ensure quality of service provision, Germany stands out in the share of workers and self-employed subject to occupational entry regulations (von Rueden and Bambalaite, 2020[18]). Qualification requirements to open a business have even been re-introduced in 12 crafts and trade related occupations in 2020. At the same time, high labour shortages have contributed to strongly rising prices and supply constraints in construction, hampering the implementation of infrastructure and housing projects. Reducing occupational entry restrictions, while ensuring the quality of vocational education and training, has large potential to foster competition, lower prices and revive business dynamism and productivity growth (Bambalaite, Nicoletti and von Rueden, 2020[19]; Affeldt et al., 2021[20]). It is also a key complement to recent efforts facilitating skilled migration and the labour market integration of migrants (see Chapter 3). As discussed by the 2020 OECD Economic Survey of Germany, regulators could rely more on quality standards for services rather than for the workers providing them. Moreover, regulation of prices, for example of lawyer and notary fees, or restrictions on where non-prescription medicines can be sold should be abolished to strengthen competition. Awareness of the potentially negative effects of regulation on competition, and hence on consumer welfare and productivity, could be raised by including a mandatory assessment of such effects in the established evaluation of regulatory compliance costs.
Improving the governance of state-owned enterprises (SOEs) would help ensure competitive neutrality and reduce barriers to competition. The scope of SOEs is larger and their governance weaker than in the average OECD country (Figure 2.6). Across levels of government, SOEs operate in 14 out of 24 commercial activities, such as transport services, banking, manufacturing, utilities, hospitality or gambling. The rationale for state-ownership is not regularly evaluated, particularly at lower levels of government, although OECD best practices recommend such an evaluation every five years. Better defining assets, goods and services of strategic interest and conducting in-depth analysis on the presence of market failures and the consequences of state-ownership on competition is key for making decisions on the rationale for state-ownership more transparent and improving social welfare (IMF, 2019[21]; OECD, 2021[22]). For those SOEs that remain public, ensuring that ownership is separated from the state’s other roles as regulator or policy maker is key to ensure competitive neutrality. This, however, is complicated by the applied dispersed ownership model of SOEs, as SOEs are managed by ministries that also set policy priorities and exercise regulatory powers in areas that affect the operations of these SOEs. Ministries are involved in selecting CEOs and serving politicians are not prohibited to sit on the board of SOEs, creating conflicts of interest (Akcigit, Baslandze and Lotti, 2023[23]; Diegmann, Pohlan and Weber, 2024[24]). Moreover, commercial SOEs have no formal rate-of-return targets. Following the 2024 OECD Guidelines on Corporate Governance of SOEs, centralising ownership rights in all SOEs into a single holding entity could help clarify their objectives, unify transparency, accountability and performance standards and better ensure competitive neutrality (OECD, 2015[25]). This entity should also set performance standards for local SOEs and monitor their performance (OECD, 2021[26]).
Improving transparency on financial statements and the internal use of public subsidies, in particular for municipal but also some federal SOEs, such as the public rail operator, would strengthen the monitoring of level playing field conditions in markets where SOEs and private companies compete (Monopolkommission, 2023[27]). In line with the OECD Ministerial Council Recommendation on competitive neutrality, all SOEs should be required to apply high standards of transparency, accounting separation and disclosure for activities that pursue public policy objectives, including those of statutory monopolies, and their commercial activities, which compete with private market players (OECD, 2021[28]). The competition agency should receive the power and necessary resources to regularly monitor this accounting separation and assess whether SOEs are cross-subsidising their commercial activities. This requires full access to data collected by the respective regulator. For example, the Australian Competition and Consumer Commission provides comprehensive guidance for SOEs to assess cross-subsidisation and monitors its implementation. In Germany, local public savings banks have a large market share in many regions, while local elected officials are often part of the board. As empirical evidence points to political lending, which might also include lending with preferential rates to local SOEs, raising transparency on loan conditions and lending practices is key for ensuring competitive neutrality (Veron and Markgraf, 2018[29]; Asatryan and Havlik, 2020[30]; Kropp and Saadi, 2015[31]). Following the 2024 OECD Guidelines on Corporate Governance of SOEs, elected officials should be prohibited from serving as board members of local public banks and other SOEs.
To strengthen the enforcement of competitive neutrality, the competition agency should receive the power to challenge decisions of public bodies, in case certain administrative decisions, regulations, or institutional arrangements hamper competition (Motta and Peitz, 2021[32]; OECD, 2021[33]). The new market investigation tool only focuses on measures against firms and requires consensus with the regulatory agency to address distortions in regulated markets. However, in many cases the management of SOE’s is under the same ministry that is also responsible for setting policy objectives and regulating markets where the SOE is active, which leads to conflicts of interest (Monopolkommission, 2024[34]). At the municipal level, the competition agency has identified many cases where licensing decisions for infrastructure provision have favoured municipal SOEs preventing private firms from competing on a level playing field, for example in markets for charging infrastructure for EVs (Bundeskartellamt, 2024[35]). Although in specific cases, licensing activities by municipalities could be perceived as economic actions and thus be subject to competition law, strengthening the power of the competition agency to challenge decisions by public bodies and regulators in the context of the new market investigation tool would help. In other OECD countries, such as Italy and Spain, or in Romania, the competition authority can challenge administrative decisions and regulations issued by public bodies, including procurement procedures, in case it finds that they hamper competition (OECD, 2016[36]) (Motta and Peitz, 2021[32]) (OECD, 2021[33]).
Public procurement rules and procedures differ across lower levels of government, contributing to a high administrative burden and information asymmetries that restrict competition in tenders. A recent draft bill aims at reducing barriers for younger and smaller firms to participate in public tenders, including by facilitating reporting requirements and raising thresholds for direct contracting. While this is welcome, it should be combined with the requirement to publish information on planned tenders in advance, as currently bids in many cases must be submitted 30 days after publishing the tender, which is often not enough for younger and smaller firms to prepare their bids, particularly if the bid requires partnering with other firms. Moreover, to reduce information asymmetries and further lower barriers to bidder participation, the publication of all tenders on the recently introduced federal e-procurement website should be made mandatory for all levels of government, including tenders below the EU threshold for public procurement (Fazekas and Blum, 2021[37]). Further incentivising Laender and municipalities to also use the new centralised federal e-procurement platform for procurement processes and harmonise heterogenous procurement rules and procedures would have large potential to reduce the administrative burden for firms applying for public contracts. It would also help raise public spending efficiency by facilitating joint procurement across the public sector and realising economies of scale and gains from specialisation (Allain-Dupré, Hulbert and Vincent, 2017[38]). In addition, data from this e-procurement platform could be used to establish a red-flag system to identify risks for bidder collusion. Many countries, such as the United Kingdom, have established databases of public tenders, improving accountability and facilitating data analysis to detect irregularities and bidder collusion. The competition agency could be tasked to operate such a centralised red flag system, as currently supervision of procurement procedures is decentralised across the Laender. In any case, it should receive access to such data to be able to screen for potential bid rigging.
2.2.3. Designing regulation and public policies to facilitate structural change
Declining business dynamism is also related to labour market policies and regulation that can hinder firm growth and hold back structural change. Start-ups in technology-intensive activities face high uncertainty about their future income streams and are hesitant to scale up employment if costs of eventual dismissals are high. This also applies to other firms in sectors exposed to large fluctuations in demand, for example crafts businesses in the construction sector. Although Germany only ranks slightly above average in the aggregate OECD Employment Protection Legislation (EPL) Index (Figure 2.7), it stands out concerning large exemptions for small firms, which act as an incentive for firms to stay small. Firms with 10 or less employees do not have to pay severance payments or follow social considerations when deciding on whom to dismiss, while firms with 20 or less employees are exempt from regulation for collective dismissals. Reducing exemptions for small firms, while making employment protection regulation more flexible, could help to support the employment scale-up of startups and other small firms and facilitate structural change. The possibility for start-ups to extend fixed-term contracts up to four years after firm birth should be maintained as it provides flexibility to test business models and incentivises market entry.
Strictness of employment protection, individual and collective dismissals of regular workers, 0-6 scale, 2019
Source: OECD Indicators for Employment Protection, https://www.oecd.org/en/data/datasets/oecd-indicators-of-employment-protection.html
Although the short-term work scheme helped maintain productive worker-firm matches during the pandemic and energy crisis, it has also hindered the reallocation of workers to booming sectors and firms facing high skilled labour shortages (see Chapter 3). During the pandemic, Germany was the only EU country with rising replacement rates over time in the short-term work scheme. This in combination with an extended eligibility period of 24 months has reduced job-search incentives and labour reallocation (Heinemann, 2022[39]; Calligaris et al., 2023[40]; Bundesbank, 2022[41]) (Brinkmann et al., 2024[42]). Training uptake within the scheme was low as the pandemic-related special clause, which reimbursed 100% of social security contributions for employers, counteracted the training incentives of the main scheme, which consist in reimbursing 50% of social security contribution during training periods. The total fiscal costs of the short-term work scheme amounted to about EUR 42 billion in 2020 and 2021 (about 1.2% of GDP). To facilitate structural change and reduce labour shortages in booming sectors and firms, the short-term work scheme should be re-designed to increase incentives for job-search, mobility and training over time, and the maximum duration of benefits should be reduced. This would also lower its costs and allow using scarce public resources for re-training workers to equip them with the skills required in expanding sectors and firms (see Chapter 3).
The weak portability of occupational pensions, which cover more than half of the work force, is another barrier for labour mobility across firms and sectors. A large share of occupational pensions are defined-benefit systems that are based on book reserves of firms, where employees’ contributions are retained within the firm for internal investment, hindering the portability of pension entitlements when transitioning to another job (see Chapter 1). Although in some sectors, such as construction, metal products, electronic goods or the chemical industry, firms agreed on a sector-wide system, portability to other sectors is still problematic. Requiring occupational pensions to be funded defined-contribution systems could help improve their portability and deepen capital markets (see Chapter 1).
The recent rise in subsidies to firms in specific industries has been justified by geo-political reasons and supply chain risks, for example in chip production, but they also risk distorting the level playing field and hamper competition and innovation. An impact evaluation of generous firm support programmes during the pandemic and energy crisis is still pending, as legal constraints to access, merge and analyse administrative micro data had to be addressed delaying the project. Generous firm support in the form of grants might have contributed to declining business dynamism and slowed down structural change (Bundesbank, 2022[41]). The temporary crisis and transition framework that has relaxed EU state aid rules during the pandemic and energy crisis is still in place. Together with France, Germany accounts for the large majority of approved subsidies, including subsidies to specific firms in the context of the green transition as well as to support chip production. Conducting rigorous evaluations on the effects of subsidies and tax expenditures on competition and designing them to prevent distortions to competition is key for fostering business dynamism, innovation and productivity growth. A subsidy report is published every other year by the Ministry of Finance, but it applies a specific subsidy definition and includes simple evaluations for half of the measures, although many subsidies and tax expenditures introduce market distortions (Laaser and Rosenschon, 2020[43]). It should be a key policy priority to adopt and implement the planned research data act to facilitate policy impact evaluation and better target support measures in the future.
Inefficient insolvency procedures might also weigh on business dynamism and productivity growth, as they discourage entrepreneurs to declare insolvency, hampering structural change and the reallocation of resources to more innovative and productive firms (Adalet McGowan, Andrews and Millot, 2017[44]). However, according to the OECD Insolvency Indicator, the efficiency of insolvency procedures has improved from 2016 to 2022, positioning Germany slightly better than the average OECD country (André and Demmou, 2022[45]). This is mainly due to a 2020 reform that reduced the debt discharge period for bankruptcy from six to three years, facilitating a fresh start for failed entrepreneurs. Nevertheless, room for improvement remains. Introducing simplified insolvency frameworks and counselling for smaller firms could facilitate restructuring, which in smaller firms is often complicated due to high costs of insolvency procedures and because record-keeping is poor and business and personal finances are strongly intertwined (André and Demmou, 2022[45]). Allowing other types of personal assets to be exempted from insolvency procedures, which currently only comprise modest personal assets, might also facilitate restructuring of smaller firms.
As discussed in the previous Economic Survey of Germany, simplifying the tax system and strengthening tax enforcement is also key for levelling the playing field between firms and fostering competition and productivity growth. Multi-national firms make larger use of tax-avoidance schemes to lower their effective tax rates compared to domestic firms, as they can exploit loopholes due to differences between complex national tax systems and can afford the high fixed costs of specialised tax optimisation services (Sarin and Summers, 2019[46]; Tørsløv, Wier and Zucman, 2022[47]). Strengthening tax enforcement requires stronger incentives for the tax administrations of the Laender to scale up their enforcement capacities, improve IT and data infrastructure and enhance the cooperation with other Laender to avoid duplication and allow for more bundling and specialisation of enforcement efforts. The inter-linkage and analysis of tax and other data across Laender is key to better detect suspicious cases, focus scarce investigative capacities and strengthen international cooperation to fight cross-border tax avoidance and fraud schemes (Spengel, 2017[48]).
The decline in business dynamism, investment and productivity has been accompanied by rising mark-ups and concentration in many sectors of the economy, indicating the importance of strengthening competition enforcement to foster innovation and productivity growth (Weche and Wagner, 2021[49]; De Loecker and Eeckhout, 2018[50]; Monopolkommission, 2024[34]). Rising concentration might be positive for productivity growth, as long as employment is increasingly concentrated in high productivity firms, scale effects in production can be realised and competitive pressures on incumbents remain strong, for example due to international competition or market integration (Bighelli et al., 2022[51]; Draghi, 2024[52]; Calligaris et al., 2024[13]). Higher mark-ups can also be compatible with competitive and innovative markets, if they represent returns to innovation and fixed investment, such as intangibles, and encourage the entry of new and innovative firms, which uphold competitive pressures on incumbents. However, rising mark ups have been negatively correlated with intangible investments as well as research and software intensity, and firm entry rates have declined, including in sectors with rising mark ups (Weche and Wagner, 2021[49]). This indicates that rising market power of incumbents might act as a barrier to firm entry and growth as well as knowledge diffusion, discouraging investment, innovation and productivity growth (De Loecker, Eeckhout and Unger, 2020[53]; Akcigit and Ates, 2021[11]).
Competition enforcement has been recently strengthened by introducing a market investigation tool. Prior to the reform, the competition authority could only correct market distortions if it was able to prove explicit collusion of firms or abuse of dominance cases but had no legal tools to deal with cases of tacit collusion. Enforcement was also challenging when confronted with vertical integration or other anti-competitive market structures. The new market investigation tool enables the competition authority to issue binding orders to firms to correct for market distortions if a sector-specific market investigation has identified such distortions. Market investigations involve information requests, ex-officio investigations and data analysis, and need to be completed within 18 months. Possible measures can include the request to design products to be interoperable with complementary products of other producers, the prohibition of locking in customers in long duration contracts or even, as a last resort measure to enforce competition, the forced selling of firm parts. In the United Kingdom, for example, the use of such a market investigation tool enabled the competition authority to split up a monopoly in the air transport sector with significant benefits reported for customers (Whish, 2020[54]).
Further improving IT and staff capacities of the competition agency is key to strengthen enforcement and enable the effective application of the new market investigation tool as well as the EU Digital Markets Act. Although staff and budget resources have increased since 2020 (Figure 2.8), there is a need to further improve data infrastructure and IT capacities. Establishing data bases including all merger control and cartel cases and related rulings and improving digital skills of staff would allow using ex-ante risk-based approaches such as automated cartel screening tools, which can help better focussing scarce resources. Regular ex-post evaluations of rulings would help improving the effectiveness of future applied policy measures (Monopolkommission, 2024[34]). Moreover, the investigative capacity of the competition agency should be expanded to enable tracking concerted practices involving the exchange of sensitive commercial data, which would also require legal adjustments (OECD, 2017[55]). Additional resources for stepping up IT capacities could be freed by increasing the revenue threshold above which the investigation of notified mergers is mandatory. At the same time, criteria for mandatory merger notification should be expanded to also include technological criteria or the purchasing price for the merger. This could be instrumental in digital markets, as competition has been hampered by take-overs of innovative start-ups with low revenues but large innovation potential.
Making leniency agreements more attractive and further strengthening the protection of whistleblowers and public officials can help improve detection of misconduct and enforcement. Since 2014, leniency applications in cartel cases have strongly declined (Figure 2.8). This is related to the implementation of an EU directive in 2017 that has increased the scope for damage claims of third parties, including against first successful leniency applicants in cartel cases (Monopolkommission, 2022[56]). Shielding first successful leniency applicants of any damage claims from third parties would help improve the attractiveness of leniency agreements and, thus, the detection and prosecution of cartels. A 2023 law has significantly improved whistleblower protection against retaliation by employers, improving incentives for insiders to provide information. However, the compensation of whistleblowers for non-financial damages, such as mental health issues due to bullying, and the protection of compliance officers investigating cases within firms could be improved. Moreover, raising awareness about the legal protections of public officials against damage claims of investigated firms can help reduce risk aversion and improve competition enforcement. Recent court rulings have stated that officials of the competition authority are only liable for damage claims by an investigated company if they have acted in bad faith to harm the company, which has increased legal protection for public officials (Bundeskartellamt, 2022[57]; Oberlandesgericht Duesseldorf, 2014[58]).
Note: Comparable data on resources of competition agencies was not available for other large EU or OECD economies.
Source: OECD Competition Trends 2024; Federal Cartel Office; (Monopolkommission, 2022[56]).
To improve enforcement in merger control, the Ministererlaubnis should be reformed to reduce scope for political or special interest influence. It allows the government to override the decision of the competition authority to block a merger, if the decision hurts important public interests. For example, the merger in the energy sector between EON and Ruhrgas in 2002 was allowed by the government, against the ruling of the competition authority, with the argument that it would raise energy security in Germany. However, together with other decisions that followed, it had contributed to reduce incentives to develop the supply of LNG terminals and increased dependency on the supply of Russian gas through pipelines (Budzinski and Stoehr, 2023[59]). In 2016, a merger in the food retail market was allowed against the ruling of the competition authority with the argument that the likely loss of jobs would hurt public interests. Plans to re-introduce the possibility of legal action against the Ministererlaubnis by third parties, such as competing firms and consumers, should be implemented. Moreover, it is key to better define the notion of public interest for justifying a Ministererlaubnis to reduce scope for lobby influence (Budzinski and Stoehr, 2023[59]).
Given the high regulatory density, the risk that incumbent firms use political lobbying to influence the design of laws and regulation as well as their enforcement, favouring their interests against the interests of potential competitors, is high. To reduce this risk and rebuild trust in institutions, a centralised lobbying register has been introduced at the federal level, increasing transparency on lobbying activities. As a result, regulation has become more competition friendly according to the OECD PMR Indicators (Figure 2.6). In 2024, the register has been further strengthened by including contacts with lower administration levels, where many lobbying activities take place to influence draft bills (OECD, 2022[60]). However, the threshold above which lobbying organisations have to register was only lowered to 30 contacts with the administration within three months, which is still too high. Although objectives of lobbying activities are now tracked by the register, the monitoring of regulatory outcomes of lobbying activities is not yet included. A mandatory regulatory footprint has been introduced in 2024 that details for each draft bill the stakeholders who were consulted for drafting the regulation as well as the inputs taken on board, which is a big step forward. However, the provision of technical information is still excluded from this requirement and should be included to close potential loopholes. The information on outcomes of lobbying activities should be included in the lobbying register. Implementing and enforcing the improved lobby register will require equipping the responsible administration of the parliament with sufficient staff and IT capacity, improving investigative powers and ensure its independence (Lobby Control, 2021[61]). Moreover, as the Laender are responsible for the implementation of federal laws and regulations and have the jurisdiction about many important policy areas, the register should also be expanded to sub-national governments. The public integrity framework for public officials should be better adapted to the specific risks of lobbying by establishing more detailed standards and guidelines for interactions with lobbyists and other stakeholders at all levels of government (OECD, 2021[62]).
Continuing the fight against corruption and money laundering is key to level the playing field and foster business dynamism and productivity growth. It is also key to strengthen trust in institutions, which has declined recently, although it is still above the OECD average (Figure 2.9) (OECD, 2024[63]). As recommended by the previous OECD Economic Survey of Germany, the definition of corruption by members of parliament has been expanded to include side activities where legislators might use their status to unduly influence the public administration, for example in procurement decisions. Data on side activities and other income of legislators is now published on the website of the parliament. Moreover, transparency related to campaign and party financing has been significantly strengthened, as thresholds for immediate disclosure of individual donations have been lowered to EUR 35 000, loopholes related to sponsoring activities and campaign financing have been closed, and the information on donations is published at a centralised and publicly available up-to-date data base. However, maximum thresholds for party donations and campaign financing, which exist in 19 EU countries, are still absent (OECD, 2016[64]). To reduce the risk that politicians and other public officials use their acquired network and insider information directly for specific firms and interests after their mandate ends, the supervision and enforcement of cooling-off periods should be strengthened. Transparent rules for the selection of the three members of the responsible advisory body – nominated by the federal government and appointed by the President – and binding sanctions for non-compliance with the regulation should be introduced (European Commission, 2022[65]; GRECO, 2019[66]). Moreover, cooling-off periods should also apply to medium-level officials in the public administration and the notification of any activity should become mandatory after leaving public office. Data on job transitions and applied cooling-off periods should be made publicly available. As regulations on conflict of interest remain much weaker at the Laender level than at the federal level, efforts should particularly focus on improving the public integrity framework at all levels of government.
Despite recent improvements in fighting money laundering, significant challenges remain. A bill drafted by the previous government to establish a new federal agency to combat financial crime is welcome. The new government should continue this reform and improve it by strengthening the investigative powers of the new agency, while avoiding duplication of responsibilities vis-à-vis the Federal Police (BKA) and the enforcement agencies of the Laender, as recommended in the previous OECD Economic Survey of Germany. Moreover, the supervision of the about 300 decentralised anti-money laundering agencies for the non-financial sector should be centralised under the roof of the new agency. Bringing together data analysis, investigation capacities and supervision related to anti-money laundering and sanction enforcement in one federal agency would allow to realise returns to scale across fragmented agencies and levels of government, improve international cooperation and strengthen enforcement capacities (FATF, 2022[67]). This should be combined with accelerating the digitalisation and inter-linkage of commercial, real estate, company and other registers and allowing to link them with other data including on bank accounts and financial assets – as far as it is consistent with the EU General Data Protection Regulation – to improve the quality of the beneficial ownership register (see the previous OECD Economic Survey of Germany). Another draft bill to improve investigative capacities in the context of undeclared ownership of assets is welcome and should also be pursued by the new government. Complementing this draft bill with a suspicious wealth order to facilitate the confiscation of ill-obtained assets within the constitutional limits and strengthening cooperation between tax authorities and the planned federal agency to combat financial crimes could further support the fight against money laundering and the enforcement of sanctions. Improving data collection on confiscation and case-related information would help to better understand the structural patterns and scale of money laundering activities (Transparency International, 2021[68]). Moreover, automatic international exchange of tax relevant-information on crypto-assets, which can be used for money laundering, should be established according to the OECD Crypto-Asset Reporting Framework. Newly introduced legislation to prohibit cash payments for real estate purchases will help reduce the scope for money laundering activities, but cash payment thresholds should also be introduced for other asset purchases by implementing the EU anti-money laundering rules (FATF, 2022[67]).
Note: Panel D shows ratings from the FATF peer reviews of each member to assess levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11 immediate outcomes. "Investigation and prosecution¹" refers to money laundering. "Investigation and prosecution²" refers to terrorist financing.
Source: Panel A: World Bank, Worldwide Governance Indicators; Panel B: Varieties of Democracy Project, V-Dem Dataset v12; Panel C: OECD (2024), OECD Survey on Drivers of Trust in Public Institutions – 2024 Results: Building Trust in a Complex Policy Environment, OECD Publishing, Paris, https://doi.org/10.1787/9a20554b-en ; Panel D: OECD, Financial Action Task Force (FATF).
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