Germany: Rocky road out of recession

When German business leaders meet annually in Berlin for the so-called TdI, the "Day of Industry," politics cannot be missed. Whether it's the Chancellery , ministries, or party headquarters, the top federal politicians don't hesitate to attend when the influential Federation of German Industries (BDI) extends an invitation. It's an event that says a lot about the current state of the relationship between government and business.

In 2023 and 2024, then-Chancellor Olaf Scholz faced scathing criticism of his government, comprised of the SPD , the Greens , and the FDP . The Russian invasion of Ukraine and its consequences, the energy crisis and inflation , persistently high electricity prices , and much more had pushed Germany into a prolonged recession.

Siegfried Russwurm, then President of the Federation of German Industries (BDI), spoke of lost years for Germany as a business location, saying the Chancellery was apparently underestimating the seriousness of the situation. Chancellor Scholz countered, speaking of "turnaround years" and warning against disparaging the location.

Global crises are bad for the world economy

The German economy will remain in slump in 2025. The economy will not be able to recover this year, predicted the new BDI President, Peter Leibinger, at the beginning of the Industry Day, pointing to the increasing global crises: the tariff dispute with the USA , the war between Israel and Iran , and the US intervention . There are a growing number of flashpoints that are negatively impacting the global economy and world trade.

Concerns in the economy are great. "We have a longer and more difficult path out of the recession ahead of us than we had hoped," Leibinger said.

The principle of hope reigns

Nevertheless, the economic mood is significantly better than last year. This is due to the new federal government and its announcement to provide financial relief to companies. "The signs are now right again," said the BDI president, praising the coalition ofthe CDU/CSU and SPD: There, a sense of urgency is palpable. "This is a completely different story than what we had before."

One of the first legislative proposals already being discussed in the Bundestag is a so-called growth booster, a package of tax relief measures for companies to encourage investment. "We haven't had any tax cuts in Germany for 20 years; we're implementing them," said Chancellor Friedrich Merz at the TdI.

This will make Germany more competitive again, said the Chancellor, who is visibly pleased by the positive feedback he is receiving. "Yes, we are now making a fresh start, we are approaching this work with a new spirit, and we know what we have to do."

The calculation was made without states and municipalities

However, things aren't going quite as smoothly as Merz portrays. If companies pay less taxes, it will tear a huge hole in the coffers of the federal, state, and local governments, which share the tax revenue. Around 48 billion euros will be short. The states and local governments refuse to accept this and are demanding that the federal government pay, as it was the one who came up with the law.

But the federal budget is also tight. While large amounts of debt can be incurred for defense spending in the future, and a total of €500 billion in loans are available for investments in the dilapidated infrastructure over the next twelve years, savings are necessary in many other areas. Almost all other political projects in the coalition agreement between the CDU/CSU and SPD are subject to funding.

Investors urgently sought

In this situation, an economic recovery is all the more urgent, because the better the economy performs, the higher the tax revenues for the state. Federal Finance Minister and Vice Chancellor Lars Klingbeil (SPD) is also counting on foreign investors. "Especially in these times, when there is growing uncertainty on the other side of the Atlantic, we are sending a clear signal to investors that it is worthwhile to invest in Germany and that we are a safe haven. With stability, a functioning constitutional state, and a free society."

And with lower energy prices. Klingbeil announced to the executives that the federal government would decide to lower electricity and gas prices. The planned infrastructure investment package is also intended to make Germany more attractive to investors. "I want the excavators to get rolling quickly," said Klingbeil. Roads, railways, bridges, digital infrastructure, and energy and heating networks are to be modernized and expanded.

"This is central to ensuring that we have economic performance, sustainable, safe, punctual mobility, digital administration, a well-developed charging infrastructure, well-developed networks, an infrastructure that we can once again be proud of in our country," said Klingbeil.

Fight against bureaucracy

Businesses repeatedly complain about high administrative costs. Chancellor Friedrich Merz analyzed the bureaucratic "thicket of regulations" at the Industry Day, saying it has arisen because of the increasing emphasis on precautionary measures. "Nothing is allowed to happen; every risk is anticipated and eliminated from the outset—except that this threatens to render us unable to act."

In other countries, the principle of liability is more important. "You can do many things, try many things. If things go wrong, the person affected is liable." This spirit must be reinstated in Germany, too.

US tariffs: criticism of the European Union

But it won't be up to the new government alone to decide whether and when the economy will recover. For the Federation of German Industries (BDI), the tariff dispute with the US poses a particularly high risk. If the US tariffs actually come into effect, they are likely to cost the German economy about 0.3 percentage points of growth, according to Peter Leibinger.

In this context, the German Chancellor criticized the EU's negotiating style. "This European Union is negotiating far too complicatedly." Negotiating with the US on hundreds of customs regulations simultaneously now is wrong, he said. "The Americans are simply focused on reaching an agreement with us on four or five major industries." This must be respected.

Rapid agreement in key sectors

"We don't want the best of the best, but the most important of the necessary. Automotive , chemicals, pharmaceuticals, mechanical engineering. These sectors are vitally important to us – steel, aluminum. We need a quick agreement with the Americans now."

The business community is also hoping for this, and it is giving politicians one thing to bear in mind: the announcements must now be followed by action very quickly. The Chancellor is also aware of this, comparing the hopes placed in his government to a stock price. It also rises when there are expectations. "We must not disappoint these expectations." Merz said he hopes that an "initial interim assessment" can be made by 2026 at the latest, at the next German Industry Day.