Economic development without necessary reforms pose a threat, as per DIW's warning
Germany's Economic Outlook and Key Reforms for a Sustainable Future
The German economy, known for its successful export orientation, is facing unfamiliar challenges, according to the German Institute for Economic Research (DIW). The current federal government, comprising the SPD (Social Democratic Party of Germany) and the Greens, is being urged by DIW President Marcel Fratzscher to implement four key reforms for a sustainable and future-proof tax and social security system.
The coalition government, which took office following the 2025 federal election and the collapse of the previous "traffic light" coalition that included the FDP, is currently a minority government. The CDU/CSU opposition and other parties play roles in the Bundestag but are not part of the government.
The recovery of the German economy is not expected to be quick, with Fratzscher fearing that it will take five to ten years for many industrial sectors to recover. In June, the DIW had predicted 0.3% growth for 2025, but this has been revised downward. The gross domestic product is expected to increase by 0.2% in 2025, but a significant growth boom is predicted from 2026, according to the DIW Institute.
The DIW predicts that while domestic impulses will drive the economy, exports are expected to rise again with the recovery of demand from Europe. However, the traditional growth driver of external trade is noticeably restrained by increasing trade barriers and US trade policy.
Fratzscher sees four priorities for making the tax and social security system sustainable and future-proof in fiscal policy. He calls for the abolition of tax privileges, such as those for large inheritances or real estate gains. Tax increases are inevitable in the long term, with a focus on taxing large and passive wealth more heavily and relieving small and medium incomes.
Subsidies should be reduced, with climate-damaging subsidies alone amounting to around 60 billion euros annually, according to the International Monetary Fund (IMF). Fratzscher also emphasizes the importance of strengthening private investments and innovation capability of companies.
DIW economic expert Geraldine Dany-Knedlik states that the revival of the German economy should not overshadow persistent structural problems. Other leading economic research institutes, such as the Munich Ifo, the Kiel IfW, the Essen RWI, and the Halle IWH, have also lowered their forecasts for 2025.
Fratzscher advocates for the federal government to implement these four key reforms to address these structural problems. The details of these reforms were not specified in the provided paragraph. The German economy is gaining momentum after a zigzag course in the first half of the year, but growth in 2025 is expected to be weak. From 2022, the economy is predicted to experience a growth of 1.7%, and an additional 1.8% in 2027, as per the DIW.
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