Strengthening Germany as a business location with more investment

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POSITION | ECONOMIC POLICY | INVESTMENT

Strengthening Germany as a business location with more investment

Investment package needed to improve infrastructure, facilitate transformationandbuildresilience

Public investment and incentives to stimulate private investment must be scaled up considerably over the next decade. Germany needs an infrastructure, transformation and resilience package with a volume of between 375 and 395 billion euros over the next decade. Around one quarter of this volume should be spent on additional incentives to stimulate private investment in transformation, buildings and resilience, and the other three quarters on public investment.

Investment in infrastructure, buildings and residential housing should be increased to around 315 billion euros over the next decade. Investment in transport infrastructure accounts for around one half of this sum, about 160 billion euros, investment in education infrastructure for around 100 billion euros, and the construction sector for approximately 56 billion euros.

The green transformation should be spurred on with investment incentives of a further 41 billion euros until 2030. The wider economy will need to make very high additional investments of more than 100 billion euros per year to bring about the transformation. Additional incentives to stimulate private investment will be required in several fields in order to reach the set climate targets. In addition, the adequate level of financing for grid expansion and restructuring, and hydrogen and carbon infrastructure in line with Germany’s Power Station Strategy needs to be clarified in general. The financing required here has not been included in the study in hand.

To meet the resilience targets of Germany and the European Union, we estimate that between 20 and 40 billion euros worth of incentives will be needed for derisking over the next ten years, primarily in microelectronics and battery technologies.

Over the next few years, it will be crucial that policymakers set the right priorities in public budgets in order to tackle the security challenges and the impact of demographic trends on state expenditures and enable the required scale of investment. The German Bundestag and the Bundesrat have the power to set up special funds with a constitutional majority as long as these are precisely defined in terms of scope and time, ensure a more efficient use of public funds, tackle necessary structural reforms and prioritise capital expenditure

Financial policy must set course for more investment

There are major challenges on the horizon for Germany in the next ten years. War in Europe, successive crises and geopolitical shifts are stirring up high tensions in society, in the wider economy and among policymakers. At federal and state level, the country remains in crisis mode trying to navigate the international turbulence According to its Annual Economic Report, the federal government has furthermore identified the implementation of structural reforms to strengthen the competitiveness of Germany as a business location in the long term as an important and urgent task (Federal Government 2024). German industry shares this view and, further still, believes that if Europe and Germany are challenged at the international level then a strong economy will be more existentially important than ever. A strong economy provides the basis for prosperity and a government capable of safeguarding freedom and security.

Tackle growth agenda and kickstart investment

A debate on the future financing of state spending must factor in the current economic lull in Germany. Economic growth in Germany is set to remain lower than in almost all other industrialised countries. Although economic indicators are currently looking up somewhat, structural barriers are, if anything, increasing. Radical reforms are necessary to change this situation. Public investment in infrastructure must become a top priority in the public budgets at federal and local level to work off the backlog in investment that has accumulated through years of neglect. Measures to increase public investment and stimulate private investment must form central elements of the strategy to increase the competitiveness of Germany as a business location. Ideally, these measures would provide planning certainty for the business sector and foster trust in the policy environment.

Increase spending efficiency and set priorities

Rigorous discipline in spending will be required to ensure viable and solid public budgets in the future. The state should establish appropriate organisational procedures to ensure the efficient use of public funds. In this regard, current structures for cooperation at federal, state and municipal level should be reviewed to ensure they harmonise with the properties of an efficient state. A high amount of leverage would be gained through steeply accelerating the pace of digitalisation of administrative procedures. Digitalisation would not only make the state more modern and faster but, above all, free up financial resources.

Public procurement should also be primed towards the objective of achieving the best, most effective and low-cost use of funds. This can be encouraged through a competition for the best economic, ecological and technical ideas. State spending must prioritise capital investment in infrastructure, transformation and resilience at federal and state level. In general, the consumption and investment spending of the government should be at such a level in future that the state is in a position to shoulder the required volume of public investment without taking on additional debt. Such efforts could then increase financial scope, particularly in the federal budget. The federal government could primarily use these extra funds in the next few years to tackle the rapidly growing challenges in the area of defence and demographics

Keep public budgets in line with fiscal regulations

Given the backlog of investment and reforms that has built up over the past few decades and the major challenges on the agenda of accelerating the process of transformation and increasing resilience, the volume of funds required is enormous and difficult to finance within the confines of the normal budget

A solid financial policy must include the financing of the public spending required in the fields of infrastructure, resilience and transformation. An objective debate to identify the measures required and how to finance them must be conducted. One thing is clear, since the Federal Constitutional Court decision of November 2023 there will be no simple solution.

Abolishing or watering down the debt brake enshrined in German Basic Law is not a good idea. The debt brake has proven to be an important safeguard for solid public finances. The debt brake has substantially slowed down the rise in federal debt, providing much needed scope for spending. The debt brake forces policymakers to set priorities and manage public funds efficiently.

There is no direct connection between German and European fiscal rules on these topics. An analysis of the complex debate on the possible reform of German fiscal rules is beyond the scope of this study in any case (see e.g. Feld 2024, Fuest, Hüther, Südekum 2024 and Hüther 2019). Modifications in fiscal regulations have recently been proposed by various experts (German Council of Economic Experts, 2023, Scientific Advisory Board of the Federal Ministry for Economic Affairs and Climate Action, 2023). In addition, the impact of the latest amendment to the Stability and Growth Pact under the revised European Semester should also be considered. Germany needs to submit macrostructural plans in autumn detailing the government’s plans for public finances, factoring in all planned reforms and investments.

Strengthen growth potential

The federal government recently proclaimed (Federal Government 2024) strengthening the mediumterm growth potential of the German economy as a central economic policy task. This will require fundamental reform to increase the supply of labour. Additional stimulation is needed to lift the overall momentum in investment. Momentum here has been relatively weak for sustained periods over the last twenty years and a subject of concern for some time now (Handelsblatt Research Institute / German Institute for Economic Research 2014, Deutsch, Frisse 2016). Technical advances must be encouraged with proactive innovation policy. The administrative burdens imposed on citizens and companies should be reduced substantially (BDI 2024), planning and approval procedures further improved and accelerated, and other aspects of location policy tackled, especially improving the tax parameters for investment and innovation.

Reduce investment backlog and address new challenges

The state is currently faced with the task of having to catch up on or kickstart high-volume investments Investment in infrastructure has been particularly neglected in the recent past, with investment levels far too low for far too long. It has now got to a point where Germany risks losing its competitiveness still further unless investments are scaled up. We have also identified areas of investment in transformation that are necessary but that have not yet been included in the financial plans. These gaps must be closed because Germany will only succeed in its efforts at transformation if it reaches the required speed of change. Lastly, shifts in the geopolitical situation have exacerbated international tensions sharply over the last two to three years and created new challenges for the state in the area of resilience. The increase in military tensions means that securing the country against existential supply risks which could ensue in the event of conflict is an urgent task that cannot be postponed. At this point in time, all these factors make for extraordinary circumstances where further delaying public financing is not an option.

The area with the greatest need for public investment is infrastructure (education, residential housing, municipal infrastructure, transport infrastructure), followed by additionally necessary investment for

transformation, above all in the areas of buildings, industry and transport, as well as resilience. The study in hand calculates the volume of additional public funds that will be required to meet the targets and run the programmes that have been adopted in the form of legislation or regulations but that have not yet been included in the financial plans at federal or state level. These estimates are naturally based on some variables which may be imprecise or unknown and can only be estimated with more accuracy once the tasks are planned by the policymakers themselves. This also means that new objectives will lead to additional funding needs that cannot be estimated at this point in time. It is already clear, in particular, that a substantial volume of additional investment will be required to transform the energy infrastructure (power grids and Power Station Strategy).

Public investment and transformation support measures form core building blocks

Public investment in infrastructure will make a much-needed contribution to growth and improve Germany as a location for citizens to live and companies to operate. Despite the low proportion of slightly over ten percent of total investment, many of these infrastructure investments bring impetus to growth. The lion’s share of the necessary investment is the result of collective mismanagement over the last twenty years in the German system of financial federalism, and analysis of which is beyond the scope of this study. It is painfully evident that investment on the municipal level in particular has systematically been too low. Germany cannot afford to have such a degree of wear and tear in its municipal transport networks and education facilities, just to mention the two most well-known problem areas. Support measures for climate protection and resilience are necessary components of a broad public investment agenda which is designed to lead the country to climate neutrality by 2045 and enhance security in alignment with the diverse strategies of the EU and Germany.

Public investment and financial support measures needed in infrastructure, transformation and resilience

The study in hand shows that the federal government currently faces the task of catching up on and kickstarting a very high volume of investment. There are huge deficits in infrastructure due, in particular, to too little investment in the past. The allocation of these deficits to the individual levels of public authorities is a complicated task in itself and will not be examined here in more detail.

Public investment has been too low for too long across the board

Public investment levels have largely been too low on average over the last twenty years. We welcome the fact that the federal government has successively increased public investment levels since 2016 However, the state has substantial deficits overall in its gross capital investment and in most years has just about managed to invest enough to cover replacement costs. This is simply not adequate at a time where demands on public infrastructure is rising and in light of the backlog in investment in school buildings and in the Deutsche Bahn AG, to name just two well-known examples.

The fact is that over the last two to three decades a backlog of municipal and general public investment needs has built up (Rürup 2024), public buildings in the education sector are not up to scratch, wide sections of the transport infrastructure require substantial renovation and expansion in line with climate policy targets, and residential housing also needs support from the state. These problems have also often been pointed out on an international level. Germany has received recommendations to take such measures frequently in the last few years by institutions including the European Semester of the European Union, and also by the OECD and the IMF (IMF 2024a, b, OECD 2023).

Gross and net capital formation ratio* of public authorities

Source: Gemeinschaftsdiagnose

Public gross fixed capital formation was particularly weak in the years between 2010 and 2016, then only rose gradually, going back up to around 2.7 percent of GDP by 2023. For comparison, the longerterm average in the EU is around three percent of GDP. Public net fixed capital formation in Germany has remained within a narrow corridor of plus/minus 0.3 percent of GDP since 1996. Public net fixed capital formation at the municipal level has been negative since 2011. Public net fixed capital formation at the federal level was negative between 2010 and 2016 and only marginally positive between 2017 and 2022. The indicator is currently pointing down again (see also project group Joint Economic Forecast 2024). On a positive note, the federal government at the time (2016/17) identified the problem and set course to scale up the volume of capital expenditure at federal level. The work of the expert committee Strengthening Investment in Germany injected significant momentum into increasing

investment levels in Germany (Expertenkommission 2015). However, in many areas, the response at federal and local level was inadequate. Furthermore, policymakers have since drastically increased the volume of investment needed for security and climate protection without actually sorting out the financing

Investments required for the transformation are not yet covered in full

We have also identified areas in the transformation process the financing of which has not yet been included in the plans but should be. In contrast to what is often bandied about in public, we are not talking about capital expenditure in the triple-digit billion euro range here but about very detailed additions to the fiscal support measures of energy and climate policy that are already well established in Germany. The task here is to align the expenditure of the actual support measures much closer to planned expenditure, to increase the take-up of funds from the Climate and Transformation Fund from the current level of just over one half, and a partial supplementation of support instruments. Assuming that overall spending levels in the current budget plans are not significantly amended, the average public expenditure for transformation in the areas of energy, industry and mobility are at around 26 billion euros per year this decade. The BDI/BCG study, Climate Paths 2.0 (BDI 2021), puts the required level of spending at around 33 to 37 billion euros per year. In 2021, it was not possible to include an estimate of the future costs of expanding the grid and implementing the Power Station Strategy in any detail, which means that the financing needs here are higher and that currently only phase one of the Power Station Strategy is included in the fiscal planning. The BDI-BCG estimates are largely consistent with other studies available on reaching climate neutrality in Germany, in so far as they include any concrete calculations for financial policy at all (for fiscal estimates, see also Halle Institute for Economic Research 2024, KfW Research 2021, Krebs, Streitz 2023, Dullien et al. 2024 and Bardt et al. 2019 and, without estimates, dena 2021, Prognos, Institute for Applied Ecology, Wuppertal Institute 2021, McKinsey & Company 2021, German Council of Economic Experts 2023). A review of the estimates is currently in progress, but we can assume that the gross fixed capital formation requirements have risen again slightly since 2021. In analysing the level of funding needed for measures to put Germany on the path to climate neutrality as pegged out in legislation, we believe that there are considerable gaps in the funding included in the fiscal plans so far, particularly in the areas of mobility and related infrastructure, the decarbonisation of industry, and buildings The general issue of putting a figure on the volume of financing needed for the restructuring of the German electricity grid in alignment with the Power Station Strategy also needs to be clarified (see below).

Additional investment in resilience will become necessary

To implement the European Union’s Economic Security Strategy and diverse strategies of the federal government (incl. on China, national security, industry, raw materials), concrete steps are needed to increase the resilience of the German economy against further security shocks that potentially have a large economic impact. The academic debate on this issue is very advanced (CEPR 2024, BDI 2022), but a debate must be held in the near future to clarify which fields have little potential for market diversification and risk reduction and which are in particular need of funding instruments to deliver very targeted risk reduction in global supply chains. Even if the 40-percent target set by the European Union in the recently adopted Net-Zero Industry Act is not regarded as binding, there are very precise tasks to be tackled in green technologies and in a broad range of other industries. Alongside the wellestablished areas of support, microelectronics and battery technologies, measures are also needed in other industries. Overall, financial support measures needed here are on a scale of between 20 and 40 billion euros. According to the calculations of the European Commission, Germany’s share of funding for green technologies alone amounts to a volume of 20 billion euros. Meeting the EU’s

20-percent target for microelectronics will also require corresponding funds from Germany in the medium term.

Large volume of funding needed overall

We estimate that the total volume of required catch-up and additional investment in infrastructure, the transformation and resilience will amount to a volume of investment of between 375 and 395 billion euros. The lion’s share of public investment and support measures, around 315 billion euros, will be needed for infrastructure in the areas of transport routes, education buildings and buildings (residential housing). Climate protection measures will require additional funds to the volume of 41 billion euros. For the purposes of resilience, a structured process should be conducted to identify the areas of action needed and to allocate the necessary funds. We estimate a volume of between 20 and 40 billion euros over the period of ten years as the lower limit of funds needed

Other municipal financing needs

It is an uncontested fact that public investment is needed on the local level to maintain the transport routes to the scale of over 380 billion euros in the future. In addition, according to the KfW Municipal Panel 2023, the volume of public investment needed at municipal level for sport facilities, administration, water, information technology, fire service, healthcare and culture amounts to a total of 65.98 billion euros. Dullien et. al. (2024) estimate the additional needs of local authorities for climate adaptation measures such as desealing measures, protection against heat and strong rain and improving the climate in cities by adding greenery at 13.2 billion euros. This estimate assumes that the ratio between the planned and required level of investment for climate adaptation as identified by KfW Municipal Panel corresponds to that of climate protection, which means that the expenditures for climate adaptation would be more than twice as high as current plans. Policymakers at federal, state and municipal level need to discuss how to finance the required investments in a clear, political process

In our opinion, additional investment and financial support is particularly necessary in the following areas:

Source: BDI

Infrastructure

Investment needed in transport routes and modes

We estimate that transport infrastructure will need additional investment (i.e. investment the financing of which has not been reliably secured) of around 158 billion euros

Federal railways

The Coalition Committee of Germany’s governing parties calculated that the railway network will need extra funds of 45 billion euros until 2027 and expressed its intention to finance them. Current calculations of the Deutsche Bahn put the investment backlog until 2030 at around 90 billion euros. So far, a total of 27 billion euros has been earmarked for the railway grid until 2027, leaving a financing gap of 63 billion euros until 2030. The large majority of these investments are related to the renovation, digitalisation and expansion of the railway infrastructure, including plans to renovate 40 sections of the railway network until 2030, conduct general maintenance of the railway network, rapidly increase capacities, digitalise the network, renovate train stations, carry out new construction and expansion projects as well as electrification.

Major federal roads

Rising construction costs have opened up a financing gap of 7.8 billion euros until 2030 for the maintenance and expansion of the federal network of major roads, if the federal government continues its investments as currently planned (BDI calculations). This financing gap may well widen further given the economic development and potential fallouts in revenues from the truck toll which were planned to finance these works. Furthermore, federal motorway operator, Autobahn GmbH, has calculated additional financing requirements of 5.5 billion euros until 2028 for the execution of the bridge renewal works

Federal waterways and ports

The ISW, an initiative to strengthen the waterway infrastructure in Germany, estimates that investments of two billion euros per year are needed to reduce the backlog of renovation works for the federal waterways, growing to five billion euros per year by 2030 on account of general price increases of six percent per year and an annual target increase in the volume of renovation works of 15 percent. Assuming the federal government keeps to the planned level of investment until 2030, the total volume of additional financing required by waterways until 2030 would be around 3.6 billion euros.

In addition, there are also other areas which require financing, such as port infrastructure. The federal government has so far paid coastal federal states an annual compensation of 38.3 million euros to cover the costs of the ports. The coastal states and the seaport industry believe that investments in the billions range will be needed to shoulder the infrastructural adaptations needed in the wake of climate transformation and are therefore calling for the annual compensation for port costs to be increased to at least 400 million euros per year. This would amount to additional financing of 2.4 billion euros until 2030. Furthermore, inland ports have calculated that they need financing of two billion euros over the next ten years for the renovation of the quay walls of inland ports.

Public transport and regional and local road infrastructure

The investment needed for the maintenance and expansion of railroads and roads in cities, districts and municipalities amounts to around 372 billion euros this decade, with catchup and replacement works for municipal roads accounting for the greater majority of 283 billion euros. Alone the financing requirements for the infrastructure of public transport until 2030 amounts to around 64 billion euros (German Institute of Urban Affairs, 2023).

Investment needed for buildings, district heating and housing

We estimate that the additional costs to cover the investment in buildings (not including the education infrastructure) needed to meet targets set in climate and housing policy at around 56 billion euros

Financial support for renovation

We estimate that the funds needed to support the refurbishment of buildings to increase energy efficiency and meet the set climate protection targets amount to around 18.9 billion euros per year (BDI calculations). According to the BDI study, Climate Paths 2.0, funds will need to be scaled up to around 20 billion euros per year until 2030 (BDI 2021), which does not factor in any additional costs due to inflation. The volume of additional funds needed (excluding additional costs due to inflation) until the end of the decade amounts to 18.97 billion euros, assuming the continued availability of the funds currently budgeted per year

Residential

construction

The federal government’s current and additionally planned programmes to promote residential construction should be continued until 2030 without interruption to meet the need for additional residential housing. As well as maintaining the funds currently available of 2.6 billion euros per year, the climate-friendly new buildings programme, KFN, will need another 750 million euros per year as the outflow of funds is much higher than the volume budgeted. Additional funds of 23.3 billion euros are needed here, also not including additional costs caused by inflation. This means that additional financing of 18.25 billion euros is needed until the end of 2030, over and above the funds currently budgeted until the end of 2025.

Construction of social housing

The current level of federal funding for the construction of social housing must be sustained to reach the targets set until 2030. With an annual budget of currently 3.15 billion euros, this amounts to total funds until 2030 of 22.05 billion euros, without including additional costs caused by inflation. Additional funds needed here above the funds earmarked for this area until 2027 amount to 9.95 billion euros

District heating

Federal funding of 2.2 billion euros per year is needed to support the expansion of district heating. This amounts to total funding until 2030 of 15.4 billion euros (BCG calculation). Funds earmarked for district heating until 2030 presently only amount to 6.75 billion euros which means that an additional 8.65 billion euros of federal funding are needed here until 2030.

Investment needed in education infrastructure

The investment needs of the education infrastructure currently stand at around 101 billion euros according to our calculations. Around sixty percent of that sum is needed for investment in schools, one third for further education, and the rest for nurseries

Nurseries

According to a survey conducted by the German Institute for Urban Affairs from September to December 2022, the KfW Municipal Panel 2023 put the backlog of municipal investment needed in nurseries at 11 99 billion euros

Schools

The KfW Municipal Panel 2023 estimated the backlog of municipal investment in schools at 47.44 billion euros. Dullien et. al. (2024) also factor in the expansion of all-day schools. Rauschenbach (2021, 37) calculates the costs of the expansion of all-day schools at 6.7 billion euros factoring in the ongoing value of investments and assuming increasing demand and future price increases. We therefore put the volume of investment needed here at 54.14 billion euros

Further education

Based on the report of the Standing Conference of Ministers of Education and Cultural Affairs (KMK) on the climate-friendly renovation of public further education institutes in Germany from 2023, Dullien et. al. (2024) put the volume of investment needed by the federal states to renovate their public further education institutes at 34.7 billion euros excluding renovation works to increase energy efficiency.

Transformation and climate protection

Climate protection spending only slightly lower than required this decade

The additional public money needed for investment and support in climate protection and transformation measures are not huge, as often purported, but on a moderate scale of around seven billion euros per year. This sum does not factor in some areas that have not yet been clarified. Since 2021, when the study was written, new financing needs have emerged related to phase two of the Power Station Strategy, the carbon management strategy, possible cofinancing arrangements for the expansion of the electricity grid and for the imminent climate adaptation strategy

Capital investment needs, new investment and investment support need to be clearly differentiated

Assessing whether state expenditure on climate and transformation-related measures is sufficient to meet the requirements set down in climate protection legislation is currently only possible on the basis of various estimates from a range of different sources. While the necessary private capital investment volume, including additional investment, and some categories of required public investment can be evaluated in the framework of studies, comparing requirements with the funds allocated in the public budgets (and subsidiary budgets) is comparatively difficult

Many studies have estimated the volume of gross fixed capital formation required for Germany to meet the targets set down by the state (initially climate neutrality by 2050, later by 2045). The studies are largely consistent and estimate the total climate investment required to be around 2.5 percent of GDP per year, with purely additional investment accounting for around one percent of GDP. The volume of additional investment needed is particularly large in industry (energy, transport and buildings).

The largest divergence in the scenarios currently is in the precise structuring of energy policy, while estimates for buildings, mobility and industry are less open to controversy. Regarding energy policy, the higher-level Power Station and Grid Strategy is of central importance in calculating the volume of investment required (compare McKinsey 2024), but less so for the volume of funding needed for financial support measures as the very large majority of investments will be private. BDI/BCG (2021) identified the need for an investment volume of 860 billion euros (2021-2030) which corresponds to 100 billion euros per year (2.5 percent of GDP) for all sectors. The great majority of the additional investment required is for energy (425 billion euros) and transport (220 billion euros) while buildings (175 billion euros) and industry (50 billion euros) need a much lower volume of investment. The period examined in the study does not extend to 2045, however. Furthermore, some of the assumptions are based on costs that no longer reflect their current levels due to changes in the market situation or in the political situation.

Relatively similar studies do not arrive at completely different results either. The Halle Institute for Economic Research and the project group Joint Economic Forecast use this estimate and regard 2.5 percent of GDP as the required volume of investment. German development bank, KfW estimates (KfW 2021) the volume of investment needed at five trillion euros until 2045, averaging 190 billion euros per year, of which only around 70 billion euros is above the normal level of replacement investment. While the largest proportions of gross fixed capital formation is for transport (2.1 trillion euros), energy (840 billion euros), households (636 billion euros) and industry (620 billion euros), additional investment required is particularly high in industry (462 billion euros), followed by energy (396 billion euros) and households, i.e. for buildings and heating (254 billion euros), while the transport sector only needs a low level of additional investment as transport modes are subject to high replacement investment in any case and these will become successively green (150 billion euros).

The German Council of Economic Experts recently also presented estimates for the energy sector and energy-intensive industries (SVR 2023) with two scenarios (ambitious and delayed climate policy) putting the investments needed until 2045 at between 507-607 billion euros, of which only 115-184 billion euros are additional investment. This corresponds to an investment volume per year of 25-30 billion euros, of which six to nine billion euros would be additional investment. Compared to the BDI/BCG study, the SVR factored in a significantly lower volume of investment for the energy sector and industry; the BDI/BCG estimate for the total investment required until 2030 is only slightly lower than the SVR estimate for total investment required until 2045. Presumably, the difference lies in the assumption of the Council of Economic Experts that new investment will be available at the same cost as conventional replacement investment.

McKinsey (2021) has estimated the total volume of investment needed until 2045 at six trillion euros (240 billion euros per year), of which about one trillion euros or 40 billion euros per year are classified as additional. In 2024, McKinsey calculated the volume of investment needed by the energy sector at 860 billion euros as things stand currently (250 billion euros for transmission, 120-160 billion euros for distribution, 300-400 billion euros for renewables and 30-50 billion euros for reserve power stations). These figures are more or less consistent with BDI/BCG estimates. McKinsey proposes bringing down the growth pathway of renewables and building more hydrogen-compatible gas power stations in the south to also reduce the need for investment in grid expansion. This approach would bring the total volume of investment needed down to between 550 and 700 billion euros.

Volume of funding needed for public investment and the support of private investment in climate protection measures

Not many of the studies available (BDI/BCG 2021, Krebs/Streitz 2021, IW Halle 2024, Bardt et al. 2019, Dullien et al. 2024) estimate how much (gross) financing the transformation will need in the form of state expenditure (public investment and support measures). The first three studies estimate a volume to the scale of between 30 and 50 billion euros per year (without subtracting the revenues from ETS and Fuel Emissions Trading Act). Back in 2019, Bardt et al. had estimated 7 5 billion euros per year. Dullien et al. increased the volume of financing estimated by them as necessary to 20 billion euros per year in the updated version of the initial study

The BDI/BCG study estimated additional public funds needed until 2030 would be on a scale of between 330 and 370 billion euros, which corresponds to an average of 33 to 37 billion euros per year, and possibly also compensation measures for households and enterprises to the sum of 40 to 140 billion euros per year. With revenues from carbon trading at between 130 and 240 billion euros that would result in a net sum of between 230 to 280 billion euros which corresponds to between 23 and 28 billion euros per year. Using similar parameters, Krebs/Steitz (2021) calculate additional financing needs of between 380 and 400 billion euros between 2021 and 2030, excluding compensation payments and revenues. The Halle Institute of Economic Research do not provide detailed figures. Dullien et al. estimate the volume of financing needed at 200 billion euros over a period of ten years

Actual public investment and support measures for private investment

Not all of this financing volume has been planned in. Since 2021, policymakers have approved several large-scale packages of measures which take account of a proportion of the financing needed. Krebs and Steitz note that policymakers have already mobilised 87 billion euros with the Climate Protection Programme 2030 (2019), the Economic Programme 2020 and the emergency package Climate Protection (2021). The Easter Package 2023 for renewables has not to our knowledge created the need for any particular government funding. Several new programmes have been initiated and have entered the expenditure phase (climate protection agreements, negotiating framework steel, scaling up hydrogen, financing the renewables levy out of the federal budget / the Climate Transformation Fund, financing the GEG (Buildings Energy Act), IPCEI Hydrogen and Batteries II, grants for charging and fuelling infrastructure; the purchase premium for battery-charged electric vehicles has been terminated in the meantime, however). Furthermore, the Power Station Strategy factors in 16 billion euros of state support in the first phase. The figures for the second phase have not yet been substantiated. A part of the programme will be refinanced through the German Recovery and Resilience Fund, by NextGeneration EU and the EU Innovation Fund, which should mobilise a good 20 billion euros altogether

We expect the volume of investment and support measures of the federal government and from EU funds for the area of climate policy to total around 184 billion euros between 2021 and 2027, which corresponds to an average of 26 billion euros per year, or around 0.7 percent of GDP. We are well aware that the planned outflows of the Climate Transformation Fund for 2025 to 2027 are on very shaky financial ground given the strain the budget is under (the open issue of federal grants to the Climate Transformation Fund from 2025 onwards, lower revenues than planned due to the steep drop in certificate prices in the ETS, possibly more expenditure than planned for the EEG levy, actual use of DARP funds, etc.).

A high proportion of the funds for federal government investment and support measures identified in the BDI study as necessary until 2030 is included in the federal government’s climate policy

programmes as long as the scaling up of funding for climate policy measures from 2025 onwards is sustained at more or less the planned level. The overall gap in financing (policymakers’ projections versus climate paths) amounts to between 30 and 70 billion euros. Comparing the calls of the Climate Paths study for additional public investment and support measures for private investment to the sum of 330 to 370 billion euros (or 33 to 37 billion euros per year) for 2021 to 2030 to the budgets that can already be estimated with accuracy (2021 to 2024), then average expenditure is at 21 billion euros per year, while around 33 billion euros per year have been planned so far for 2025 to 2027; it is obviously also unclear whether the take-up of these programmes will be better and whether the support measures available will actually be taken advantage of. In many cases it is also unclear what to expect for 2028 to 2030. Current figures for funding in 2024 put the funding volume for buildings slightly over the volume recommended in the Climate Paths study, in the case of transport much lower, and for industry at around the same level for decarbonisation but lower for green process heat, while real energy investment support was not yet represented in the study.

Additional investment needed for the transformation

Decarbonisation of industry

Germany has moved on to a clear pathway supporting investment and operating costs for the decarbonisation of industry. This path should be continued with determination and more force. Programmes should be expanded or supplemented in some areas particularly in the support of industrial process heat, in climate protection agreements, in the corresponding programmes for small and medium-sized business, in the support of investment for low-carbon facilities in the area of steel, chemistry and cement and in the support of biomass, hydrogen and recycling facilities. Total funding for these purposes should amount to 26.8 billion euros until 2030. In view of the existing commitment appropriations in the federal budget to the volume of 9.6 billion euros until 2030, this means that the funds available for the financing of support measures for decarbonisation until 2030 should be increased by 17.2 billion euros (BDI/BCG 2024).

Scaling up charging and fuelling infrastructure

In the current phase of the scaling up of electric vehicles, the federal government needs to ensure that the expansion of the charging and fuelling infrastructure is prompt, needs-based and comprehensive by providing the appropriate framework and support. Closely monitoring the further scale up of the market and adjusting the available funding where necessary will be decisive to this programme’s success. An overall concept for the charging infrastructure must plan the parallel development of private, commercial and publicly accessible charging stations for cars and heavy vehicles and provide financial support during the start-up phase The development of the hydrogen fuelling infrastructure must also be tailored to needs. Investment required in this area is estimated at 47 billion euros between 2024 and 2030, of which 20 billion euros is public funding. Five billion euros has been earmarked in the Climate and Transformation Fund for this purpose which leaves a financing gap of 15 billion euros. The funds needed for investment and support measures for the required grid connections are included in the calculations for the energy industry (BDI/BCG 2024).

Scale up of carbon-neutral fuels

Carbon-neutral fuels are essential if we are to reach the climate protection targets in transport. These fuels enable the carbon-neutral operation of car and heavy vehicle fleets, of air transport and shipping overseas, non-electrified rail transport and inland shipping. In air transport and overseas shipping, carbon-neutral fuels represent the only option for long-term and extensive decarbonisation. It is

therefore very important to increase the proportion of carbon-neutral fuels, i.e. electricity-based fuels, green hydrogen and advanced biofuels. On account of the high risk of investment in this area and first mover disadvantages, the necessary investments in production facilities have not been made, particularly in the field of electricity-based fuel (power to liquid – PtL). The investment requirements for PtL and renewables facilities abroad has been estimated at ten billion euros between 2024 and 2030. Additional investments are needed in national projects to test the technology on an industrial scale. During the scaling up phase, private investments should be incentivised by suitable support measures and financing mechanisms for investment (CapEx) and operating costs (OpEx). Prior to the decision on the Climate and Transformation Fund, the federal government was intending to support facilities to generate electricity-based fuels, advanced biofuels and drive technologies for aviation with a sum of 74 million euros in 2024 and to secure the necessary long-term funding for the market launch phase using commitment appropriations of 2.06 billion euros until 2038. In addition, funds of 84 billion euros were earmarked for the development of renewable fuels in 2024 and commitment appropriations of 750 million euros until 2037. The current Climate and Transformation Fund only has an overall budget of 230 million euros between 2024 and 2027. This means that there is a financing gap of three billion compared to the original planning of the Climate and Transformation Fund alone. To regain lost trust and enable the decarbonisation of transport and secure a pioneering role for Germany in the area of carbon-neutral fuels, the federal government must close this financing gap as quickly as possible and lift the funding available to at least the level planned before the decision on the Climate and Transformation Fund (BDI/BCG 2024).

Grid expansion and power station strategy

Looking at the necessary measures to lead Germany towards the legally stipulated objective of climate neutrality, we estimate that there is a moderate gap in the financing required, particularly in the areas of mobility and the related infrastructure, industrial process heat and in buildings. A general question that needs to be clarified is the issue of the adequate financing of the conversion of the German electricity grid and other energy infrastructure for hydrogen and carbon in alignment with a power station strategy or a capacity market to ensure supply security in the face of the intended phase-out of coal with the expansion of corresponding capacities of controllable gas-fired power stations

In view of the plans to electrify wide sections of the economy, the volume of investment required in the expansion of the electricity grid are very high, at around 600 billion euros (around two thirds for transmission and one third for distribution). To what extent this particularly dynamic portion of the electricity system costs will result in correspondingly higher grid costs will also depend on how quickly the demand for electricity actually rises, i.e. how synchronised the expansion of infrastructure is with the increase in demand. The flat trend in the growth of demand over the last few years indicates that the demand for electricity is growing slower than initially projected and that the specific costs per kilowatt hour will therefore increase substantially. This makes it all the more important to follow the recommendations of the Coal Commission and plan for the state to cofinance transmission grid fees in the medium term. A cofinancing of 5.5 billion euros was originally planned for 2024 but was then cut after the decision on the Climate and Transformation Fund triggering a substantial increase in grid fees

A Germany-wide hydrogen core network with a focus on the transport level requiring an estimated volume of investment of around 20 billion euros is also planned to be financed mainly by the network users. State financing would only be required here in future if the state needs to honour its security pledge to guard against very low demand for hydrogen. Investment requirements for a transport infrastructure for carbon to be sequestered and brought to the coast have not yet been calculated in

detail but would most probably be much lower than that. It is not possible to foresee at present to what extent such transport pipelines would be financed by private investment alone or would also require security pledges or cofinancing.

To be able to phase-out coal-fired electricity by 2030, or by 2038 at the latest, while maintaining supply security, corresponding additional capacities from adjustable hydrogen-capable gas power stations need to be developed. In the first phase of its Power Station Strategy, the federal government intends to incentivise the construction of about ten gigawatts of power station capacity in the short term using corresponding auctions. Plans are to develop a market-based capacity mechanism to supply additional capacities from 2028 onwards that adheres to the competition and subsidy regulations of the European Commission. The amount of financing required for the specified ten gigawatts cannot be calculated at present with total accuracy as it depends heavily on the framework conditions (number of full load hours eligible for funding per year, restrictions to the funding period, trends in wholesale prices, etc.). Preliminary estimates put the financing required in the low two-digit billion range.

Resilience: basic decisions need to be substantiated by financing

Policymakers at national and EU level have extensively and ambitiously set course to reach the objective of increasing resilience. The European Union, in particular, has set ambitious overall resilience targets in the last few years in a range of areas. This is a good idea (see also BDI 2023bh, 2022). In individual fields, these objectives have been translated into concrete action on the part of the state, primarily through European legislation. In many other areas, however, political initiatives have not yet been completed or even commenced. In October 2023, the EU called on its member states to hold a structured dialogue with the industry of their countries. The federal government has also injected impetus in a number of fields and affirmed targets in a number of strategies (national security, China, industry, raw materials, etc.). At the European level, efforts to substantiate these objectives with European funds have failed for the time being as the EU institutions only managed to agree on minimal new funds for the programme on strategic technologies during the review of the multiannual financial framework The European Commission had previously calculated that around 90 billion euros of public funding would be needed to reach the targets of the Net-Zero Industry Act These include important but by no means all areas of derisking to reduce the dependence of the European economy on autocracies in global supply chains (European Commission 2023b). Furthermore, additional support measures will be needed to reach and maintain the target market share of 20 percent set in the field of microelectronics

Implementation is still in its infancy, in Europe as in Germany

The implementation measures with state funding are currently still on a small scale with most focussed on promoting the production of semiconductors and batteries. Various pieces of EU legislation have not been equipped with any notable funding either at EU level or at national level. An exception here is the CHIPS Act which is equipped with ten billion euros of EU funds and an additional framework of national funds to the volume of 30 billion euros. A substantiation with funding has not taken place systematically in other fields, including raw materials (Critical Raw Materials Act), green technologies (Net-Zero Industry Act in conjunction with STEP) or other areas such as armaments and healthcare. Some of the current IPCEIs (Microelectronics I and II, Batteries I and II), on the other hand, have been set up explicitly for resilience purposes. First steps have also been taken in clean tech, largely with the national process (Stipel) and the NZIA. The measures in Germany have so far been financed either by IPCEIs or the Climate Transformation Fund In contrast to the widely held notion that state spending

on resilience purposes is very high, funding has until now been at a very low level and largely limited to batteries and microelectronics

Need for support on the horizon in relevant areas

The largest requirements for investment and financial support to reduce the risk of supply chains on the import side remain in microelectronics, raw materials, clean tech value chains, chemicals/pharmaceuticals and armaments. Putting a price tag on the financing needs will only be possible once the measures to be taken have been clarified by economic policymakers. Funding measures should generally only be introduced at the end of a review process proving the criticality of the imported good (high dependency on autocratic suppliers, no or barely any substitution possible through other supplier countries, high potential damage if supply chain is disrupted, low market insurance potential, low domestic production flexibility) (see CEPR 2024, BDI 2022). Fortunately, there are only a small number of goods that require funding support for a limited period to build German or European production competences and production volumes. A structured analysis and decisionmaking process to identify the funding measures needed for areas in which market diversification is not or hardly possible on account of security risks would be particularly necessary in order to assess the volume of state funding required.

A start has been made

Until now, measures directly related to resilience targets comprise, above all, the funding earmarked for microelectronics with a total of 12.5 billion euros. Of this amount, only 2.7 billion euros is included in the planned spending in 2023. The lion’s share of the expenditure is planned for 2025 and 2026 with public funding for Infineon, Intel, TSMC and Wolfsspeed. The financial support of the domestic solar industry was long debated but then postponed in the wake of the reduced expenditures available after the Federal Constitutional Court decision on the Climate Transformation Fund. Around 3.6 billion euros have further been earmarked for the financial support of batteries between 2021 and 2027, which we have included in the financing needed for transformation for systematic reasons. These funds are nonetheless also building resilience

Issues which need clarification

It is still completely unclear to what extent the indicative targets for European-based production for technologies set down in the Net-Zero Industry Act will require funding. Looking at the facts of the case, there are many indications that monopolistic positions on the market (usually, Chinese) can only be broken down with a mix of tendering rules, sustainability criteria and explicit support measures. However, there has not yet been a strategic clarification about which EU programmes or member state programmes can be used to develop and implement the necessary measures. Extensive analyses on this subject are available (see also BDI 2022, Bundesbank 2023, CEPS 2023, European Commission 2023a, b, 2022, ECB 2023, ifo Institute 2024, 2021, IW Consult, Vfa 2022, Matthes 2024, Fraunhofer 2023, German Council of Economic Experts 2022, Spain’s National Office of Foresight and Strategy 2023).

Financing the investment agenda

The financing of the public infrastructure and support measures needed in climate policy and to increase resilience must be considered over a period of several years. The backlog of investment in public infrastructure is so large that a catch-up programme of several years, well-coordinated between federal, state and municipal level, will be needed to work it off. In climate policy, on the other hand, a

large proportion of the required transformative investments will need to be made in the next ten years, followed by further investments in the periods up to the beginning of the 2040s. Regarding the financing requirements related to resilience, there are many one-off derisking tasks which can be completed within five years. Only some areas, such as microelectronics, will need financial support over a longer period of time

The political decisions taken to broaden the investment agenda of public authorities consequently need to be reflected in the public budgets to successively cover a large portion of the required volume of financing. A certain proportion will also need to be financed by net new debt. We believe that setting up one or several special funds as envisaged in German Basic Law would be a good idea.

Option of special fund conceivable

Additional sources of financing will be needed to cover the catch-up and extraordinary public investment requirements of the country. The German Bundestag and the Bundesrat have the power to set up special funds with a constitutional majority as long as these are precisely defined in terms of scope and time and adhere to the principles of forward-looking budget policy, namely, ensure a more efficient use of public funds, tackle necessary structural reforms and prioritise capital expenditure. Such measures could generally only be applied to secure the share of financing of the specified backlog of necessary investment in the areas of infrastructure, transformation and resilience that has not yet been included in financial plans at federal or state level

In the event that policymakers chose to use the option left open by the Federal Constitutional Court to set up a special fund, they should set up different special funds for the different tasks at hand. These individual special funds can then be structured separately depending on the specific situation and have different timelines. Each special fund should be set up by a separate piece of legislation precisely stipulating the respective tasks, responsibilities and financing modalities, including repayment modalities. A plan to get back to financing all investments out of the annual public budgets at federal, state and municipal level also needs to be developed and is binding.

One special fund or several

If policymakers chose to use special funds, there are several options of how to structure them. On account of the varying timelines, we believe that it would be useful to group the general infrastructure and resilience needs in one special fund with a timeline of eight to twelve years (two to three legislative periods) and the climate and transformation needs in two successive special funds (Special Fund 1 spanning two legislative periods until 2033, and Special Fund 2 until 2041), as the medium-term needs here are more difficult to estimate at present while the needs for the next eight years are relatively easy to calculate because the technologies and framework conditions are already established in most areas. The justification for the special funds is that complimentary, rapid and effective investment is needed on the part of the state and the market because the time window for transformation and thus securing long-term competitiveness is limited and the process involves risks and launching new technologies and fuels onto the market (Hüther 2024). Binding timelines have been set down in climate policy for many areas of infrastructure and transformation investment, a speed which the uncoordinated, slow and uncertain response of the market to changed relative prices would not deliver. In the field of resilience, on the other hand, urgent security risks need to be reduced which cannot be internalised by companies and markets exclusively on account of the principles of law and order alone

Repayment

Financing would be best structured with the issue of ten-year or longer period government bonds. The loans should be serviced out of the federal budget. As it will certainly take some time to execute the investment projects, particularly in the public sector, and to expand production capacities in the construction sector, actual outflows will probably only reach planned levels after a period of five or more years. The special fund should be furnished with a repayment plan. With complete financing from a special fund this would result in new debt of around one percent of GDP over a period of ten years which would amount to expenditure in the federal budget of around fifteen billion euros per year. A tapered start would make the costs correspondingly lower in the beginning.

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Imprint

Bundesverband der Deutschen Industrie e.V. (BDI)

Breite Straße 29, 10178 Berlin www.bdi.eu

T: +49 30 2028-0

German Lobbyregister Number R000534

Authors

Dr. Klaus Günter Deutsch

T.: +49 30 2028 1591 k.deutsch@bdi.eu

Kenneth Frisse

T.: +49 2028 1736 k.frisse@bdi.eu

Raffael Kalvelage

T.: +49 2028 1528 r.kalvelage@bdi.eu

Peter Mair

T.: +49 2028 1629 p.mair@bdi.eu

Uta Maria Pfeiffer T.: +49 2028 1436 u.pfeiffer@bdi.eu

BDI Publication Number D 1932

Petra Richter T.: +49 2028 1514 p.richter@bdi.eu

Dr. Carsten Rolle

T.: +49 2028 1594 c.rolle@bdi.eu

Wilko Specht

T.: +49 30 2028 1599 w.specht@bdi.eu

Editorial / Graphics

Marta Gancarek

T: +49 30 2028 1588 m.gancarek@bdi.eu

This translation is based on “Standort D mit Investitionen stärken | Programm für Infrastruktur, Transformation und Resilienz erforderlich”, as of June 2024.

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