Over regulation and over bureaucratisation are causing a dramatic loss of competitiveness for companies in Germany- and its attractiveness as a business location. This is the result of a study conducted by the Center for European Economic Research (ZEW) in Mannheim, for the Foundation for Family Businesses. A comparison with numerous other European countries also shows that an approach that relies more on the market, and price mechanisms, is much more effective, efficient and cost-effective than a series of individual regulations, and official monitoring of entrepreneurial activity. In addition, according to ZEW, with a view to other countries, more incentives via market mechanisms also increase public acceptance of projects.

A high cost location such as Germany, writes the ZEW, can certainly remain attractive. However, the return on investment must be satisfactory, and this is no longer the case: Compared to 21 other countries, bureaucracy and governance have a negative impact on the business location. Germany's public sector, with its administration, regulation and public service provision, is now perceived as a weakness rather than a strength.

Compared to other European countries, as well as the UK, Japan, Canada, the USA and China, the public sector in Germany is bloated. According to the study, the volume of expenditure is 49.48% of Gross Domestic Product (GDP). In contrast, Japan achieves the same average location rating as Germany with a much lower use of resources (44% of GDP).

Added to this is the high level of regulation. Even if each individual rule appears to be well founded, according to the ZEW the interplay of a constantly growing body of rules is leading to an increasingly dense network that restricts entrepreneurial scope for decision making. The fact that the costs of this regulation are ultimately detrimental to the underlying social objectives is not recognised. They act as a brake on investment and growth, and deprive the national economy of the resources actually needed for the transformation. High costs actually undermine the social consensus that is essential for a future-oriented strategy.

In Germany, for example, nine procedural steps are required to set up a business. In Finland and Ireland it is only three, in Canada just two. Even France manages with five steps. Germany also does not cut a good figure when it comes to acquiring real estate. According to ZEW, it takes 52 calendar days to complete the final step in Germany, compared to around three days in the Netherlands, four days in Canada and „only“ 16 days in Italy.

The verdict is downright disastrous for the export industry, which - despite bureaucratic hurdles - continues to be one of Germany's growth engines. A standard export transaction can be processed in Spain, Italy, the Netherlands or Austria in one hour. In Ireland it takes 25 hours, and in post-Brexit UK 28 hours. In Germany, on the other hand, companies would have to spend 37 hours.

In view of the challenge of climate transformation, and its importance for the coalition government, the ZEW took a closer look at climate policy. Germany has chosen a strongly regulatory approach here, which severely restricts the freedom of companies, according to its assessment. However, this has resulted in businesses approaching climate policy with pessimism. In contrast, companies in Scandinavian countries, which are often held up as role models for climate policy by the German government, are more optimistic and willing to accept the climate transition. However, a more market-based approach is consistently pursued there, with greater reliance on the CO2 price mechanism, and less on specific targets and regulation.

ZEW considers the results of its study to be extremely worrying, not least because the German bureaucratic and regulatory approach runs against what are actually important current social goals, such as promoting a startup culture, and stimulating housing construction. Rainer Kirchdörfer, Chairman of the Foundation for Family Businesses, has expressed his frustration, and warned against the irritation caused demotivating intervention. „The social consensus that we actually need to tackle future challenges is being lost," he said. Politicians should instead encourage companies with clear market signals, and "not frustrate them with bureaucracy“.

Nikolas Stihl, Chairman of the Supervisory Board of Stihl AG, agrees. He refers to his global experience with regard to the amount of bureaucracy worldwide. Germany scores very poorly. „When it comes to climate protection in particular, we need a market-based climate policy instead of small scale regulations and bans", he said. A regulatory framework should help promote competition between ideas, and encourage openness to technology. „Companies and consumers want to decide responsibly and freely – and not be patronised.“, said Stihl.