Just a few years ago, economists were talking about the „productivity puzzle“. The significant investments in digitalization seemed not to translate into growth. However, it was likely just a matter of the technology reaching maturity and achieving critical mass. Today, the steadily increasing growth in the US and other highly digitalized economies is being attributed to those earlier investments. The knot appears to have loosened after industries, governments, societies, and markets were digitally reshaped.

Europe and Germany have been left behind. Instead of focusing on digitalization and automation, job security has remained a top priority, at the expense of productivity. Labour unions exercised wage restraint, and the government provided generous financial aid during the COVID and energy crises. There was no money left for investments in infrastructure, as social concerns always took precedence. Now, there is a poor economic outlook, competitiveness has eroded, and growth remains weak.

In his report for the EU, former ECB President Mario Draghi refers to the dramatic technological imbalance between Europe and the US as an „existential challenge“. This doesn't seem exaggerated: Between 1995 and 2019, productivity in the US increased by 50%, compared to just 28% in the EU. From 2019 to 2024, US productivity grew by 6.7%, while the EU saw only a meagre 0.9%. In Germany, productivity has also weakened: in 2000, it grew by 1%, in 2010 by only 0.6%, and by a negligible 0.3% in 2023.

Whether the EU can reverse this trend with massive spending programmes, as Brussels envisions, is doubtful. With the „Lisbon Strategy“, the EU aimed to make Europe the most competitive region in the world, but failed. Research and development (R&D) spending was supposed to rise to 3% of GDP, but it missed that goal, with just 2.2%, while the US reached 3.5%. Moreover, that US funding was primarily directed toward modern, digital industries – fuelling future growth.

This should have been the right path for Germany as well, since its workforce is expected to decline due to demographic trends. Real growth can then only be achieved through productivity increases. Key to this are investments in modernisation, new technologies, R&D, and infrastructure. Only the latter requires direct government involvement. The rest can be steered in the right direction through tax incentives and deregulation. In the US, it was private investors who created today’s highly profitable digital giants.

Businesses and innovation don’t need industrial policies or state micromanagement, but rather the right framework, entrepreneurial freedom, and efficient capital markets. New technologies should be welcomed with open arms, instead of letting skeptics take the lead. Artificial intelligence, for instance, should not be overregulated and stifled, as privacy advocates have done with digitalization.

To boost productivity again, Germany could learn from other countries, as shown by a study from the German Economic Institute: If Germany follows Japan's lead in patenting, growth could increase by 8.5%. If it models its digitalization efforts after the US, growth could rise by 10%. But first and foremost, Germany needs to stop the capital outflow. In 2023, 250 billion euros „left the country“. It should be the government's primary task to create incentives that make Germany attractive to investors again – without relying on subsidies. There are plenty of textbook solutions for how to achieve this: tax reform, depreciation rules, and reliable, consistent economic policies.