The transformation of the German economy towards climate neutrality is not only a huge structural challenge because of the need for a large part of the capital goods stock has to be replaced, but also raises concerns about financial constraints, and deindustrialisation. At the 33rd Roundtable hosted by DekaBank in collaboration with the German Economic Institute (Institut der deutschen Wirtschaft- IW) and Börsen-Zeitung, the participants stressed the importance of openly addressing the challenges associated with the transformation. It should not become view as an „elite project“, said Danyal Bayaz, Finance Minister of Baden-Württemberg, to prevent giving space to populism.

IW Director Michael Hüther, along with his colleague Markus Demary, criticised the immense bureaucracy that has been built up surrounding ESG regulation, which has held back progress on productivity gains in many areas, due to the enormous time and cost involved. Hüther referred to it as „regulatory overload“. According to Demary, the numerous reporting requirements are particularly difficult for small and medium-sized enterprises to handle. Moreover, the returns from „green production“ are uncertain, because they often entail higher product prices that may not find demand in the market.

According to Demary, the transformation should be designed in such a way that it generates growth and creates jobs, rather than destroying growth and industries. But instead, the debate focuses on deindustrialisation, which is really about sectors that are no longer competitive. The focus should be on those sectors that benefit from the transformation, what Germany's will look like as a business location, and how it should position itself.

Demary added that many of the problems arising when implementing the transformation should have been addressed beforehand, including the financing needs of investmentsfor climate-neutral reconstruction. Many SMEs cannot access the capital market, but are dependent on bank finance. And the SMEs and banks are acting cautiously, in view of the unclear financing risks in the sustainable sector, and because of regulatory restrictions.

Demary, along with Hüther and Bayaz, called for a reactivation of the securitisation market.

Deka's Chief Economist Ulrich Kater believes the financing question is resolvable, in view of the high global savings rates, and an increasingly large financing market outside the banking sector, the so called shadow banks. „In a world where we have excess savings globally, it should be possible to mobilise the volumes needed for transformation investments“, he said. It just depends on the market is structured.

However, Germany is entering the climate transformation with a weakened industrial sector. While he did not explicitly use the term deindustrialisation, Kater highlighted that domestic industry, especially in energy-intensive sectors, has suffered – particularly in comparison with the rest of Europe. The reasons include high energy costs, general weak demand due to political uncertainty, and deglobalisation, which poses significant challenges to the German export industry.

He added that China is exacerbating the situation for German companies with its „dominance strategy“. Thus viewing European subsidies as a gift is not acceptable in the face of unfair competition from China. Political action is needed, especially to preserve key sectors.

Finance Minister Bayaz also criticised the excessive and costly taxonomy, but at the same time called for a better industrial policy to support start up financing in core sectors. According to Bayaz, the federal government „must also strengthen the strong“ in competition with China and the US, and not just focus on the weak areas. At the same time, Germany must enable structural change, and „say goodbye to a few sectors“.

On the political front he doesn't see a clear perspective, a coherent master plan, or open discourse regarding the overall structural transformation. Hardship will be inevitable, and this should not be hidden. In this context, he referred to the expectations nurtured by politics among Germans, and a growing complacency. Every political change is considered a burden, and there is a lot of talk about a four-day week, 32-hour week, and work-life balance. Bayaz said. If Germany wants to be successful worldwide again, it needs to activate the throttle.