Germany faces challenges in fostering an environment conducive to innovation, according to Clemens Fuest, President of the Ifo Institute for Economic Research. Speaking on Thursday, Fuest argued that comprehensive and well-considered reforms are necessary to simplify the process of innovation and restore sustainable economic growth.
He highlighted a pressing need for targeted support for new ideas, technologies and business models to overcome the current economic stagnation. Despite a high savings rate amongst the German population, investment isn’t consistently directed towards domestic innovative companies. This often forces startups, even after securing initial funding, to seek capital from US investors.
Fuest attributes part of the problem to the German tax system, which he says disadvantages risky investments. Furthermore, strong employment protection laws are seen as hindering innovation, as companies require the ability to swiftly conclude projects that fail – including the ability to restructure workforces without incurring substantial follow-up costs.
Currently, Fuest suggests, a convincing economic policy framework focused on boosting innovation is lacking. He points to neighbouring countries like Denmark as potential models, specifically referencing the “flexicurity” approach – a system combining relatively low job security with strong unemployment benefits. He proposes that adopting a similar model, at least for highly skilled workers, could prove beneficial for Germany.
