Slump in Foreign Direct Investments in Germany Persists
Persistent Slump in Foreign Direct Investment Remains Unabated in Germany - OECD: Persistent inflow of Foreign Direct Investment in Germany persists
Foreign direct investments (FDI) in Germany are on a continuous downturn, with a pronounced decrease in 2024 compared to 2023. According to EY's latest report, overall FDI in Europe decreased by 5%, but the dip in Germany was significantly more pronounced, exceeding the global average.
Here's a breakdown:
- France clung onto its top spot with 1025 projects, registering a 14% decrease; followed closely by the United Kingdom with 853 projects, experiencing a 13% drop.
- Germany trailed in third place. However, Spain and Poland witnessed considerable increases in investment projects.
EY monitors investment projects that result in the establishment of new locations and jobs, excluding mergers and acquisitions. Most foreign investments in Europe originate from the USA, with Germany maintaining its second position as the source country. Central and Eastern Europe primarily see investments from German companies, while Western Europe leans heavily on the USA.
However, the number of US investments in Europe, particularly in Germany, has seen a steep decrease. Overall, there were 11% fewer US projects in Europe and a staggering 27% fewer in Germany in 2024. This shift has granted China the position of the most significant foreign investor in Europe, though China only ranks fifth globally.
EY CEO Henrik Ahlers expressed concern about the "slump" in Germany. "This is another warning signal for the German location," he said. "While other European countries are making progress, such as enhancing digitalization in public administration and fostering business-friendly climates, Germany is losing ground."
Reforms are now imperative. "The new German government has set a goal to strengthen Germany's location with a multi-billion euro investment package and to reduce bureaucracy," Ahlers continued. However, he cautioned against the "constant back-and-forth in regulation and political guidelines."
Some possible reasons for the decline in FDI include:
- Economic instability: Germany's economy is grappling with significant challenges, including high energy costs due to the Ukraine conflict and weakening demand from major markets like China. This instability makes Germany less appealing to foreign investors.
- Political uncertainty: Changes in leadership and potential tariff disputes contribute to investor uncertainty. The recent switch in government leadership and the anticipated election of Friedrich Merz as Chancellor may further affect investor confidence.
- Competition and tariffs: The threat of new tariffs on German exports, particularly to the U.S., increases uncertainty and potential costs for foreign investors. The lingering tariffs, especially the 25% tariff on German cars, may deter investment in the automotive sector.
- Global economic trends: The post-pandemic economic recovery has seen a general decline in FDI across Europe, with Germany being part of this broader trend.
Despite the decline in FDI projects, Germany surprisingly saw a 35% increase in job creation in 2024, indicating that the jobs created by the fewer projects are of significant scope. However, the overall economic growth might be affected by the reduced investment. The decline in FDI could also lead to increased competition from other European countries, pressuring Germany to improve its investment environment.
In conclusion, the slump in FDI in Germany mirrors broader economic and political challenges affecting Europe, but also offers opportunities for regional rebalancing and potential growth in alternative regions.
- In light of the persisting slump in foreign direct investments (FDI) in Germany, there is a growing need for vocational training programs to upskill the local workforce and attract businesses.
- To counter the decrease in foreign investments, especially US investments, the German government could consider implementing policies that foster a more business-friendly climate, similar to those in other European countries, potentially including vocational training initiatives to support local businesses.
