The social market economy is regarded as a cornerstone of German prosperity, yet this economic and societal model has come under increasing pressure, according to a recent study. Several prosperity indicators show "a decline or at least stagnation," states a study released on Tuesday by the Munich-based Ifo Institute. There is a risk that "prosperity in Germany is deteriorating" or that the population is becoming disconnected from global prosperity trends.
The social market economy symbolically represents the economic resurgence of the Federal Republic after World War II and aims for maximum prosperity combined with optimal social security. This model enjoys "broad support" among the German population, as the authors write in their study commissioned by the Association of Bavarian Business (VBW). And in comparison with G7 nations, Germany has achieved "a high level of prosperity."
However, indicators such as gross domestic product (GDP) per capita, GDP growth, as well as life satisfaction and life expectancy point to "a decline since 2020 at the latest," explained Ifo researcher Sarah Necker. While domestic competition functions fundamentally well, the study notes, digitalization is transferring negative effects of global market concentration to Germany, the Ifo Institute explained.
Above all, the influence of U.S. companies poses challenges for competition policy in Germany. Additionally, Germany has catching up to do in digital technologies.
At the same time, declining "social mobility" over recent years, which serves as a measure of equal opportunity and social participation, points to problems in the education system. Furthermore, the future viability of the German economy is burdened by demographic change and low investment levels.
The study provides a mixed picture regarding the state of economic freedom and personal responsibility: government expenditure and new debt have not returned to their lower pre-pandemic levels, unlike in other G7 countries following the coronavirus crisis. On the positive side, however, the number of transfer payment recipients has been declining over the past 20 years.
According to the Ifo Institute, the resilience of the social market economy is also being tested by geopolitical crises. The authors view critically that import dependency in the energy sector has increased since the turn of the millennium, which has heightened vulnerability to "geopolitical shocks."
In light of this assessment, "far-reaching reforms" are necessary, demanded Ifo President Clemens Fuest. The social market economy is "more relevant than ever, especially in times of change," added VBW President Wolfram Hatz.
Possible levers for strengthening the social market economy mentioned in the study include an education and continuing education offensive, a "strengthening of labor supply" through higher employment participation of women, older workers, and immigrants, as well as reducing bureaucracy. Additionally required is a "sustainable reform of social security systems," a "competitiveness-protecting energy and environmental policy," and strengthening economic resilience in foreign trade.
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