Germany’s High-Tech Agenda: Trapped In The Subsidy Loop

Submitted by Thomas Kolbe

Germany is falling behind in the economy’s future fields. Whether artificial intelligence, autonomous driving, biotech or quantum technology – the US and China are making the headlines. A high-tech agenda by the federal government is meant to close this gap.

On Wednesday, Chancellor Friedrich Merz and Research Minister Dorothee Bär presented the federal government’s high-tech agenda in Berlin. At the centre of the initiative is a state subsidy fund that is intended to kick-start pre-selected high-technology projects such as artificial intelligence in the future.

Of course — how could it be different — green projects, climate-neutral approaches in the fields of quantum technology, mobility and other so-called future fields are at the forefront of the political engagement.

Subsidy pot and governance

The technology fund is to make available up to €2 billion by 2029. “We want to close the technological gap to the US,” demanded Chancellor Merz — with more competition, less bureaucracy and technology-open processes, the Chancellor said.

That competition gap is by now so wide that international investors barely find Europe on their strategic map.

The tech initiative is accompanied, as always, by political buzzwords such as the necessary reduction of bureaucracy and fast approval procedures.

That sounds charming, it sounds citizen-friendly and above all it suggests an interest in the flourishing of the Mittelstand — a media evergreen.

But beneath the slick presentation paper lies the same old playbook: A problem has been identified, a tailor-made subsidy pot filled with fresh credit — always aligned with the political-ideological line of climate regulation. Understanding of market-economic dynamics, open markets or technology-neutrality? None.

Even Merz’s repeated lip service to competitiveness and free-market economy changes nothing: the federal government ignores the real capital market until Germany has finally disappeared from the international high-tech radar.

Competitiveness as a complex problem

Competitiveness of an economy is a tricky matter. Sometimes it’s skill shortages, sometimes lack of investment capital. Then again regulations, fiscal burdens or lack of access to resources weigh on firms’ performance. In Germany’s case, indeed each of those conditions seems to be fulfilled. 

Well-educated young Germans are leaving the country in droves. Foreign direct investment flows elsewhere. China threatens to turn off the resource tap — and from the Kafkaesque regulatory work, the overflowing bureaucracy and the ever-rising burdens on companies and employees we have reported regularly.

Germany would have to start very small as a provider of niche products in the competition environment. To put the problem in perspective: The gulf between Germany’s economy and the US in artificial intelligence and the booming data-centres is enormous.

This year alone, Microsoft is pumping $80 billion into its AI data-centres, Google follows with $75 billion, Meta with $65 billion. The entire sector in the US invests year after year well over a half-trillion dollars in its high-technology infrastructure — driven by the free-market process of a largely deregulated economy.

Here lies the secret of success. Europe’s political experiments — be it censorship or the threatened taxation of US digital platforms like recently demanded by Culture Minister Wolfram Weimar — will not change anything about the competitive situation of German firms.

Innovation does not emerge through political subsidy packages, regulation or fiscal harassment, but through massive, consistent investments by the private economy in free markets, which make high-tech a locational advantage.

Germany way behind

How far the German business location is lagging is shown by the example of Deutsche Telekom: Together with the US company NVIDIA it is “only” investing a billion euros in an AI data-centre in Munich. In contrast stands Intel, which simply rejected a €10 billion subsidy and decided against locating chip production in Magdeburg.

A case study of the real problems of the location: too high energy costs, crushing regulation, fiscally unattractive. Here it becomes clear that political subsidy packages alone cannot close the gap to the global frontrunners. They are rather counterproductive, because they politically-selectively weaken competition and tie up capital.

If one wants to be internationally competitive, one needs market-economic framework conditions that don’t deter companies, but attract them.

In the wrong company

The complaint from the economy across the land always sounds the same: The location lacks competitiveness massively. The criticism of the German corporations — because only here you still meet chancellor and ministers regularly in dialogue — at least seems to bear fruit in the diagnosis work. Both the Chancellor and Economy Minister Katherina Reiche stressed last week in unison the competitive gap that has opened up between the German economy and the leading locations — above all the US and China.

Too expensive, too over-regulated, too slow, concluded Friedrich Merz yesterday in his Berlin speech. It cannot go on like this. Administrative tasks, approval procedures, general bureaucratic processes must become leaner. Overall there must prevail a different competitive climate, said the Chancellor.

In principle with politics it’s always the same problem. It is of course more effective in the media to address the large industry. Here one bundles the forces of joint media work, known names, familiar faces. That sells well. The structural problems we see in the Mittelstand. Here are the problems that the grotesque regulatory work of Brussels and Berlin produce, felt day by day. 

Here it leads to distortions and significant burdens in the cost structure when an export business is encumbered by a supply-chain law or the European deforestation regulation. Big corporations have their own administration department and are in fact indirect beneficiaries of regulatory work, because they suppress annoying competition.

Politics on the wrong track

And so we experience the repeat of the always same: Shocked outrage at Germany’s economic weakness, full-blooded reform announcements to reassure the public, only to immediately return to business as usual and keep the course.

It cannot be denied that of the gaily announced initiative to reduce bureaucracy — which was meant to relieve the German economy up to €16 billion or 25 % of the bureaucratic burdens per year — nothing remains. Merz wanted to save eight percent of public-service personnel to relieve the state budget — a nice dream and a typical Merz number: full-blooded announcements that then, in hope that soon other topics will cover them, dissipate in the wave of the daily press spectacle.

But from all the appearances of the Chancellor, his Finance Minister Lars Klingbeil and the Economy Minister nevertheless a last hope glimmers through. The big debt-package, camouflaged under the euphemism of the “special asset”, is now supposed to bring the great turnaround.

As Lars Klingbeil said a week ago in New York during the UN-Congress: For companies a unique window of opportunity is opening — enabled by the massive engagement of the state in the coming years. The calculation is simple: subsidies, price guarantees, aid to the exploding energy costs shall brighten individual corporate balance sheets.

Merz should have discussed with Intel’s management in depth about the German location. What must go wrong, so that a firm — despite its internal problems — rejects a €10 billion subsidy, which would have carried about a third of the total investment, and instead prefers the US location? 

As long as politics cannot give a substantive answer to this question, nothing will change about Germany’s decline and the downfall of the European Union.

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About the author: Thomas Kolbe is a German graduate economist who has worked as a journalist and media producer for clients from various industries and business associations. As a publicist, he focuses on economic processes and observes geopolitical events from the perspective of the capital markets. His publications follow a philosophy that focuses on the individual and their right to self-determination.