Germany a sinking ship?

Alarming capital flight from the former showcase country. A swan song?

The initial situation:

The last week of June was dominated by negative news about the German economy. Numerous news formats sounded the alarm after a new study was published by the Institute of the German Economy (Institut der deutschen Wirtschaft). Among the newspapers are numerous well-known representatives, such as Handelsblatt, Financial Times and others.

In 2022, +$130 billion more direct investment flowed out than was invested in Germany. Among 46 countries, this was the strongest outflow. Only €10.5 billion came in. This represents the largest gap on record between outbound investments by German companies and inbound business investment.

The study highlights several factors contributing to this decline in investment. Most of which are well known. High energy prices, high (corporate) taxes, excessive bureaucracy, and an ailing infrastructure as some of the problems Germany is facing. The study also points out that 70% of the outbound investment by German companies went to other European countries, which is concerning considering the collapse of investments by European neighbors.

My view and experience:

As an investor, I have never been a big fan of German stocks, with the exception of a few - admittedly highly successful - stocks like Rheinmetall and Allianz, I avoid German stocks both in our fund and in my own portfolio.

As an entrepreneur I can confirm the analysis of the study. Bureaucracy and processing procedures are a horror. Approval processes in projects in which I am involved sometimes take years. It doesn't matter if it's multi-party real estate or renewable energies. Even the repayment of subsidies sometimes takes 3 times as long as announced. A disaster for cash flow planning and working capital.

The infrastructure, particularly with regard to digital processes and productivity-enhancing restructuring, is in some cases catastrophic, especially in the midmarket. According to the motto "old tried and tested is better", outdated structures are being clung to and innovation potential is being left to the left and right.

In my view, the political volatility has already posed an enormous risk to entire industries for decades. Examples? The short-term shutdown of nuclear power plants brought chaos to the energy industry and resulted in compensation payments. Just a few years ago, diesel vehicles were touted in Germany as climate saviors and massively subsidized, only to be pushed into extinction a few years later as a climate sin. Constantly new requirements for building materials are causing such rapid increases in construction costs that the costs are rising steadily, completely independently of the rampant housing shortage.

Public discussions about rent caps and the expropriation of housing companies are not likely to make investment in this area any more attractive. Laws whose implementation is neither infrastructurally nor financially feasible for small and medium-sized businesses are becoming more and more of a nuisance for small and medium-sized businesses. Especially when the implementation takes up so much capacity that the actual core business suffers.

Political long-term development plans similar to a business plan simply do not seem to exist. Instead, short-term trends are followed in the shortest possible cycles in order to participate in them. The maximum advance planning period is 4 years. One legislative term.

Interestingly, the undoubtedly great and innovative German products seem to be used very successfully abroad. In this country, however, one is often amazed at how great these products work there and what old-fashioned products we are confronted with on site. Can you imagine hardly being able to make uninterrupted phone calls on German autobahns or in inner cities? This is reality in Germany. On the A5 in the direction of Switzerland, calls are regularly cut off, even with the latest mobile phone and the best network provider. This is particularly amusing if the business partner at the other end of the line is not from Germany. Many international business partners assume that Germany is a high-tech country. The subsequent explanation usually begins with "Yes, but..."

What is particularly interesting is how closed off a large proportion of Germans are to criticism. To put it quite populistically: Everything is basically better in Germany. In other countries, everything is worse. We've always done it this way, so we won't change anything about XYZ. It is almost archetypal that the closed-mindedness to criticism comes primarily from employees, public servants or persons who do not take any entrepreneurial risk of their own and therefore hardly ever come into contact with the actual weaknesses of the system.

I cannot give a general answer to the original question. But to be honest, I take a very critical view of developments over the last few decades. A financially intensive investment, with an amortization that takes decades, combined with a political will that can change diametrically every 4 years, is currently out of the question for me in Germany.

Let’s see what the future will bring.

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