Until not long ago, the German recipe for economic success seemed unbeatable. Its foundations were a skilled and motivated labor force, fast technological growth and a focus on high-quality products propelled by continuous improvements in productivity. Attractive margins followed. At the same time, considerable trade surpluses translated into a high savings rate that would generate significant investments on a global scale. What could possibly go wrong? As it turns out, a lot.

In fact, over the past five years, the recipe has failed to generate the expected results, and Germany has stagnated. Poor investments have often been singled out as the major culprit. Yet, investments are not the problem. Although they have been waning from historic highs in 2022 relative to gross domestic product (GDP), they are still elevated (about 22 percent of GDP in 2024) and close to the long-term average. […]