Germany's Service Sector Potential

By Maria Martinez

(Reuters) – German policymakers may have overlooked the growth potential of the country's services sector while trying to salvage its industry champions.

The German economy, once described as Europe's growth engine, has underperformed euro zone peers since 2018 and faces further challenges amid Volkswagen's plans to shut factories at home.

Recently, Germany's governing coalition collapsed after Chancellor Olaf Scholz sacked his finance minister, ending months of budget policy debates.

Scholz aimed to stabilize energy costs and fund measures to protect jobs in the auto sector. In contrast, pro-market minister Christian Lindner advocated for spending cuts, lower taxes, and less regulation to sustain Germany's industrial sector.

However, experts argue Germany should focus on its services sector, which, although smaller compared to other European economies, is growing faster than manufacturing. Guntram Wolff, a senior fellow at Bruegel, stated, "If you can do something to boost a bit the services sector, it could overcompensate for the shrinkage in manufacturing."

In fact, services accounted for 70% of Germany's GDP last year, lagging behind countries like France and Spain. The German Economic Institute IW reported that the services sector grew 1.6% in the first half of this year, while manufacturing fell by 2.8%.

Business leaders believe that bureaucracy and heavy regulations hinder new job creation and company formation, particularly for small and mid-sized businesses that make up 55% of the workforce.

Entrepreneur Leonard Benning shared his experience of starting a business in the UK, where the process was seamless compared to the lengthy and costly bureaucracy in Germany, which took over four months.

According to a poll by the German Chamber of Commerce and Industry (DIHK), 56% of services sector respondents listed regulation as their main concern, while manufacturing sector respondents worried primarily about risks to domestic demand and energy prices.

Strict and lengthy certification processes deter new companies from entering the market, especially in finance and health. 50% of companies in the services sector reported difficulty finding workers, exacerbated by the high proportion of the workforce employed in regulated professions.

Marcel Krieb highlighted that strict employment qualifications make it tough to hire young talent at his consultancy, with only 1.4% of auditors under 30 years old.

Addressing these challenges calls for policymakers' attention. However, while manufacturers can leverage a powerful business lobby, the fragmented services sector lacks a unified representation.

Cyrus de la Rubia criticized the scarcity of data available about the services sector, arguing it reflects the neglect by politicians of this vital economic segment.

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