“The fear of Germany’s deindustrialization is justified. Industry is under immense pressure—facing international competition, excessive bureaucracy, and rising costs. Yet, panic is unwarranted. After all, the sheer volume of industrial output is less of a guarantee for long-term growth than is innovative capacity, productivity, and the ability to translate technological advancements into economic value. This presents a far more nuanced picture—one in which opportunities become apparent.
Germany possesses a key locational advantage: its decentralized, regionally anchored industrial landscape. Mid-sized industrial hubs scattered across numerous regions secure employment and foster the development of technical expertise that is in high demand on the global market. Unlike highly concentrated industrial centers, this structure fosters broader prosperity and greater stability. The question, therefore, is this: How can this inherent strength be harnessed to secure—or maintain—leading positions in the high-technology sector?
Here lies the central challenge: Many German industries are strong in ‘mid-technologies’—sectors such as mechanical engineering, automotive supply, and chemicals. Innovations in these fields tend to be incremental in nature, serving primarily to ensure the continued survival of the companies involved. However, the disruptive leaps required in the high-tech sector do not emerge through this process. Germany faces the looming threat of the ‘Mid-tech Trap’: solid competence, yet insufficient dynamism. How, then, can Germany preserve its broad, decentralized industrial base while simultaneously providing targeted support to high-tech sectors with significant future potential?
The focus must shift to sectors that, while currently still relatively small, hold immense future potential—particularly in the fields of pharmaceuticals, semiconductor manufacturing, and technologies for energy generation and decarbonization. With appropriate support, such sectors can be transformed into powerful catalysts for value creation and job growth.
To that end, here are six proposals:
First, Germany’s decentralized industrial base must be systematically strengthened. Many industrial hubs—particularly those located in economically disadvantaged regions—still suffer from inadequate transport links, insufficient digital infrastructure, and a lack of tailored educational opportunities.
Secondly, a mission-oriented innovation policy is required—one in which funding is not primarily allocated to the largest applicants (who also tend to be the loudest voices in the political decision-making process), but rather to those companies that present the most compelling concepts in the competitive pursuit of future-oriented themes—that is, "grand missions." By pooling public funds and establishing appropriate markets to support them, scientific insights can be translated into commercial successes, thereby contributing to the achievement of political objectives such as decarbonization.
Thirdly, progress is impossible without innovation-friendly capital markets and regulatory frameworks that allow for experimentation. Only under these conditions can technological breakthroughs evolve into viable companies—and do so with the necessary speed to compete successfully on the global stage.
Fourthly, an industrial policy geared toward transformation is essential. If the primary focus remains on preserving existing structures, problems are merely deferred to the future, making the eventual transition both more difficult and more costly. Conversely, by prioritizing continuing education, retraining, active labor market measures, and a clear regulatory framework for change—such as through carbon pricing—we can actively shape the transformation process.
Fifthly, strategic European collaborations in infrastructure and innovation (IPCEIs) can help accelerate the realization of economies of scale and facilitate the coordination of investments. Such initiatives would also bolster urgently needed technological sovereignty and help unlock new competitive advantages through specialization within the global marketplace.
Sixthly, the integration of high-tech clusters with the broader industrial base can prove to be a decisive advantage in the realm of innovation. While technological breakthroughs often originate within specialized clusters, they only realize their full potential once they diffuse into regions characterized by a strong presence of small and medium-sized enterprises (SMEs). Robust technology transfer programs, collaborative networks linking universities, research institutions, start-ups, and SMEs, as well as regional innovation hubs, can serve as the catalysts for these modern-day economic miracles.
The current debate surrounding deindustrialization runs the risk of devolving into a purely defensive reaction. If the aim is to preserve the existing industrial landscape stands in the way of a urgently needed renewal. It would be preferable to use the existing decentralized industrial base as a starting point and combine it with a targeted high-tech strategy. It will not be possible to halt industrial structural change—the pressure in a globalized world is simply too great for that—and this pressure will continue to mount. However, there are still good opportunities to fundamentally revitalize the industrial sector.
Oliver Falck is the Director of the Center for Innovation Economics and Digital Transformation at the Ifo Institute in Munich.
Daniel Schraad-Tischler is the Director of the Sustainable Program Social Market Economy at the Bertelsmann Stiftung in Gütersloh.
“Industrial transformation cannot be halted. Here is how it can succeed.” [1]
Germany needs a source of cheap oil and gas in order to preserve industry, to finish green transformation and to start an AI revolution in the economy. You don’t have that. Your captive EU market doesn’t trust you, as Poland shows hesitating to buy German arms with money borrowed from EU through SAFE program. You have no clue how you will compete with the USA and China in global markets. You are in deep doodoo, people.
Germany faces a severe industrial crisis driven by high energy costs, loss of cheap Russian gas, and slow digital transformation, placing its economic model under unprecedented pressure. Energy-intensive sectors are losing competitiveness, and the country faces competition from the USA and China, requiring a rapid shift in its economic strategy.
Energy and Industry Crisis: High energy prices, still roughly twice the 2022 level, have led to a decline in competitiveness for German industries, especially after the loss of Russian supplies. Many companies are struggling, forcing a difficult transition in the industrial sector.
Green Transformation and AI: The transition to green energy and the necessary investment in AI require immense capital and a stable, affordable energy supply, which is currently a massive challenge.
European Competition and Trust: Germany's traditional role is challenged as it navigating a volatile geopolitical environment and competition within the EU market. Concerns about competitive edge against the US and China are prominent.
Economic Strategy: Reports indicate that Germany’s economic model is facing a "deepening G-Zero leadership deficit" and needs, among other things, significant economic reform to revive its economy.
The situation is critical, with analysts noting the need for rapid, transformative change, with some suggesting that "German industry is pouring billions into" an effort to restructure and survive.
1. Wie Deutschland die Zukunft gewinnen kann. Frankfurter Allgemeine Zeitung; Frankfurt. 20 Dec 2025: 22. Von Oliver Falck und Daniel Schraad-Tischler
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