Germany’s new government has named climate change as its top priority and promised reforms to bolster its start-up ecosystem as it aims to modernise Europe’s biggest economy.

The coalition between centre-left Social Democrats, pro-business Free Democrats and the Greens took office in December 2021, and is already signalling big opportunities for those investing in the green transition and digitisation.

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Its policy agenda is praised for being more progressive than those under Angela Merkel’s 16 years of leadership, which often focused on sustaining the status quo. “This coalition treaty is very much geared towards the future of economic development, and social and technological issues,” said Achim Hartig, head of investor consulting at Germany Trade & Invest. “That is appealing to the business community.” 

Clean priorities

The biggest investment opportunities are tipped to be in renewables and activities linked to the green economy, such as electric mobility. Companies in these sectors “will benefit from this new government,” said Markus Van Tilburg, managing director of FDI consultancy Global Aldea.

The coalition has named the Paris Agreement as its top priority and expanded the federal economics ministry to also encompass climate action. It has brought forward the deadline for phasing out coal to 2030, upped offshore wind targets by 50% and wants to quadruple solar power capacity by the end of this decade. 

While fDi Markets data shows some larger German states — namely Baden-Wurttemberg, Bavaria and North-Rhein Westfalen — have historically attracted more foreign direct investment (FDI) renewables projects than their counterparts, the types of renewables they attract varies from state to state.

At his inauguration as economics minister, Greens co-leader Robert Habeck spoke of the need to use public investment to “kick off a massive amount” of private investment. Some €60bn originally earmarked for Covid-19 stimulus spending has been redirected to a climate and transformation fund, and national development bank KfW will be mandated to incentivise private investment in climate change. 

Details of green incentives are yet to be announced, but Mr Van Tilburg said “there will be money to support the growth of these types of industries.” This includes research and development which, in combination with plans to streamline infrastructure projects that support a decarbonised economy, is tipped to lure international cleantech companies. 

Business environment

In line with its intention to transform Europe’s industrial powerhouse into a more digitised state, the government aims to make Germany the leading start-up location in Europe. It will empower KfW to act as an innovation agency and venture capital provider, and shorten the company registration process to 24 hours — an ambitious target given its lowly rankings on starting-a-business scoreboards. 

Mr Hartig expects the country’s Digital Hub Initiative, which links entrepreneurs with research institutions and corporate leaders, to be rebooted. “This will probably be integrated into an even more coherent system so that services for start-ups and scale-ups can be better addressed,” he said. 

Under the initiative, the country has highlighted 12 digital hubs across Germany focused on different sectors, including logistics in Hamburg; mobility and insurtech in Munich; and the Internet of Things and fintech in the capital, Berlin. Historically, Bavaria and Berlin have the largest share of foreign direct investment (FDI) projects in the tech sector amongst all German states, according to fDi Markets.

More broadly, the government has promised no tax hikes, but the minimum wage will increase by 25% to €12 per hour. 

Nuanced on China

Compared to her European and US peers, Ms Merkel took a soft stance towards Beijing and championed the EU–China investment agreement which was signed in 2020 (although is yet to be ratified). Data from fDi Markets shows that over the past five years, Germany has been China’s biggest European target for greenfield FDI by project number. 

However, there is a marked change in tone from the new government. The coalition treaty supports Taiwan’s participation in international organisations, recognises China’s human rights violations in Xinjiang and notes the security crackdown in Hong Kong. But Mr Van Tilburg does not expect this to directly impact greenfield investment. “Maybe they won’t be as diplomatic as Merkel … maybe we will see a little more criticism against China and also Russia, but I don’t think this will change the welcoming of FDI from China,” he said.