IVA's President: Some thoughts on Germany

Dear IVA Friends, 

We need to talk about Germany. Europe’s traditional economic “locomotive” is behaving these days more like a late-model diesel engine than one of its electric high-speed trains. Geopolitical instability, stiff global competition and regulatory burdens have sparked talk of de-industrialization. Germany’s dependence on imported fossil fuels is driving up costs while its goods no longer find a huge market in China.  In July, the BDI Federation of German industry reported that manufacturing is hemorrhaging 15,000 jobs a month. The OECD expects Sweden’s economy to grow 1.9 percent this year – and Germany’s by only 0.7 percent.

We can be proud of Sweden’s accomplishments as one of Europe’s more dynamic economies. The Financial Times in June praised our corporate regulation and financing methods (through capital markets rather than bank lending). “Stockholm has attracted more IPOs in the past decade than France, Germany, the Netherlands and Spain combined,” it reported. Sweden also ranked number two of 140 countries in the WIPO Global Innovation Index. 

But before we indulge in a little Schadenfreude, Sweden’s industry remains deeply intertwined with Germany’s. And Germany is our biggest trading partner, supplying around 16 percent of our imports and taking around 10 percent of our exports in return. It is also  the third largest economy in the world (nominally), That’s why Germany’s difficult transformation to a more dynamic, tech-driven economy is cause for concern. “What is bad for Germany is bad for Sweden,” as the Teknikföretagen Association of Swedish Engineering Industries said in June.

Yet, history tells us that such manufacturing powerhouses can also drive new industries – like the enterprise software innovator SAP in the 1980s. Having grown up in West Germany during the Cold War, it has been exciting for me to see how Dresden, in the eastern state of Saxony, has emerged as one of Europe’s major semiconductor clusters. The optics company Zeiss, also located there, has now branched out into chip-making lithography, one of the most consequential high-tech capabilities in manufacturing.

With tech start-ups growing 52 percent in the first half of 2026 from the second half of 2025 – one-third of them focused on AI – Germany is showing signs of a tech ecosystem emerging alongside its industrial base. The ability to combine traditional industrial strength with cutting-edge AI-driven tech was on striking display this summer when Neura Robotics, a maker of humanoid and cognitive robots based near Stuttgart, raised USD 1.4 billion in private capital from tech giants like Nvidia, Amazon and Qualcomm, putting it among the top global robotics players now challenging US and Chinese competitors. 

Although it must still confront  bureaucratic headwinds to speed up implementation and keep pace with the rapidly changing tech sector,  Berlin hopes to advance the trend with an ambitious Startup- und Scaleup-Strategy. Other government initiatives point in the same direction. A new modernization program aims to cut a quarter of bureaucracy-related costs for business, slash red tape for infrastructure projects and create a new digital marketplace for public procurement. And Germany’s federal agency for innovation, SPRIND, is working on an international standard for “Law as Code” – machine-readable legal infrastructure that would help integrate and scale cross-border operations for European businesses.

Germany also has money to spend. After loosening its rules on deficit spending and legislating a EUR 500-billion infrastructure package, Berlin has created substantial new room for public investment. Much of it is likely to flow into precisely those areas in which Sweden has strong capabilities – defense, energy and electrification, transport and infrastructure. That could turn Germany’s economic weakness into a major source of new demand for Swedish companies.

Since Russia’s war on Ukraine war has made defense an existential priority for Europe, the money pouring into this sector in Germany is also creating huge opportunities for Swedish and other European companies. Munich has become a continental hub of defense innovation. It is also home to the most highly valuated AI defense start-up Helsing, with strong ties to Sweden, among other things through the chair of its board and key investor Daniel Ek, the co-founder and CEO of Spotify.

Feeding into the Munich innovation cluster are two of Europe’s top-ranked public research universities: the LMU Munich and the Technical University of Munich. These have benefitted from a significant rise in public R&D spending over the last decade, which has made Germany the EU’s top public R&D funder today (over 1% of GDP). The recent opening of a consulate in Munich underlines the importance of this region and the country for Swedish industry, defense and technology. This, together with the fact that Germany is one of the biggest financial supporters of Ukraine, also makes me wonder whether Germany shouldn’t be included in NB8, and informal cooperation on security and foreign policy among Nordic and Baltic states.

Germany’s current economic challenges notwithstanding, these developments offer opportunities for both Sweden and for Europe. If Germany’s huge fiscal spending package can raise productive capacity, the benefits will extend well beyond its borders. Easing regulation is essential to this effort, and it also aligns with the EU's Competitiveness Compass, which aims to support innovation, decarbonization, and competitiveness, and reduce supply-chain dependencies.

But a more competitive Germany is not enough. Europe also needs to reassess an economic model that has relied too heavily on Germany as its locomotive. The goal should not be to restore that model, but to build an economy with cross-border engines of growth – by integrating supply chains, deepening capital markets and enabling companies to scale so that they can sell to (and source from) the entire single market.

When I say we need to talk about Germany, what I mean is that we need to talk about the country’s strengths, not just its weaknesses – and about moving beyond Europe’s German-centered growth model.

That’s a conversation for and about the future.