Germany's Economic Chief Urges Reforms Amid Rising Bankruptcies

Germany's Economic Landscape and Reform Needs

BERLIN, Jan 27 (Reuters) - Germany's government must press ahead with structural reforms and accept the "creative destruction" of companies going bankrupt as the price of reviving economic growth, Reint Gropp, president of the Halle Institute for Economic Research (IWH) told Reuters in an interview.

Current Bankruptcy Trends

Europe's largest economy has been experiencing high numbers of bankruptcies, and insolvency-related business closures are at their highest level in 11 years, data has shown, while its potential economic growth has dwindled from past levels.

Government's Growth Forecast

Gropp said this was part of a healthy competitive business environment and it was fine to let some firms fail if domestic production was no longer viable due to high energy or labour costs.

Challenges in Implementation

"We need a process of predatory competition, where new ideas push out old ones," Gropp said in an interview with Reuters.

He added that the government appeared to lack the impetus to implement reforms and remove the bureaucratic hurdles that delay new projects.  

"It must be possible to create something new without getting stuck in German bureaucracy," said Gropp.

To raise Germany's potential economic growth rate - the maximum rate at which it can grow over the long term without generating rising inflation - from the current 0.6% towards levels closer to 1.5% as seen in the past, Gropp said Germany needs more start-ups, stronger research and less uncertainty to encourage investment in new technologies. 

LOWER GROWTH EXPECTED, REFORMS LAGGING

The government is set to lower its growth forecast for gross domestic product in 2026 to 1.0% from 1.3%, according to a person familiar with the projections, reflecting greater uncertainty over international trade.

"The uncertainty is simply very large," Gropp said, citing the unpredictability of U.S. economic policy. 

He said the outlook rests heavily on the government's economic programme, including an investment fund and higher defence spending, with the hope that the measures will help lift demand.

The main reason the 2026 forecast is expected to be revised down by 0.3 percentage points, he said, is a familiar one: problems with implementation.

"The problems facing the investment programme are the same as in the past," he said, citing bureaucratic hurdles and lengthy procedures that delay projects and weaken the near-term impact.

Promised structural reforms have lagged, he said, which highlights the need to simplify procedures, tackle pension reform and advance the climate transition. 

Private investors would need the government to make a credible commitment to structural reforms to spark stronger momentum. 

"But even this commitment to reforms cannot be seen in the federal government at the moment," Gropp said. "There is still a lack of trust."  

(Reporting by Maria Martinez, Christian Kraemer, Klaus Lauer and Reinhard Becker in BerlinEditing by Miranda Murray and Hugh Lawson)