1 Introduction

Ladies and gentlemen, it is a great pleasure to be here with you today. Governor Kazāks, thank you very much for your invitation and for your warm hospitality.

We have gathered here today in a remarkable building: the National Library of Latvia. Its design was inspired by the Glass Mountain in Rainis’ “The Golden Horse”. In that classic Latvian play, a princess lies trapped in an enchanted sleep at the top of a steep, slippery mountain made of glass. The king promises a great reward to whoever can reach the summit and rescue her. Everyone knows what needs to be achieved. Yet reaching the summit proves difficult.

The theme of this conference – “From Policy to Impact” – captures this tension particularly well. We know the destination: Germany as well as Europe as a whole need to strengthen their growth potential and their resilience. The hard part is not so much identifying the right policies, but rather, implementing them decisively. Or, metaphorically, climbing the mountain.

In my speech I would like to focus on three questions. First, where does the German economy stand? Second, what does Germany need to do to raise its growth potential? And third, how can deeper European integration support growth, resilience and economic sovereignty?

2 Recent developments and outlook for the German economy

Let me start on a positive note: Various institutions – including the International Monetary Fund, Germany’s leading research institutes and the German Federal Government – expect to see growth of around 1.3 percent this year and 1.1 percent in 2027. To fully appreciate why this represents such a positive signal for us, it is important to consider the broader historical context.

Between 2019 and 2025, Germany barely grew. That was an exceptionally protracted period of stagnation for an economy that had long been one of Europe’s growth engines. What explains this episode?

To start with, Germany was particularly exposed to disrupted supply chains during the pandemic because of its strong links to global trade. Its reliance, at that time, on Russian gas also made it particularly vulnerable when energy prices surged after Russia’s invasion of Ukraine.

But those external shocks were only part of the story. You see, they hit an economy that already had structural weaknesses. Germany’s economy relies on a competitive industrial sector and open global markets. That focus delivered prosperity for a long time. But it has come under increasing pressure.

German firms have become less competitive and lost export market shares.[1] In some cases, their products have become relatively more expensive. In others, they have not adapted quickly enough to changing global demand and circumstances. Competition from China has intensified sharply, particularly in areas where German firms have traditionally been strong, such as automobiles, electrical equipment and mechanical engineering.[2]

Manufacturing has consequently lost some of its relative weight in the German economy. Manufacturing as a share of total German value added has fallen, dropping from around 20 percent during most of the 2010s to 18 percent in 2025.[3] That development certainly deserves attention.

But it should not be mistaken for broad deindustrialisation. A declining share of manufacturing is a common trend across high-income economies, and Germany’s share remains comparatively high. In the United States, for example, it is just 10 percent or thereabouts.[4] Still, the message is clear: Germany can no longer take its industrial strength for granted.

But as I mentioned earlier, we are seeing encouraging signs of improvement in the latest economic data and projections. Real GDP rose by 0.4 percent in the first quarter of 2026 and by a further 0.3 percent in the second quarter. Robust foreign demand played an important role in this. Manufacturing expanded again, especially chemicals and electrical equipment. The current level of industrial orders suggests that this trend is likely to continue.

However, the recovery is not yet broad-based. Private consumption remains subdued, and investment in machinery and equipment declined in the second quarter.

Despite disruptions to transport caused by low water levels on the Rhine, preliminary estimates suggest that economic activity expanded by 0.2 percent in the third quarter. Economic growth is likely to accelerate in the fourth quarter. Above all, higher spending on defence and infrastructure will continue to support demand.

The Bundesbank will publish its next full forecast in December. Our interim assessments point to a stronger recovery than we were expecting in the summer. That is encouraging but should not make us complacent.

Fiscal policy is unlikely to noticeably raise growth potential. Bundesbank estimates suggest that the additional public investment in infrastructure will strengthen potential output, but only very modestly.[5] Additional defence spending, meanwhile, is not expected to increase potential output growth in the foreseeable future. That is precisely why Germany needs to press ahead with structural reforms.

3 Structural challenges for the German economy and policy solutions

At present, Germany’s potential growth rate is about 0.3 to 0.4 percent. That is definitely too weak. Demographic change is shrinking the labour force. Investment has been subdued. And productivity growth remains weak. These challenges will sound familiar to many of you, including here in Latvia. Against this background, I see three main areas of reform: labour supply, the energy transition, and the business environment.

3.1 Demographics and labour supply

Let me start with demographic change and its impact on labour supply.[6] This is one of Germany’s most pressing constraints on growth. The German working-age population peaked in 2025 and is now likely to decline.[7] Immigration and higher labour force participation can cushion the effects of demographic change. We saw that clearly in the years before the pandemic. Under current policies, however, they will not fully offset those effects. Germany must therefore use all the available levers to expand labour supply.

First, many part-time workers – especially women – would like to work longer hours but face practical and financial obstacles. More reliable care facilities for children and the elderly would make a real difference. The expansion of all-day care for primary school children, starting in August 2026, was a step in the right direction.

Furthermore, the tax and social contributions system should stop discouraging second earners from extending their working hours. At present, the tax and social security system discourages second earners from working. For example, non-employed spouses are covered by their employed partner’s statutory health and long-term care insurance at no additional cost. Once they take up employment, they have to pay their own contributions. And this implies a high marginal tax rate.

Second, Germany needs more labour market-oriented immigration. The planned Work-and-Stay Agency is a promising initiative in this regard. It would be a central, digital one-stop platform that helps streamline, digitalise and accelerate skilled immigration to Germany. The new rules on the faster recognition of foreign qualifications in health professions are also a step in the right direction.

Third, the reform of basic income support that took effect in July has reinforced the principles of “promote and push”. For example, it strengthened the sanctions for breaches of obligations and removed the grace period for assets. These are sensible steps and should improve incentives to take up work.

Finally, Germany needs to mobilise the potential of older workers. A fundamental reform of the pension system is still needed. In Germany, the statutory retirement age is set to rise to 67 years by 2031. Employees who retire earlier generally face permanent pension reductions – the earlier they retire, the greater the reduction. However, an exception was introduced a few years ago: workers with 45 years of contributions are allowed to retire early without any deductions. This option should be phased out.

After 2031, the statutory retirement age should be linked to life expectancy. The recent recommendations of a Pension Commission, established by the incumbent government, provide a sound basis for this reform.[8] Longer lives should mean both longer working lives and a longer retirement. That would support growth by easing labour shortages and the pressure on the pension system’s finances.

The ruling coalition has agreed in principle on the reform package for the pension system. Now it is time to climb the glass mountain and turn that agreement into a reform. 3.2 Transition of the energy sector

My second main area for reform is Germany’s transition to carbon neutrality. The conflict in the Middle East has put renewed pressure on energy prices. It is a stark reminder that Germany – and Europe more generally – has not yet weaned itself off fossil fuels. This leaves us vulnerable to global price shocks and geopolitical tensions. Accordingly, the transition to carbon neutrality is no longer just a matter of climate policy. It is increasingly also a question of competitiveness and economic resilience.

This transition is economically demanding. It must deliver lower emissions while keeping energy affordable and supplies secure. That calls for a reliable policy framework and substantial investment in energy infrastructure.

Emissions should be reduced wherever possible at the lowest cost. Hence, the central economic instrument should be an adequate and broadly uniform carbon price. At the same time, environmentally harmful subsidies should be reduced rather than expanded. These weaken the price signal and make inefficient use of scarce fiscal resources.

A coherent framework for the electricity system is equally important. Currently, reforms are being discussed to improve the integration of renewable energy into the electricity market and to better align the expansion of renewables with the availability of grid infrastructure. This is a promising direction, as it can help to reduce overall system costs. At the same time, the regulatory framework must continue to provide incentives for renewable deployment while enabling innovative technologies such as vehicle-to-grid (V2G).

Furthermore, Germany needs sufficient storage and reserve capacity for periods when wind and solar generation are low. Households and firms also need to use electricity more flexibly. Dynamic electricity prices can help them shift consumption to periods of abundant supply.

Let me give you an example of the practical barriers to such a sensible approach: The technical groundwork for dynamic electricity prices is the use of smart meters. Unfortunately, progress in this area has been too slow in Germany. Since January 2025, electricity suppliers in Germany have been required by law to offer their customers dynamic electricity prices. But their full potential has not yet been realised because smart-meter coverage remains low. In this regard, Germany could really learn from Latvia: by 2023, you had already achieved near-universal smart-meter coverage.

3.3 Business environment

My last point is that Germany needs stronger private investment and a more diversified basis for innovation. Business investment continues to be held back by structural obstacles such as excessive bureaucracy and slow planning and approval procedures.

Reducing bureaucracy must be a priority.[9] German governments at the federal, state and local levels recognise the need for action. Modernisation projects are aiming to reduce red tape and digitalise public administration. Furthermore, reporting obligations are to be abolished unless a new case can be made for retaining them.

Germany should also make it easier to start and scale a business. A fully digital one-stop shop for establishing companies would be an important step. It would reduce administrative burdens and help founders to move more quickly from an idea to a functioning company. Here again, Latvia sets a valuable example with its Unified Digital Contact Point for Entrepreneurs.[10]

To sum up: Germany could boost its growth potential by expanding labour supply, making the energy transition more efficient, and creating better conditions for investment and innovation. The domestic reform agenda is quite clear, and implementation is starting to gain ground.

4 The European dimension: need for more integration

Ladies and gentlemen, while these national reforms are essential, they will not be sufficient on their own. Some of the barriers holding back growth can only be addressed at the European level. Germany’s – and Latvia’s – prosperity depends on a competitive and innovative European Union capable of acting independently in an increasingly fragmented world. The focus should be on completing the Single Market, deepening financial integration, and strengthening European sovereignty in payment systems.

4.1 Economic integration

The European Single Market is one of Europe’s greatest achievements. But it remains incomplete. This is particularly true for services and cross-border corporate activity. Firms continue to face a fragmented array of national legal and administrative frameworks. This is holding firms back from scaling their operations across European borders and makes Europe less attractive as a location for high-growth firms.

Reducing this fragmentation should therefore be a central objective of European policy. The European Commission’s recent efforts to simplify EU rules and scale back administrative burdens are welcome. They are a great complement to national efforts to cut red tape.

The proposed “EU Incorporated” – in short “EU Inc.” – framework could become an important element of this agenda. By establishing an optional, harmonised EU-wide corporate legal framework, EU Inc. could help start-ups and scale-ups grow and invest across the Single Market. A political agreement is targeted by the end of 2026.

4.2 Financial integration

The second area is financial integration. Europe has ample savings. Yet, too much of that capital does not make its way into the productive investment that Europe urgently needs. This is where the savings and investments union comes in.

Three priorities stand out: First, Europe needs deeper venture capital and equity markets. Second, we need more consistent supervision of capital markets. And third, Europe needs simpler rules for banks and securitisation.

Encouraging progress has been made on a number of fronts recently. In June 2025, the European Commission published its proposal to reform the European securitisation framework. And just a few weeks ago, the Council and the European Parliament reached a preliminary agreement in this field. The main aim is to revitalise the EU's securitisation market as a way of boosting the lending capacity of European banks.

At the end of last year, the European Commission presented the market integration and supervision package. In October this year, the Council agreed on a common position for the upcoming trilogue. This package is intended to address fragmentation in trading venues and central securities depositories.

And this summer, the Commission also set out possible measures to strengthen the European banking sector. These aim to build a more integrated, efficient, and competitive banking market.

The “One Europe, One Market” roadmap stakes out an ambitious timetable for these initiatives. This momentum must not be lost.

4.3 Sovereign payment systems

Lastly, Europe needs to strengthen its sovereignty in payments. Nowadays, European consumers and businesses rely heavily on non-European payment providers. This creates strategic dependencies in an area that is fundamental to economic activity. Payments need to be efficient, innovative and convenient. But they also have to be resilient, and built on European infrastructure.

The digital euro is central to this objective. It would provide the general public and businesses across the euro area with a digital form of public money. The digital euro is currently envisaged to be rolled out for everyday payments as from the end of 2029. The European legislative process is expected to be nearly complete by the end of this year. It is important for legislators to now bring the process to a successful conclusion.

Europe also needs a future-proof solution for wholesale payments. Financial markets are increasingly exploring tokenised assets and distributed ledger technology. To ensure the safe and efficient settlement of transactions involving tokenised assets, market participants should be able to use central bank money. The Eurosystem took an important first step in this direction with the launch of Pontes in September this year. This new platform enables privately issued tokenised assets to be settled in central bank money. And market interest has been considerable.

Together, a digital euro for everyday payments and wholesale central bank money for tokenised financial markets could strengthen Europe’s payment infrastructure.

5 Conclusion

Ladies and gentlemen, let me conclude. Germany’s economy has regained some cyclical momentum. That is good news. But stronger public spending and a cyclical recovery cannot solve Germany’s structural problems.

Germany needs to expand its labour supply, make the energy transition more efficient, and create better conditions for investment and innovation. I am hopeful that the current Federal Government will continue to address these challenges with determination.

At the same time, we need a more integrated and sovereign Europe. Germany and Latvia are both open economies. In a more fragmented world, neither country can secure prosperity through national action alone. Europe has identified many of the policies it needs. And it is beginning to turn from policy to implementation.

In Rainis’ “The Golden Horse”, the unlikely hero Antiņš manages, in the end, to wake the princess and break the spell. But he needs three attempts to climb the Glass Mountain, each time with the help of a different magical horse. Throughout his endeavours, he remains determined, learns and adapts.

We may not know which attempt we are currently on. But if we stay the course, I am confident that we will reach the summit – and achieve the impact we are looking for.

Footnotes:

1.  See Deutsche Bundesbank (2025a), What’s behind the sustained decline in German export market shares?, Monthly Report, July.
2.  See Deutsche Bundesbank (2026a), German balance of payments in 2025, supplementary information: Latest developments in German export market shares and their driving forces, Monthly Report, March.
3.  See World Bank, Manufacturing, value added (% of GDP) – Germany, High income
4.  See Dicandia, V. (2026), Trends in Manufacturing in the United States, Federal Reserve Bank of Cleveland, Economic Commentary 2026‑21.
5.  See Deutsche Bundesbank (2025b), Forecast for Germany: Economy gradually returns to recovery path, Monthly Report, December.
6.  See Deutsche Bundesbank (2026c), The impact of demographic change on labour supply and growth in Germany – challenges and scope for action, Monthly Report, June.
7. See Gartner, H., T. Hellwagner, M. Hummel, C. Hutter, B. Lochner, S. Wanger, E. Weber and G. Zika (2026), IAB‑Prognose 2026/2027: Erwerbstätigkeit schrumpft trotz besserer Konjunktur, IAB‑Kurzbericht 17/2026.
8.  See Deutsche Bundesbank (2026d), Public finances, Monthly Report, August.
9.  See Deutsche Bundesbank (2026d), Bureaucratic burdens in Germany’s corporate sector: causes and effects, Monthly Report, July.
10.  See business.gov.lv juridisko klientu portāls