Bureaucracy costs for firms in Germany have risen significantly in recent years. A new Bundesbank analysis quantifies the rise in bureaucracy costs. On average, they increased between 2022 and 2024 from around 5% to around 7% of annual turnover, according to the latest Bundesbank Monthly Report – which is equivalent to an increase of almost one-half. The ratio of bureaucracy costs to turnover is particularly unfavourable for small enterprises, where bureaucracy consumes already limited working hours to the detriment of productive activities.

The results are based on a survey in the Bundesbank Online Panel – Firms (BOP-F), for which around 7,000 firms were surveyed. Extrapolated from the results of new econometric estimations, the rise in bureaucracy may have dampened macroeconomic productivity growth in Germany by approximately 0.5 percentage point between 2022 and 2024. The authors of the Bundesbank study stress that the increased bureaucratic costs could also hamper investment and competitiveness.

In which areas does bureaucracy weigh particularly heavily on firms?

According to the BOP-F survey, bureaucracy is affecting many areas, categories of firms and sectors. The analysis showed that the largest and fastest growing amount of red tape was in the areas of tax and financial reporting, labour law and employment regulation, environmental protection, data protection and privacy. 

For small enterprises, bureaucracy costs relative to turnover were particularly high. Although smaller firms were exempt from some regulations or were subject to simplified rules, the government regulations that did apply to them often entailed comparatively high costs. One likely reason for this, according to the experts, was that the effort involved in fulfilling requirements and documenting obligations was often independent of firm size. Smaller firms were thus disproportionately hard-hit by such fixed costs.

There had also been a significant rise in bureaucracy costs across sectors. In the financial sector, which traditionally had extensive reporting requirements, such costs were continuing to rise steeply. In the manufacturing sector, the level of bureaucracy costs in relation to turnover grew by more than one-half. As manufacturing firms were particularly competitive internationally, this could have weighed on the competitiveness of the German export industry, the report states. 

Why are bureaucracy costs rising?

According to the report, the considerable and broad-based increase in bureaucracy costs across economic sectors and size categories could be related to the fact that some new regulations are interfering quite significantly with fundamental business processes. As a result, even a few additional regulations could lead to high implementation costs. The analysis showed that enterprises with high production and labour costs, strong competitive pressure and a shortage of skilled labour were particularly burdened by bureaucracy. 

Another factor was that Germany had fallen behind in terms of digitalisation. Germany is lagging behind other EU countries when it comes to digitalisation in businesses and public administration, which may be increasing compliance costs compared with other countries, the Bundesbank’s economists write. 

The findings of the report suggest that the interplay between bureaucracy and other location factors should be given greater consideration. Advances in digitalisation or the reduction of structural problems could not only directly increase economic growth, but also ease the burdens of existing regulation. Their overall economic impact was thus likely to be greater than if considered in isolation.

Regulatory burdens in Germany particularly high 

By European standards, firms in Germany reported red tape especially often. International surveys consistently showed that regulatory burdens in Germany had increased in recent years and were sizeable by European standards. One reason for this could be gold-plating, whereby Germany implements EU directives more strictly or in a more complex manner than stipulated by EU regulations. 

Rising bureaucracy costs reduce productivity

Econometric estimates based on BOP-F firm-level information show that rising bureaucracy costs between 2022 and 2024 were associated with lower productivity growth among German firms. According to these estimates, when bureaucracy costs rose by 1 percentage point relative to turnover, turnover per employee fell by an average of around 3%. However, this relationship was only statistically significant for small businesses. 

Need for reform and possible solutions

The authors of the study emphasise that, all in all, many requirements in digitalisation, IT security or sustainability that are reasonable in themselves could nevertheless impair economic activity in Germany. Central, state and local governments have recognised this need for action and aim to reduce bureaucracy costs, they write, stressing that the Federal Government’s ongoing reform efforts are a step in the right direction. The key will be to implement these measures with speed and precision.”