German Chancellor Friedrich Merz returned from his recent visit to China visibly rattled. After touring Unitree Robotics in Hangzhou, where quadruped robots performed martial arts, he conceded that Germany is “simply no longer productive enough,” and warned that prosperity cannot be maintained with “work-life balance and a four-day week.” Germans, he declared, “will simply have to do a little more.”
Merz is right to sound the alarm. Germany’s economy contracted for two consecutive years in 2023 and 2024, and its industrial output has fallen sharply. The Federation of German Industries estimates that 1.4 trillion euros (US$1.6 trillion) in additional investment is needed by 2030 just to keep the country globally competitive. Worse, over one-third of German industrial firms are considering relocating production abroad. No one can deny that Europe’s largest economy is in deep structural trouble.
However, Merz’s prescription — to work harder — reflects a misdiagnosis of the problem. Though his remarks might partly reflect an internal coalition battle over welfare and labor market policies — where work-ethic rhetoric serves a political purpose — conflating working hours with productivity misses the point. Germany has among the fewest annual working hours in the Organisation for Economic Co-operation and Development (OECD), yet its output per hour remains among the highest in the world — around three to four times that of China. Ever since the late Nobel laureate economist Robert Solow articulated his foundational growth theory in the 1950s, economists have understood that advanced economies grow not through additional labor inputs, but through capital deepening (an increase in capital per worker), technological progress and total factor productivity growth.
What Merz witnessed in Hangzhou was not the product of longer working hours. It was the result of massive, directed investment. China did not become a technological powerhouse because its people burned the midnight oil. Rather, the state invested strategically in productive capacity, deliberately cultivating industrial ecosystems the likes of which Europe has struggled even to comprehend. China’s research-and-development spending grew nearly twice as fast as that of the US over the past five years, reaching 2.8 percent of GDP last year — exceeding the OECD average for the first time.
However, aggregates tell only part of the story. What explains Western visitors’ “cognitive shock” is the nature of China’s production ecosystems at the micro level. In keeping with the economist Michael Porter’s cluster theory, China has cultivated geographic concentrations of interconnected firms generating productivity gains through knowledge spillovers and intense competition.
For example, Shenzhen’s Huaqiangbei District packs more than a hundred printed-circuit-board fabricators, mold shops, component distributors and firmware freelancers into 1.45km2. One European tech entrepreneur, “Mehdi,” recently claimed on social media that he had completed four prototype iterations in Huaqiangbei in a week for under US$1,000, whereas a colleague in Europe spent US$12,000 on a single revision and waited two months. Such anecdotes are common, and they all point to the same thing: a deep pattern of distributed intelligence, with knowledge flowing horizontally across a global network and compounding daily, in Chinese production hubs, through thousands of simultaneous interactions.
The results speak for themselves. The Chinese firm BYD rose from obscurity to sell 4.6 million vehicles globally last year. Even under strict sanctions, Huawei managed to produce a 7-nanometer chip. And now, cities like Hefei, Chengdu and Wuhan are replicating the Shenzhen model at scale.
Meanwhile, Germany’s malaise has well-documented structural causes. The IMF attributes the problem to an aging population, chronic underinvestment and excessive red tape. Soaring energy costs since the rupture with Russian gas suppliers have accelerated the hollowing out of energy-intensive sectors, with an estimated 20 percent of industrial value creation now at risk. Digital and physical infrastructure has deteriorated after years of fiscal restraint under the “debt brake” (a constitutional rule limiting structural deficits to 0.35 percent of GDP), and the Mittelstand (small and medium-sized enterprises) have been slower to adopt automation than East Asian competitors.
None of this has anything to do with the German work ethic. In fact, Merz’s own coalition agreement recognizes the need for a landmark reform of the debt brake and an infrastructure fund of several hundred billion euros. Those are steps in the right direction, but infrastructure spending alone would not close the ecosystem gap. The harder question, which Merz’s Stakhanovite rhetoric sidesteps, is how to rebuild the productive architecture of an advanced economy in a world where the competitive frontier has shifted.
Fortunately, the economics discipline is not short of ideas. For example, Mariana Mazzucato of University College London has made a thorough case for mission-oriented industrial policies in which the state acts not merely as regulator, but as market-shaper, and Dani Rodrik of Harvard University has argued for a new generation of industrial strategy built on embedded collaborations between government and business, with room for experimentation.
Similarly, the Massachusettes Institute of Technology’s Regional Entrepreneurship Acceleration Program offers a practical model for aligning government agencies, universities, corporations, risk capital and entrepreneurs in the creation of innovation-driven ecosystems. Germany’s own Fraunhofer institutes already embody the principle of bridging research and industrial applications at scale.
The raw ingredients are not lacking. What is missing is the political will to name the problem honestly — as an institutional-design challenge, not an attitudinal problem or cultural shortcoming. Policymakers should focus on calibrating solutions to their own country’s specific institutional context, not reaching for slogans.
Germany is not alone in this. The productivity puzzle haunts virtually every advanced economy — from stagnant post-Brexit Britain to an anxiously deindustrializing France and a US that is struggling with its own manufacturing decline. Merz’s instinct to look to China for answers is sound, but he came home with the wrong one.
As Mehdi put it, telling Germans to work harder is like telling a horse to run faster when the other side has already built the internal combustion engine. Logging more hours within a broken architecture would only bring you slightly faster to the wrong destination.
Jun Du is a professor of economics at Aston University, specializing in international trade, productivity and global value chains.
Copyright: Project Syndicate
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