BERLIN/FRANKFURT (Reuters) - Germany’s thriving economy has lulled the country into a false sense of security that is hindering government efforts to close a digital technology gap with other leading economies, Chancellor Angela Merkel’s digital czar said on Tuesday.

FILE PHOTO - Dorothee Baer, German Minister of State for Digitalization, attends a Reuters interview in Berlin, Germany, June 7, 2018. REUTERS/Hannibal Hanschke

Merkel’s cabinet is holding a retreat on Wednesday and Thursday, after which it wants to present an artificial intelligence (AI) strategy to help Europe’s biggest economy adjust to the digital era.

Germany has been at the forefront of industrial innovation for decades, but policymakers have been late to realize that its export model, based on traditional manufacturing, is vulnerable, and it is struggling to catch up.

Solid growth - the economy is in its ninth year of expansion - has left many businesses too busy meeting orders today to have time to plan for a digital future.

“Unlike other countries, a majority here do not feel that there needs to be great change,” Dorothee Baer, Merkel’s Minister of State for Digital Affairs, told a business conference hosted by the Sueddeutsche Zeitung.

Invoking a need to act induced by the global financial crisis a decade ago, she added: “I’m not saying ‘unfortunately we don’t have a crisis’, but rather ‘unfortunately the need to change things is not there’.”Merkel has made fixing Germany’s digital deficiencies a priority for her fourth and almost certainly final term, saying the country’s future prosperity depends on it.

Sketching out the government’s AI strategy, Merkel’s chief of staff said last week the plan would focus on how to gather more data, support research, retain skilled workers and encourage them to found start-ups.

Extensive surveillance, first by the Nazis and then by Communist East Germany’s Stasi secret police, has led to Germans closely guarding their privacy and personal data.

Merkel believes it is time to move forward, but the chancellor faces an uphill struggle.

Inadequate investment, a skills deficit and lack of digital innovation are problems in Germany, people in the sector say.

“We don’t have an ecosystem in Germany where these people want to go and build, and find the next 10 people with talent like that,” said Gabriel Matuschka, general partner at Fly Ventures, a Berlin-based seed-stage investment fund.

DEVELOPING NATION

Lars Klingbeil, a senior member of Merkel’s Social Democrat coalition partners, said Germany must commit billions of euros to back its AI strategy or risk falling further behind the United States and China.

But Baer complained there were always other pressures to spend Germany’s budget surplus.

“It is always easier to say ‘we have sparkling tax revenues, we could also dole some out’,” she said.

Germany, hampered by an outdated research infrastructure and restrictive data protection laws, has yet to produce a world-beating start-up that pioneers the use of AI, although 120 companies have formed a lobby group to further the process.

The group’s head, Joerg Bienert, said it was important that policy makers had recognized the scale of the challenge but to tackle it they needed to back AI research with heavy investment.

“I fear that we won’t make a big enough leap,” he told Reuters.

Chris Boos, the founder of AI company Arago who sits on a panel that advises Merkel on hi-tech issues, said Germany must get to grips with digital technology or risk slipping into a steep post-industrial decline.

“The price of inaction is that you will be a developing nation in 10 years,” Boos said.