The World Economic Forum's Global Competitiveness Report for 2013-2014 showed Germany was two places up from where it was last year.
The report used 12 criteria to judge each country's competitiveness, including infrastructure, financial stability and the education system. But innovation was the key to climbing the rankings, according to the report’s authors.
Klaus Schwab, founder of the Global Competitive Index, said countries were increasingly being defined on how innovative they were rather than on how much industry they had.
Even so, the traditionally industry-based German economy was ahead of the United States in the ranking, even though the US had also climbed two places from last year. Germany was also ahead of the United Kingdom which dropped from eighth to tenth place. Germany overtook Sweden and the Netherlands to reach fourth.
One of the authors Margareta Drzeniek-Hanouz said: “We are seeing an improvement in Germany," the Welt newspaper reported.
Southern European economies were much further down the list with Spain (35th), Italy (49th), Portugal (51st) and Greece (91st).