Opinion

Germany’s Government Still Has an Allergy to Investing

The new coalition budget looks a lot like the old German coalition budget.

By: Date: July 23, 2018 Topic: European Macroeconomics & Governance

This opinion piece has been published in Bloomberg

 

Germany’s new government is composed of the same two parties as its previous one, but many in Germany and outside expected one major change: more government spending. Olaf Scholz, the new finance minister, comes from the Social Democratic Party, which heavily campaigned on a promise of more investment and growth in Germany.

And yet Scholz’s first budget suggests those hopes were misplaced: The Scholz plan looks almost identical to that of the previous minister, Christian Democrat Wolfgang Schaeuble. Despite the change at the top of the powerful finance ministry, compare the two budgets (see chart below) and it’s hard to find any substantial difference in the investment picture. That’s a worry for Germans, but also Europeans more broadly.

Federal government investment as a percentage of GDP, Germany’s investment ratio is even smaller under the Scholz plan. And that is just what’s budgeted. Investing less than what is budgeted is a recurring problem in Germany — the country simply isn’t able to plan and put in place the infrastructure projects to meet the budget allocations. The new finance minister does not address that problem; nor does he show any ambition to increase the federal public investment ratio.

This may not seem a pressing problem for an economic powerhouse like Germany, but as its economy grows, it needs better infrastructure, faster internet access, updated software on the computers of the public administration and so on. Net capital formation of the German state has been around zero since 2003 (see chart below) and is set to stay constant, at best, under Scholz. Currently, state (laender) and federal government spending together only just make up for the falling net capital stock of local government.

Low levels of public investment and the fall in the ratio of public capital to income is a real concern. A good public capital stock is essential for the private sector to thrive, but also for growth and productivity.

The net investment of the federal government only amounts to around 0.1 percent of gross domestic product, and the government sector overall has not had significant net investment since 2003. This underinvestment is most apparent in the communes of West Germany, in road and school buildings and in the network infrastructure such as broadband cable for faster internet access.

Even beyond investment measures, the new finance minister does not substantially change the course set by his predecessor. Total federal government expenditure as a percentage of GDP is, if anything, set to decline. Scholz also made clear that he will stick to a balanced budget, known as Schaeuble’s “black zero.” Thus the overall budget surplus of the German state will likely increase even further, driven mainly by surpluses of the social security systems, state and local governments.

Changing this requires a change of assumptions. The German finance ministry has long held the view that targeting net investment is the wrong approach. Schaeuble argued that the true investment position was larger than the net investment number stated because capital as still usable even if it is, according to accounting principles, depreciated.

That’s not quite right; old capital stock is typically far less productive than newer stock. Using an old version of Microsoft Office certainly comes with many problems and a loss of productivity — as one German elementary school teacher recently pointed out.

The new German finance minister should allocate funds for upgrading the network infrastructure in Germany. He should also ensure that local governments receive sufficient financial support. (The unequal distribution of tax revenues across the country ensures that while some communes are rich and enjoy good infrastructure while running surpluses, others have few funds for development.) Here, the new government seems at least determined to improve the situation, but it could take some time before additional money flows to the communes in need.

Germany’s fiscal decisions matter hugely for German growth but they have broader implications too. Many European countries  have put their hopes in Scholz using some of his abundant tax revenues to improve investment and begin a much-needed rebalancing of the German economy, thereby increasing German demand for European products. So far, it looks as if such hopes will be disappointed.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

View comments
Read article Download PDF More on this topic More by this author

Parliamentary Testimony

Promoting sustainable and inclusive growth and convergence in the European Union

This speech was delivered by Guntram Wolff at the Informal ECOFIN Meeting in Bucharest on 5 April 2019.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: April 8, 2019
Read article Download PDF

Policy Contribution

Promoting sustainable and inclusive growth and convergence in the European Union

This Policy Contribution was written for the Informal ECOFIN Meeting, Bucharest, 5 April 2019. The authors look at the EU’s economic agenda, discussing the priorities for the next five years.

By: Maria Demertzis, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: April 4, 2019
Read article More on this topic More by this author

Opinion

ICT revolution key to populist political surge

Developments in digital technology have prompted a ‘tabloidisation’ of traditional media, created opportunities for the misuse of information online, and closed the decision-making horizon for politicians.

By: Marek Dabrowski Topic: Global Economics & Governance Date: April 4, 2019
Read article Download PDF More on this topic

Parliamentary Testimony

Effectiveness of cohesion policy: Learning from the project characteristics that produce the best results

Testimony at the Committee on Budgetary Control of the European Parliament.

By: Zsolt Darvas, Antoine Mathieu Collin, Jan Mazza and Catarina Midoes Topic: European Macroeconomics & Governance Date: March 27, 2019
Read article More on this topic

Opinion

Sticks and carrots from China’s leadership to Chinese banks

The takeaway from the 13th National People's Congress (NPC) is clear: under the current economic downturn, Chinese authorities will do whatever it takes to support the real economy. Alicia García Herrero and Gary Ng reflect on the "sticks snd carrots" approach to Chinese banks.

By: Alicia García-Herrero and Gary Ng Topic: Global Economics & Governance Date: March 21, 2019
Read article More by this author

Opinion

New EU industrial policy can only succeed with focus on completion of single market and public procurement

France and Germany recently unveiled a manifesto for a European industrial policy fit for the 21st century, sparking a lively debate across the continent. The fundamental idea underpinning the manifesto is a good one: Europe does need an industrial policy to ensure that EU companies remain highly competitive globally, notwithstanding strong competition from China and other big players. However, the Franco-German priorities are unsuitable for the pursuit of this goal.

By: Simone Tagliapietra Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: March 18, 2019
Read article More on this topic More by this author

Blog Post

Russia's foreign policy does not help its economic modernisation

In the highly interdependent modern world, a country’s economy and its foreign policy are strongly linked. A country’s foreign-policy ambitions should correspond to its economic potential, but Russia’s over-ambitious foreign ventures have exacerbated the negative effects of the numerous economic headwinds it faces.

By: Marek Dabrowski Topic: Global Economics & Governance Date: March 6, 2019
Read about event More on this topic

Past Event

Past Event

Diverging narratives: European policies and national perceptions

Who tends to get the blame for the Euro crisis in national media? What do national politicians think about the EU and EMU?

Speakers: Pierre Boyer, Juha Pekka Nurvala, Giuseppe Porcaro and Laura Shields Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 27, 2019
Read article More on this topic More by this author

Opinion

China's strategy: Growth, alliances, and tech acquisition

Despite the pause in the US-China trade war, the US and China are strategic competitors, and will continue to be so for the foreseeable future. China realizes that there is little room to settle long-term disputes and, as a result has shifted towards a strategy that focuses on sustaining growth at any cost, expanding alliances, and advancing its technology.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: February 27, 2019
Read article More on this topic More by this author

Opinion

France’s institutional system favours rebellion against its leader

The 'yellow vest' movement proves that France's political and budgetary centralism, as the source of citizens' feelings of abandonment and revolt, must be reformed.

By: André Sapir Topic: European Macroeconomics & Governance Date: February 19, 2019
Read article

Opinion

What can the EU do to keep its firms globally relevant?

There is a fear that EU companies will find it increasingly difficult to be on top of global value chains. Many argue that EU-based firms simply lack the critical scale to compete and, in order to address this problem, that Europe’s merger control should become less strict. But the real question is where the EU can strengthen itself beyond the realm of competition policy.

By: Georgios Petropoulos and Guntram B. Wolff Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: February 15, 2019
Read article Download PDF More on this topic

Policy Contribution

Russia's growth problem

After the 2014-2016 currency crisis, Russia’s economy has returned to growth, albeit at a slow pace. In this Policy Contribution, the authors analyse the potential causes of mediocre growth performance, as well as its impact on Russia's economic and political relationships. They also include their recommendations for the future.

By: Marek Dabrowski and Antoine Mathieu Collin Topic: Global Economics & Governance Date: February 7, 2019
Load more posts