Ger­many’s golden op­por­tu­nity

Financial Mirror (Cyprus) - - FRONT PAGE -

The Ger­man econ­omy ap­pears un­stop­pable. Out­put is ex­pected to grow by more than 2% this year, and wages by 3%, with the cur­rent-ac­count sur­plus set to reach a tow­er­ing 8.4% of GDP. Un­em­ploy­ment has been halved over the last decade, and now stands at an all-time low. Ger­man ex­porters re­main highly in­no­va­tive and com­pet­i­tive. And the gov­ern­ment is record­ing a size­able bud­get sur­plus. While the rest of Europe re­mains mired in cri­sis and self-doubt, Ger­many’s fu­ture seems bright and se­cure. But ap­pear­ances can be de­ceiv­ing.

In fact, to­day’s rosy macroe­co­nomic data tell only part of the story. Since the euro was es­tab­lished in 1999, Ger­many’s pro­duc­tiv­ity growth has been no more than av­er­age among Euro­pean coun­tries, real wages have de­clined for half the work­force, and an­nual GDP growth has av­er­aged a dis­ap­point­ing 1.2%.

A key rea­son for this lack­lus­ter per­for­mance is Ger­many’s no­to­ri­ously paltry in­vest­ment rate, which is among the low­est in the OECD. The re­sult is de­te­ri­o­rat­ing in­fra­struc­ture, in­clud­ing roads, bridges, and schools. This, to­gether with an in­ad­e­quate reg­u­la­tory and busi­ness en­vi­ron­ment, has raised con­cerns among com­pa­nies; since 1999, the largest Ger­man multi­na­tion­als have dou­bled their em­ployee head­counts abroad, while cut­ting jobs at home.

In their 2013 coali­tion agree­ment, the Chris­tian Demo­cratic Union and the So­cial Democrats set a goal of rais­ing public and pri­vate in­vest­ment by 3% of GDP, or EUR 90 bln an­nu­ally, to reach the OECD av­er­age. Although this is not a par­tic­u­larly am­bi­tious ob­jec­tive – af­ter all, Ger­many’s cur­rent-ac­count sur­plus at the time amounted to 7.8% GDP – achiev­ing it is vi­tal to the coun­try’s con­tin­ued pros­per­ity.

Last Au­gust, the Ger­man gov­ern­ment ap­pointed a 21mem­ber com­mit­tee of ex­perts (in­clud­ing the three au­thors) from busi­ness, labour unions, fi­nance, and academia to de­ter­mine how to achieve the tar­get. Last month, the com­mit­tee pre­sented its ten-point ac­tion plan, which, de­spite dis­agree­ment on taxes and pri­vate fi­nanc­ing of public in­vest­ment, re­flects an un­usu­ally broad con­sen­sus.

For starters, the ac­tion plan calls for lim­it­ing the im­pact on public in­vest­ment of the pres­sure to con­sol­i­date the gov­ern­ment bud­get. The plan does not chal­lenge the con­sti­tu­tional debt brake that for­bids the fed­eral gov­ern­ment from run­ning struc­tural deficits above 0.35% of GDP. But it does rec­om­mend a legally bind­ing com­mit­ment to keep in­vest­ment lev­els at least as high as the rate of de­pre­ci­a­tion of state as­sets, and to use un­ex­pected bud­get sur­pluses, first and fore­most, for in­creased public in­vest­ment.

In or­der to sup­port lo­cal in­vest­ment, the ex­pert com­mit­tee pro­poses cre­at­ing a “na­tional in­vest­ment pact” to en­able mu­nic­i­pal­i­ties to in­crease in­vest­ment by at least EUR 15 bln over the next three years. And it rec­om­mends es­tab­lish­ing a public ad­vi­sory in­sti­tu­tion to help mu­nic­i­pal­i­ties re­alise their in­vest­ment projects, of which there is cur­rently a EUR 118 bln back­log.

The most con­tro­ver­sial is­sue, within the com­mit­tee and in Ger­many, re­lates to fi­nanc­ing in­fra­struc­ture via pub­licpri­vate part­ner­ships, a seem­ingly promis­ing so­lu­tion that nonethe­less has proved to be far from a panacea. To strike an ef­fec­tive bal­ance, the ac­tion plan pro­poses two pub­licly owned in­vest­ment funds – one rais­ing money from in­sti­tu­tional in­vestors, and the other from in­di­vid­u­als. The public projects fi­nanced by the funds would pro­vide suf­fi­cient ef­fi­ciency gains to at­tract pri­vate fi­nanc­ing.

As for purely pri­vate-sec­tor in­vest­ment, the com­mit­tee rec­om­mends a fo­cus on de­vel­op­ing the sec­tors that will dom­i­nate to­mor­row’s econ­omy. As it stands, Ger­many is strong in tra­di­tional industrial sec­tors, but has fallen be­hind its com­peti­tors in Asia and the United States in terms of in­vest­ment in re­search and devel­op­ment. To catch up, R&D spend­ing should be raised from less than 3% to at least 3.5% of GDP.

Nowhere is the need to over­come fi­nanc­ing bot­tle­necks more ap­par­ent than with Ger­many’s (en­ergy tran­si­tion). To suc­ceed, more than EUR 30 bln, or 1% of GDP, will have to be in­vested an­nu­ally in net­work in­fra­struc­ture, re­new­able-en­ergy gen­er­a­tion, com­bined heat and power sys­tems, and stor­age tech­nolo­gies in the com­ing decades. While some of th­ese funds will come from public bud­gets, the vast ma­jor­ity will have to be pro­vided by the pri­vate sec­tor.

A sub­stan­tial in­crease in pri­vate in­vest­ment is nec­es­sary not just for Ger­many; it is crit­i­cal to Europe’s re­cov­ery from its on­go­ing cri­sis. Given Ger­many’s rel­a­tive eco­nomic strength, it has a spe­cial re­spon­si­bil­ity to help foster in­vest­ment through­out Europe, in­clud­ing by pro­mot­ing Euro­pean-level re­forms of trans­port and en­ergy, sup­port­ing in­cen­tives for in­no­va­tion, and back­ing dig­i­tal mod­erni­sa­tion.

Ger­many’s com­bi­na­tion of strong growth, low un­em­ploy­ment, favourable fi­nanc­ing con­di­tions, and large bud­get sur­pluses present it with a golden op­por­tu­nity. With in­creased in­vest­ment in in­fra­struc­ture, not to men­tion a com­pet­i­tive ed­u­ca­tion sys­tem and more in­vest­ment-friendly busi­ness con­di­tions, it can place its econ­omy on a stronger foot­ing for the fu­ture, and help pull Europe out of its malaise. We now have a plan; all that is needed is the will to im­ple­ment it.

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