German cities just aren’t ready for the future
Now that Germany has dodged a recession, political decisions on fiscal stimulus have been postponed. Yet the country’s employers and labour unions are still demanding an infrastructure investment programme worth at least €450 billion over 10 years, not to give an immediate boost to growth but to keep the country competitive.
The €450 billion figure comes from a new report jointly drafted by the German Economic Institute in Cologne, which is close to two big employers’ lobby groups, and the Macroeconomic Policy Institute, part of a labour union-linked foundation. Presenting the study on Monday, Dieter Kempf, president of the Federation of German Industries, the country’s main industrial lobby, said Germany had turned into “snoreland” in a stupor of selfsatisfaction; it’s time to wake up.
The World Economic Forum (WEF) ranks Germany as the world’s seventh-most-competitive economy this year, down from third in 2018. According to WEF, its greatest weakness is in information and communication technology adoption, where it’s ranked 36th in the world; only one German out of 100 has a fibre optic broadband subscription, compared with one out of 32 in South Korea.
But, surprisingly for outsiders, the authors of the report suggest only that the government spend about €20 billion over the next decade on improving the telecom infrastructure, mainly to plug coverage holes where private investment can’t pay off. The rest of the money is needed elsewhere.
The WEF describes physical infrastructure as one of Germany’s strengths, but Germans love to complain about it, mentioning, for example, that the average age of railway bridges in their country is 60 years and that 10,000 of them were built before World War I. Yet it’s not roads and public transport that require the most investment, either.
The biggest single investment need comes from Germany’s municipalities. As the federal government and the states have consolidated their finances under Chancellor Angela Merkel’s government, introducing debt brakes and deficit-free budgets, not enough money has trickled down to the local level.
Even though the federal government has recognised the problem and taken over the full funding of some social programmes, municipalities’ current social obligations have been increasing, forcing them to put off investment in the maintenance of schools, streets and water-supply systems. They — especially the industrial towns that lost out from globalisation — built up a combined investment gap of €138.4 billion, according to a nationwide survey of communities cited in the two institutes’ report.
Even when the money is there in town and district budgets, many municipalities don’t have the staff and expertise to plan investment projects properly, and businesses that could take on the jobs have been wary of expanding lest municipal orders be cut back again. A big federal programme to close the investment gap would fix that.
Germany isn’t exactly in a state of disrepair. It doesn’t feel as though it is, even though potholed streets aren’t a rarity, trains often don’t run on time and cellular reception is spotty outside cities. Nor, however, does it feel futureproofed enough. The WEF touts unshakable financial stability (the country got 100 points out of 100 for it in the competitiveness ranking) as one of Germany’s biggest advantages, but that stability has been achieved, in part, by shifting problems to the local level.
The authors of the institutes’ report point out that it’s not impossible to launch the investment programme they propose even under Germany’s stringent debt-brake rule, enshrined in the constitution since 2009. The government, they suggest, could form a special foundation for the purpose. As long as it’s set up not as a funding vehicle for budgetary needs but as a structure tasked with specific new projects, its borrowing wouldn’t violate the constitutional restriction.
Such borrowing, of course, would still count as government debt under the European Union’s fiscal rules. But Germany likely still wouldn’t be in serious violation of them: Thanks to negative interest rates, the country’s debt-to-gross-domestic-product ratio is expected to drop below 60% soon, which would allow Germany to run a bigger structural deficit than today.
The investment programme proposed by the employers and the unions would cost about 1.3% of GDP a year at today’s economic output level. That’s not an impossible price for future-proofing while the interest rates are extremely favourable. If Ms Merkel wants her Christian Democratic Union to win the 2021 election, and if Finance Minister Olaf Scholz wants his Social Democratic Party to have a fighting chance, both should give the proposal serious consideration: Voters may want to rise and shine from snoreland.