Opinion

Germany’s Government Still Has an Allergy to Investing

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

By: and Date: July 23, 2018 Topic: Macroeconomic policy

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 [email protected].

Read article More on this topic More by this author
 

Opinion

Will this be the century of youthful Asia?

Youthful Asia offers immense opportunities for investors, but this potential can only be realised if their infrastructure and energy needs are fulfilled.

By: Alicia García-Herrero Topic: Global economy and trade Date: February 18, 2022
Read article More on this topic
 

Blog Post

Venture capital: a new breath of life for European entrepreneurship?

Whether the dynamism of European venture capital of the past two years can be sustained and kick start a credible alternative to bank finance in the European Union remains to be seen.

By: Maria Demertzis and Lionel Guetta-Jeanrenaud Topic: Banking and capital markets Date: February 10, 2022
Read article
 

External Publication

European governance

EU borrowing—time to think of the generation after next

Financing post-pandemic recovery via EU borrowing has proved remarkably straightforward. So why keep it temporary?

By: Grégory Claeys, Rebecca Christie and Pauline Weil Topic: European governance, Macroeconomic policy Date: December 9, 2021
Read about event
 

Past Event

Past Event

Future of work and inclusive growth: Digital dialogues

An end of year series of digital discussions on the Future of Work and Inclusive Growth in Europe.

Speakers: Janine Berg, Arturo Franco, Stijn Broecke, Esther Lynch, Mario Mariniello, Laura Nurski, Leah Ruppanner, Nicolas Schmit, Kim Van Sparrentak and Tilman Tacke Topic: Digital economy and innovation, Inclusive growth Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 7, 2021
Read about event
 

Past Event

Past Event

China’s medium term outlook: Will innovation save China from becoming old before it becomes rich?

What can China do to stop the deceleration of its economy. Is innovation the solution?

Speakers: Jean-Francois Di Meglio, Alicia García-Herrero and Guntram B. Wolff Topic: Digital economy and innovation, Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 1, 2021
Read article Download PDF More on this topic More by this author
 

External Publication

Chinese economic statecraft: what to expect in the next five years?

Chapter from 'Storms Ahead: the Future Geoeconomic world order' on the expectations from the next five years of Chinese economic policy, published on 27 October 2021.

By: Alicia García-Herrero Topic: Global economy and trade Date: November 26, 2021
Read article More by this author
 

Opinion

European governance

Growth and inflation after the pandemic in the EU

Countries hit comparatively hard during the financial crisis, helped also by domestic and European policies, are bouncing back from the pandemic faster than their peers.

By: Maria Demertzis Topic: European governance, Macroeconomic policy Date: November 18, 2021
Read article Download PDF More on this topic
 

Book/Special report

European governance

Instruments of a strategic foreign economic policy

Study for the German Federal Foreign Office produced by Bruegel, the Kiel Institute for the World Economy and DIW Berlin.

By: Katrin Kamin, Kerstin Bernoth, Jacqueline Dombrowski, Gabriel Felbermayr, Marcel Fratzscher, Mia Hoffmann, Sebastian Horn, Karsten Neuhoff, Niclas Poitiers, Malte Rieth, Alexander Sandkamp, Pauline Weil, Guntram B. Wolff and Georg Zachmann Topic: European governance Date: November 12, 2021
Read article Download PDF
 

Policy Contribution

European governance

Next Generation EU borrowing: a first assessment

The Next Generation EU programme is radically changing the way the EU finances itself and interacts with financial markets. This paper assesses the first design decisions made by the European Commission and the issuances that have taken place so far. It also outlines the potential risks and opportunities linked to this upgrading of the EU borrowing.

By: Rebecca Christie, Grégory Claeys and Pauline Weil Topic: Banking and capital markets, European governance, Macroeconomic policy Date: November 10, 2021
Read article
 

Blog Post

European governance

Is the risk of stagflation real?

Most economic forecasts predict a return, in the medium-term, to pre-pandemic growth and inflation. Nevertheless, the European Central Bank and fiscal authorities need to be vigilant for signs of the contrary.

By: Monika Grzegorczyk, Francesco Papadia and Pauline Weil Topic: European governance, Macroeconomic policy Date: November 2, 2021
Read article More on this topic
 

Blog Post

Strong, balanced, sustainable and inclusive growth? The G20 and the pandemic

The G20 is not doing enough to support strong, balanced, sustainable and inclusive growth in the wake of COVID-19, with the poorest countries left behind by the recovery.

By: Suman Bery and Pauline Weil Topic: Global economy and trade Date: October 29, 2021
Read about event More on this topic
 

Past Event

Past Event

Can climate change be tackled without ditching economic growth?

What will be necessary to achieve climate goals and keep growing?

Speakers: Francesco Starace, Simone Tagliapietra and Guntram B. Wolff Topic: Green economy Date: October 28, 2021
Load more posts