Waiting for the Impact

15. 3. 2017

The biggest economy of the E.U. is still growing, but lags behind in investment. That might not pay off in the future.

The German economy is usually considered as the engine of the whole of the E.U. Its leading position is not only tied with the GDP growth. The German economic model as such seemed to be inspirational, especially in the situation when many states were looking for ways to overcome the consequences of the 2008–2009 economic crisis or to prevent it from happening again. The German model of market economy with a strong social corrective, the so-called socially responsible market economy appeared to be the way to go.

But nothing lasts forever and clouds have begun to gather even above the German economy. While in the last quarters it has grown by a feeble one percent, the German role of the E.U. engine has been taken over by others—for example by the British, whose growth this year is being estimated at 2.5%.

The main reason why the economy of the biggest member of the E.U. is losing steam is the lack of investment. Germany likes to rely on its export but to keep the growth going it is necessary to develop production capacities and bring in new technologies—in short, to invest. But investments are something that Germany is lacking—both the private sector and the state are guilty in this case. In the last fifteen years the share of investments on GDP has fallen from 20% to 17%. Germany essentially lives off the investment made in the past.

Opinion polls, e.g. by Allensbach agency, have begun to report a growing disillusionment of the German public—about two thirds of the people polled—with the state of infrastructure. Compared to 2013, the level of dissatisfaction with the amount of spending on roads and bridges has grown by 10%.

Inadequate spending on infrastructure was already criticized by a renowned DIW institute (Deutsches Institut für Wirtschaftsforschung) two years ago. Its conclusion was that yearly investment fell short of €4 billion. The state development bank KfW estimates the amount of investment lacking in municipalities at around €118 billion.

Low spending on infrastructure goes hand in hand with the decrease of investment capital, which in turn may lead to decreased productivity and a potential loss of jobs as it might get cheaper to manufacture abroad.

However, the tide might be turning. In 2017, the federal government has increased the funding of transport infrastructure projects from €11 billion to €13 billion. The broadband Internet is set to receive €1.1 billion more. Yet not all might suddenly become rosy. Due to the cuts in recent years, many municipalities have had their capacities for zoning and construction authorities reduced.

A slightly paradoxical situation may thus arise; having sufficient funds but a lack of qualified overseers.

Other factors preventing companies from investment are: expensive workforce, high taxes, rising energy costs and very rigid employment laws.

Contentious Measures in Social Sphere

The state tends to make life difficult for businesses with further measures pushed through by a smaller coalition partner, the Social Democrats (SPD). One of these measures is an early retirement reform, when one is entitled to a full pension after 45 years of work, at 63 years of age. Experts find this in a complete contradiction with efforts to modernize the pension system, notably with regards to increased life expectation.

Another such step is the new minimum wage of € 8.5 per hour, which came into effect in January 2015. For the social democrats it was their precondition of entering into coalition government led by Christian Democrats (CDU). There are many conflicting views about how it will affect employment. Up to now, the minimum wage had been established only in certain sectors, e.g. construction. Critics warn of its gradual increase and of up to 200,000 job losses per year.

The costs of enforcing the new minimum wage rules are estimated at about €80 million a year. Most of it are allocated to customs agencies whose increased staff will be tasked with overseeing the compliance. Employers are obliged to keep precise records of work hours and the minimum wage paid. It might have negative impact on employment for people with minimum or no qualification.

The exceptions to the rule pose the problem— exempt are to be pensioners, students, employees with less than €450 a month and the unemployed with side jobs.

At the same time there are two existing ambitious projects that could become sources of new investment: energy transition (Energiewende) to alternative sources of energy and then the so called digitalization of economy.

Away with Nuclear Power

The energy transition from nuclear to alternative sources of energy is thought to require €550 billion leading up to year 2050, which is €15 billion a year. These funds are mainly aimed at development of grid network so that it could handle transfer of electricity generated in windmills by the North Sea to the south of Germany where the main centers of German industry are located.

Energy transition will also require an increased investment from private sector. Its estimated volume during the next ten years is about €30 billion a year. The sums pledged by the state and the private sector look impressive only at first glance. Not only is there the question for investors of return on investment and the price of thus generated electricity, but the whole agenda is being met by growing skepticism from the general public as well.

Some of the projects are still quite futuristic and only few people can picture something tangible. That also applies to technologies that could “store” excess energy generated during peak production hours in solar and wind power stations when weather is favorable.

Other key investments are far more clear-cut. That applies to increasing the capacity of high voltage transfer grid. The issue of new power lines seems to be the biggest liability of the energy transition, as people in the areas of the planned construction have raised protests. The nature of the growing dissatisfaction can be dismissed as an example of “not in my backyard” attitude. Nevertheless, if joined by local and regional politicians, a serious deadlock may appear that could put the whole concept of energy transition in jeopardy. Take the increasingly vocal opposition in Bavaria, for example, which is the key state in the future transfer of energy from the north to the south.

Digitalization of the Economy

Another huge topic in Germany is the digitalization of economy, which has become to be known as “Industry 4.0”. Internet of things, the interconnection of machines and technologies will enable remote control via the Internet. The goal is not only increased effectiveness and productivity, but also better management of human resources.

When examined more closely, it might seem a bit far-off in a country, where the substantial percentage of companies, mainly small to mid-sized, prefer to communicate with the outside world via fax machines. Thanks to digitalization, the expected increase in productivity may be up by 20%. To achieve that goal, about half of machinery equipment has to be renewed.

Even though we can hear about the “next industrial revolution” everywhere in Germany, there is another issue on the horizon. Only 15% of all investment into research and development is allocated to the digitalization. To the same end the U.S., in comparison, invests 29% of its R&D funds.

The most pressing issue in this context for the Germans is the investment into broadband. When it comes to optical cable network, Germany is on the tail of the E.U. The government manifesto promises 50 MB/s connection to every household by 2018. The estimated costs are about €20 billion. While metropolitan areas are covered, much of the countryside is still off the optical grid.

Another, this time typically German issue we might say, arises. Broadband connection by definition allows transfers of huge amounts of data—how will they be protected against a potential misuse? Will not super-fast Internet and two machines communicating with each other across the whole of Germany mean the final arrival of the Orwellian Big Brother?

So, as far as the experiences with the building of the infrastructure for energy transition show, there are competing tendencies that may either speed or slow down the Germans and their economy. The current and next political representations thus face a big challenge in overcoming these tensions.

Should they fail, the country will once again, just like after the reunification, become the sick man of Europe. To their own—and other Europeans’— detriment.

Robert Schuster

is the managing editor of Aspen Review Central Europe. He was the editor-in-chief of Mezinárodní politika monthly from 2005 to 2015, and a correspondent for the Austrian daily Der Standard in the Czech Republic from 2000 to 2012. He has been a foreign correspondent of Lidové noviny daily since 2015, where he covers news reports from German-speaking countries. He is a regular guest in commentaries broadcast by Český rozhlas Plus.

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