Germany risks squandering a golden opportunity
Chancellor’s plans for investment and reform may be more of a short-term boost than a fix to underlying problems
Welcome back. Germany risks squandering its chance to use a public investment splurge to raise productivity and growth potential unless it makes “significant improvements”. That was the damning assessment this week of the German Council of Economic Experts. It said under current plans half of the borrowing that is supposed to go on additional investment will instead be spent on government consumption.
The council’s report conveyed a widely shared appraisal among economists and business figures that the coalition government led by Chancellor Friedrich Merz is not doing enough — either through its €500bn special investment fund for infrastructure and decarbonisation or its reform plans — to revive long-term Germany’s flatlining economy.
The importance to Europe of Germany’s success in upgrading its growth model cannot be overstated. Only Germany has the fiscal firepower to invest its way out of trouble, with investment also buying political space for structural reforms. Failure would only further fuel the rise of the anti-EU far right. I’m at ben.hall@ft.com.
Strengths become vulnerabilities
The German economy is stuck in its longest period of stagnation since the second world war. Even with the government turning on the spending taps, the economy will only grow by 0.9 per cent, according to the council’s projection which is well below the consensus forecast. The recovery will be even weaker if the investment fund is slow to disburse or if it just pushes up inflation, especially in construction.
The economy is being weighed down by US protectionism and cheap Chinese competition. As my colleagues in the FT’s Frankfurt bureau reported in this excellent analysis, there is no end in sight to Germany’s industrial recession. The strengths that underpinned the German manufacturing powerhouse for decades have become vulnerabilities. The fact that Germany has since the beginning of this year run a trade deficit in capitals goods — a sector where German engineers once reigned supreme — with China for the first time is hugely telling. (For more on Germany’s “China shock” see this note from Deutsche Bank).
