MNI INTERVIEW: German China Plan Likely To Fail - Holtemoeller

Germany’s manufacturers are being beaten by China at home and abroad, a leading economist told MNI, calling for authorities to support future-oriented industries and boost productivity rather than attempting to reignite the economy through spending and tax cuts. (See MNI INTERVIEW: Germany Needs Solid China Strategy - Wambach)

Germany's economy is weak, and its manufacturing sector - in particular car makers - “very weak,” said Oliver Holtemoeller, professor of economics at the Halle Institute for Economic Research (IWH), accusing China of dumping on top of providing subsidies for its export industries.

Recent trade developments linked to U.S. tariffs have added to pressures on German firms, as cheap Chinese imports flood the nation’s ports at the same time as German firms find themselves losing out to China in markets such as Latin America.

“The outlook for German exports is also weak,” Holtemoeller said. “Actually, the world economy and world trade are surprisingly robust, especially where trade is not suffering from U.S. protectionism. But Germany's share of that world economy is becoming smaller.”

Germany needs to focus on its strengths rather than pursue an industrial strategy, he said.

ENERGY COSTS

“The German manufacturing system survived China’s entry into the WTO, and it survived EU enlargement and the much cheaper Eastern European labour that came with it, because of its productivity advantages. That remains the best way to deal with such external threats,” Holtemoeller said

“I don't think that the Ministry of Economic Affairs, or anybody else in the German government, should decide what German firms should produce. Managers need to decide what are profitable sectors of the economy and where they can compete internationally.”

Energy costs will be a problem for the next 20-30 years, Holtemoeller said, with companies increasingly moving production to cheaper locales. Subsidies - such as those recently announced and running until 2028 - are not the way forward. (See MNI INTERVIEW: German Energy Cap Impact Limited-GCEE's Werding)

“There are certainly political reasons to keep steel production in the country, but from an economic perspective, and putting security issues to one side, it would make more sense to focus on sectors where we can gain a competitive advantage.”

The planned additional EUR500 billion fiscal impulse earmarked for infrastructure, climate and defence investment looks set to make little difference, Holtemoeller said.

“The money from these public packages – the overall impulse from which will be the equivalent of 0.8% of GDP in 2026 - will only be spent slowly, and the largest share is defence expenditure,” he said.

“Defence spending will add to the expansion of GDP, but that’s not the same as triggering long-run growth. There is a small share also going into research and development, and there might be spillover effects to the private economy later on, but certainly not in the short run. So even with the tax cuts and subsidies that have been announced, it’s not a game-changer.”

LOW GROWTH

GDP will grow by 1.0% in 2026 according to IWH’s winter forecast, an improvement of 0.2 percentage points on the level seen in September, though Holtemoeller attributed the upturn to the availability of more complete data.

“Our general outlook has remained the same. All the other German research institutes have been more optimistic, and still they have revised their forecasts downward and closer to our view. Most institutes are converging to 1%, with the exception of the DIW, which is slightly more optimistic.”

Growth will be muted for years to come, Holtemoeller said, with potential growth already weak and declining due in particular to demographic changes. 

“Actual growth is therefore slowly adjusting towards potential output, and, unlike some other institutes, we don’t see there being any kind of boom from these fiscal packages.”

Major reform of Germany’s social security system is also required - in particular for health costs, the highest in Europe - if drastic cuts are to be avoided in future, Holtemoeller said.

Pivoting to AI - an energy-intensive industry - brings with it underappreciated risk, Holtemoeller said, with the financing of AI investment coming increasingly from debt, and at the same time becoming less transparent.

“The financial stability risks from this side are increasing. Of course, only with hindsight can you say whether there is or was a bubble, but risks are growing, and it’s something that it is important to monitor.”