MNI INTERVIEW: German Defence Boost To Fall Short Of EUR500Bln

Germany’s planned EUR500 billion boost to defence and infrastructure is unlikely ever be spent in full, calling into question its impact on growth, the vice president of the Halle Institute for Economic Research (IWH) told MNI, pointing also to the dangers the country's manufacturers face from increasingly sophisticated Chinese competitors.

“It is likely that the large financial leeway created by the amendment to the Basic Law will not be fully utilised, because there are bottlenecks,” said Oliver Holtemoeller, professor of economics at the Martin Luther University Halle-Wittenberg, casting doubt over a growth boost which analysts put at 0.3-1% per year over the medium term.

 “You can add more money to the system, which will raise prices, but there are real shortages of resources. And keep in mind that it takes 10 years in Germany to plan a new motorway before it even starts being built.  It's similar in the case of the defence industry, regarding all kinds of weapons or weapon systems.”

Additional government borrowing will also drive up bond yields and raise the cost of capital for German firms, Holtemoeller said in an interview. (See MNI INTERVIEW: German Advisor Sees Possible Joint EU Debt Deal

“This will in turn crowd out investment somewhat in other places, in particular in housing construction. Therefore the overall net effect of the fiscal programme on GDP growth is difficult to assess,” he said, adding that the focus on defence and infrastructure has meant a worrying lack of attention paid to social security.

CARE SYSTEM FACES COLLAPSE

Pension system, health insurance, and care sector contributions now account for 42.3% of gross wages, with the government’s projection of 45% by 2029 looking optimistic, Holtemoeller said. 

“In the care system in particular costs are growing much faster than revenues, and at some point this will collapse. The current government is not doing anything about it, and indeed it is extremely difficult to do anything,” he said.

Higher U.S. tariffs following the weekend’s EU trade deal still leave German manufacturers better placed than Chinese companies facing much higher levies, according to Holtemoeller, though he added that this will be of only marginal assistance unless they keep pace with the rising quality and technological sophistication of their competitors.

A high exchange rate was little impediment to German export success in the 1970s and 80s, when the country’s companies enjoyed qualitative and productivity superiority, but the erosion of this advantage means a tariff differential alone will not save them.

“German manufacturing industry had a qualitative and productivity advantage over many of their competitors. However, that is no longer the case, which is in the long run much more dangerous for the German economy than the pure cost factor that tariffs provide,” he said. “For the German automotive industry tariffs are not the most severe problem. The competition with China is also very challenging, as China is aiming at technological leadership in several fields.” (MNI INTERVIEW: German Car Makers Have 5 Yrs To Change-Suedekum)

High energy prices are also a serious problem for German companies, Holtemoeller said.