MNI INTERVIEW: German Energy Cap Impact Limited-GCEE's Werding

German energy price caps will have only limited positive effects on growth unless public spending is redirected towards infrastructure investment and away from consumption, a member of the German Council of Economic Experts told MNI.

Energy-intensive industries will need to be confident that a price of five euro cents per kilowatt-hour until 2028 announced as part of an “Autumn of Reforms” is not just a temporary measure, but rather part of a package aimed at transforming energy networks, storage and generation, Martin Werding said in an interview

“You need a long-term perspective that energy prices will stabilise at an acceptable level for the firms which are benefiting most to really engage in high levels of investment, otherwise they may stop or slow down the process of reducing employment while withdrawing investment from Germany.” (See MNI EM INTERVIEW: Czech Industry At Risk From German Energy Cap)

The success of another new measure, the “Germany Fund,” which  was announced shortly after the GCEE published its Annual Report and will use EUR10 billion of public money to bring in EUR90 billion of private sector investment in SMEs and scale-ups, will depend on still-to-be-announced details including its framework, details of co-financing, and insurance for private partners, said Werding, professor of social policy and public finance at Ruhr-University Bochum.

“While 100 billion over a time horizon of a few years sounds nice, it's not really a breakthrough.”

 “SPENT ON ANYTHING”

The government’s EUR500 billion Special Fund for Infrastructure and Climate Neutrality fails to clearly define investment priorities, Werding said.

“There is interaction with the core budget - the money can be spent on anything,” he said, adding that the extent to which that was now happening is “really shocking,” and that the needs of cash-poor regional governments are also influencing the use of the funds.

“The hope is that between 2028 to 2030 we will see a higher share of additional investment, or, at least, spending that is more likely to increase aggregate growth. But based on current plans, up until 2029 we see that less than 50% is actually going to be spent on the original purposes for which it was intended.” (MNI INTERVIEW: German Budget Talks Likely To Extend Into 2026)

Other fresh policies, including corporation tax reforms, are in line with GCEE thinking and will have “moderate” positive effects, though Werding observed that any resulting small losses in government income will be covered from the special funds.

The GCEE sees Germany’s economy growing by 0.2% next year - an upwards revision of 0.2pp on the previous forecast - and by 0.9% in 2026, Werding said.

“In 2026 we expect that 0.3 percentage points – one third of the GDP growth for the year - is due to calendar effects, because public holidays will be on a Sunday. This isn't really growth, it's just a coincidence. Another 0.3% might be due to government spending from the special funds. So again, the contribution from that side is really weak.”

RISKS

Risks to the outlook include the misuse of special funds, not spending them quickly enough, and a small dangerthat disbursing them quickly might push up inflation, Werding said.

“The situation is gloomy, but there aren’t any large upward or downward risks. And our forecast is at the lower bound of what many other forecasters have said – although we would of course like to be positively surprised.”

A major defence spending boost will have only modest macroeconomic effects, with more European planning needed to make structures effective, followed by talks on how to make joint EU defence financing incentives compatible, Werding said, adding that boosting military spending to 3.5% of GDP will push Germany’s debt-to-GDP ratio sharply higher over the next 10-15 years.

“We can't continue to finance that for 15-20 years. If we did, Germany’s debt ratio would move towards the French one. So we need a plan for the years starting from 2030 to really consolidate the core budget in such a way that substantially more of these regular government spendings can be financed from regular revenues. The Bundesbank spelled out a gradual plan for that, and this is fully in line with what we said.”