MNI INTERVIEW: German Fiscal Boost Impact Limited - Bofinger

Germany’s defence and infrastructure spending drive will boost GDP next year but its growth impetus will fade shortly afterwards due to a failure to foster new high tech industries or provide incentives for the country’s companies to maintain domestic production, former German Council of Economic Experts member Peter Bofinger told MNI.

The CDU-SPD coalition government’s “almost Keynesian” moves to establish a EUR500 billion infrastructure fund, exempt defence spending from debt brake rules, and allow states to borrow more will do little to help industry escape its “middle technology trap,” Bofinger said in an interview.

“What is missing is a comprehensive strategy for how to transform the economy. And so for the medium- and longer-term, I'm quite pessimistic. There are funds, but they are not disbursed in a very efficient way,” Bofinger said, noting how domestic carmakers are opting to shift production elsewhere. 

“Look, for example, at the example of Volkswagen, which is set to begin production of its new model in Spain rather than Germany. Similarly, BMW will produce its “Neue Klasse” cars in Hungary, where they can be closer to battery producers and other clusters of manufacturers, than they are to remain in Germany,” he said.

“Germany is no longer the standard production location as a place to produce and work. I think that’s frightening. But this is also reflected in the employment plans of many of the major companies in a number of sectors, all of which plan to reduce numbers.”

AI SHORTFALL

The government’s motivation still seems to be to improve the situation of existing industries, rather than develop future capacity in new technologies, said Bofinger, senior professor for Monetary Policy and International Economics at Wuerzburg University, and a member of the SPD's Advisory Board on Economic Policy. (See MNI INTERVIEW: German Gov Plans, Tariff Hopes Lift Sentiment)

Only EUR1.1 billion in public funds has been set aside for high-tech investment in the Federal Budget, of which only EUR140 million is earmarked for artificial intelligence, he said. By contrast, around EUR 6.5billion has been allocated to reducing energy costs next year - although it will only benefit German households by around eight euros per month - with EUR17 billion for the so-called EEG Umlage, the feed-in tariff; a three-billion-euro cut in the electricity tax, and another three-billion-euro subsidy for highly energy-intensive companies. 

“It’s sensible to support existing companies in reducing their energy costs, but there has been no discussion about how best to allocate these funds,” Bofinger said.

A government scheme that enables companies to book a 30% depreciation each year until the end of 2027 is likely to do little to engender additional private-sector investment, Bofinger said

“That's also something which is very costly for the budget, especially in the years 2027-28. But it is not very effective, since for the companies it's not a grant, it’s only a zero-interest loan. So there will be huge financing gaps arising from an instrument that for companies is not that decisive, especially those companies which end up making the same investment decisions as they planned to before.”

SPENDING CUTS

With government borrowing likely already high, authorities may look to cut spending elsewhere, especially on social programmes, Bofinger said. However he was sceptical as to whether any amount of austerity could come close to filling the holes in the Federal budget. (See MNI INTERVIEW:German Debt-To-GDP Risks Sharp Rise-EFB's Janeba)

“The potential is really limited. Could you cut the pension scheme? I don’t think that this is politically possible. Could people retire later? In principle yes, but not before 2031, as it has already been decided that the retirement age will increase to 67 years until that date.”

Limiting the increase of pensions to compensate for inflation rather than tying them to wages would provide some relief, but risks leaving those who have paid a fifth of their income into the pension system for 45 years with little more to show for it than those who have not worked at all, Bofinger said, adding that the health system faces a similar dilemma.

“I simply don’t see a magic bullet.”