MNI INTERVIEW: Germany Must Cut Red Tape To Compete - Advisor

Germany’s governing coalition will need to make politically costly deregulation and social security reforms or it will squander the opportunity to use a massive fiscal boost to refashion the economy to compete with China, a leading government advisor told MNI.

“I see great potential for structural change leading to higher sustainable growth of the German economy, but it is not clear we will take advantage of it,” Volker Wieland said, noting that just under half of a EUR500 billion fiscal package agreed last year will be spent on previously-planned state-level programmes and climate-related subsidies.

“There  is less additional and less infrastructure spending than some observers initially believed. Personally, I'm not surprised,” he said. (See MNI INTERVIEW: German Energy Cap Impact Limited-GCEE's Werding)

Planning and environmental regulation, together with vested interests, have impeded even maintenance and replacement investment over many years and urgently need change, Wieland, a member of the German Council of Economic Experts from 2013-2022, said in an interview.

An advisory group created by conservative Economy Minister Katherina Reiche in September has found that while plans for infrastructure and defence spending, corporate tax cuts, and unemployment benefit reform are positive, “you need more if you want to really kick off potential growth," said Wieland, also a member of the Finance Ministry’s Scientific Advisory Council.

“We need to make it much easier to take risks in innovation and investment, in particular, in the areas of information technology, the creation and broad-based application of AI, the development of new products via biotechnology and genetic engineering, and knowledge-intensive services.”

BEYOND COALITION AGREEMENT

Chancellor Friedrich Merz understands that he must push beyond the coalition agreement between his conservative CDU and the centre-left SPD, but both parties are nervous about cutting subsidies, including those for farmers, as well as of reducing the costs of social, environmental and climate policies and increasing flexibility in labour and product markets, Wieland said.

“I’m not sure the SPD is ready for that. And the same may be true for parts of the Christian Democrats. They may be ready to spend more, financed by additional government borrowing, but I’m not sure they’re ready for greater reform of the social security system. … The fact is that some sacrifices will have to be made in many areas.”

The way forward might be to combine reforms in several different areas, which would share the burden of adjustment, said Wieland, who noted a tendency within each ministry to protect its own turf.

“In the most extreme case, this could mean cutting all budgets and subsidies across the board by a given percentage,” he said. 

ACROSS-THE-BOARD CUTS

“That can only be overcome at Cabinet level. If it isn’t, then the innovation and the emergence of new industries and service sectors will just happen elsewhere, and Germany, which is already losing ground to China especially in mid-tech industries, will continue to stagnate and experience relative decline.”

While subsidies that keep production processes running but do little to boost profits or incentivise inward investment must be dismantled, industry cannot be allowed to fade away, he said. (See MNI INTERVIEW: German China Plan Likely To Fail - Holtemoeller)

“The point is not to have a particular industrial policy or industrial strategy. What you need is a strategy to create the openness and flexibility needed for structural change."

This is especially true in the defence sector, Wieland said. If more industrial production and labour is to be shifted from cars and machinery to tanks, missiles and drones, then Germany needs to be more willing to allow exports of military goods, at least to allies. 

"The build-up of German defence alone will not create sufficient demand to offset the reduction in world demand for German cars and machinery," he said. “What’s really needed is not more government planning, but less regulation.”