The belligerent plans for the German economy are full of holes
“I I HOPE YOU I’ll never have to see it like that again, ”says Markus Quint, communications manager at Frankfurt’s Messe (exhibition center), as he inspects 440,000 square meters of empty halls from a 22nd-floor terrace. When the pandemic struck last spring, the Messe, which had welcomed nearly 2.5 million visitors in 2019, had to close for all businesses except the digital type. Global revenues (the Messe has 29 subsidiaries) plunged from 736 million euros (870 million euros) to 257 million euros. Most of Frankfurt’s roughly 1,000 employees continued Kurzarbeitergeld, Germany’s much-imitated holiday scheme.
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As the Germans prepare to go to the polls on September 26, the recovery is making itself felt. Mr. Quint says he could have “wept for joy” in July when the Mass reopened for its first physical exhibition, a bike parts manufacturers’ fair. Bigger shows are in the works, including a return of the famous Frankfurt Book Fair next month.
Yet the threat of covid-19 has not evaporated. In the case of the Mass, border restrictions and quarantine rules make it nearly impossible for what was once a large contingent of Asian and American visitors to attend the performances. Other companies fear the return of some contact restrictions amid a fourth wave of infections and the worrying vaccination rate in Germany.
Hiccups in supply chains are a more serious drag on Germany’s recovery, says Clemens Fuest of the Ifo Institute in Munich. The global semiconductor shortage is crippling the powerful German automakers. 70% of all German manufacturers say they run out of everything from aluminum to paper. Highly globalized Germany – its total trade was equivalent to 88% of GDP in 2019 – is particularly exposed. Having previously predicted that the economy would reach its pre-crisis level by the end of 2021, Ifo has become more pessimistic.
No wonder German companies are watching the election campaign with keen interest and in some cases grave concern. Jürgen Vormann, CEO Infraserv Höchst, a Frankfurt-based chemical services provider, says he fears the next government is zealous about climate change and thus wraps business in bureaucracy. Electricity prices in Germany, the highest in Europe, are weighing heavily on the industry. Some of Germany’s influential family businesses fear tax raids. “You don’t have to be pessimistic to anticipate that we are going in the wrong direction,” says Vormann.
In a consensual Germany, none of the probable coalition configurations will bring an economic break. But differences between party platforms will make post-election negotiations tricky, especially as polls suggest that only ideologically confused three-way coalitions will be viable. The pro-business free democrats (FDP) and the conservative Christian Democratic bloc (CDU/CSU), for example, undertake not to increase the tax burden, while the Social Democrats (SPD) and Greens want higher wealth tax and income taxes for the rich. All parties agree on the need to accelerate climate protection, but strongly differ on the balance between market mechanisms and regulation.
This problem will interact with a more familiar one: the sums of the parts do not add up. German Economic Institute (IW) estimates that by 2025, increasing demands on the state pension system, additional defense spending and some other new spending could reach a cumulative amount of € 263 billion. But among the main parties, only the Greens have made commitments which they believe will be revenue neutral. The FDPtax cuts could add 75 billion euros, or about 2% of GDP, to the deficit. No party manifesto will survive coalition talks. But the German constitutional brake on public debt, which entered into force in 2016, limits annual deficits to 0.35% of GDP. All major parties except the Greens say they want to comply, but growth alone will not generate enough cash to do so.
Parties always make questionable tax and spending claims, says Thomas Obst of IW. He is more alarmed by their inability to meet Germany’s demographic challenges. As baby boomers retire en masse Throughout the 2020s, subsidies to the pension system, which already swallows up 30% of the federal budget, will explode in the absence of reform. During a televised debate on September 12, only Armin Laschet, the CDU/CSU candidate, recognized the urgency of the problem. Olaf Scholz, the SPD favorite, swept him aside, placing his faith in expanding the workforce.
Another test will be to meet the investment requirements presented by Germany’s climate goals, including the extension of power grids and the insulation of buildings. The private sector can take much of the slack; the overhaul of town planning rules and municipal working practices in Germany will help. But some estimates place the demand on the federal budget at nearly 50 billion euros per year.
If this also seems incompatible with the constraints of the debt brake, there may be room for a political solution. Admittedly, the tweak to the brake sought by the Greens is doomed to failure, since it needs a two-thirds majority in each of the two parliamentary chambers. And months before the European Commission began a review of the EUthe budgetary rules of the CDU/CSU fears that assent to German lavishness will encourage others (see Charlemagne).
But most parties would probably accept what Obst calls the “second best solution” of creating off-budget investment funds that could bypass the debt brake. And there are signs of a subtle change. Some CDU/CSU the numbers shocked their colleagues as they questioned the rigidity of the debt brake in the era of cheap money and pressing investment needs. And while the FDP remains attached to it, Christian Lindner, the leader of the party, recently stressed that he was not ideologically attached to a balanced budget, an approach interpreted as an opening to the SPD, currently leading the polls, and the Greens. The trio could form a left-wing “traffic light” coalition, the most plausible result if current polls are confirmed on election day.
This illustrates a broader shift in the economic debate in Germany. “Everyone knows we have to transform Germany… and for digitization and decarbonization, it’s all about investment,” says Otto Fricke, a FDP budget specialist. Divisions between parties over budget planning, monetary policy and European spending seem less rigid than in the past. Public debate is more tolerant of what were once far-fetched opinions. As always, the theatricality of the campaign before the election will not prevent the compromises that may be made afterwards. ■
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This article appeared in the Europe section of the print edition under the headline “Spinning the Wheels”