MNI INTERVIEW: Cut Red Tape To Boost GDP -German Gov't Advisor

Germany’s failure to cut social spending and slash red tape while boosting digital innovation and investment will prove more of a drag on growth than the decision to reactivate strict spending curbs from this year, a senior government advisor told MNI.

Having weathered the worst of the energy price rise caused by Russia’s invasion of Ukraine, Germany’s economy is doing “better than feared, but worse than possible,” Joerg Rocholl, president of the Berlin’s European School of Management and Technology and chair of the Federal Ministry of Finance’s advisory board said in an interview.

Energy costs remain a long-term concern, Rocholl said, but excessive bureaucracy and failure to match the U.S. and China in digital innovation are likely to hinder growth, as Germany comes to terms with the “dramatic” effect of the war on its economy.

Germany is second only to America in the number of new designs registered with the European Patent Office, Rocholl said, with China in third place. But its traditional focus on machinery, chemicals and cars means Germany lags behind in digitalisation, and it is expected to slip down the rankings over the coming years.

DEBT BRAKE

Still, he was hopeful that the Finance Ministry’s decision to once again comply with the constitutional debt brake from this year - having suspended it during the Covid-19 and energy crises - will not be a significant drag on growth.

“There will be some very strong limits regarding the constitutional debt brake, and the fact is that the exceptions to the debt brake cannot be prolonged indefinitely,” he said. “But debt brake compliance does not have a big impact on growth. Rather, I’m concerned that we keep asking for additional pieces of fiscal stimulus, while at the same time, our social security expenses keep increasing quite significantly.” (See MNI INTERVIEW: German Court Threatens EUR180 Bln Spending Plan)

While social spending is high, public investment is insufficient, he argued, adding that “the balance of the German fiscal budget should actually look different than it currently does.”

With labour markets remaining tight and core inflation expected to remain stubbornly above 2%, workers are likely to demand higher wages for longer, Rocholl said, calling for policymakers to reform immigration policy, while making work more attractive for those currently excluded from the workforce.

“First, we need to think about better migration policies. Second, we can think of better opportunities to engage women, and in particular to engage women full-time in the labour market. Third, too high a proportion of school leavers are not employable. We could give incentives to older people to work longer,” he said, pointing to a conservative opposition suggestion for retirees to be taxed less or not at all if they work.

Private investment will be key to transforming Germany’s economy, Rocholl said, though higher funding costs, energy prices and sticky inflation will make this more challenging.

FINANCIAL INVESTMENTS

Germany should also take advantage of above- European average household savings rates by gearing behaviour away from low-yielding bank accounts and towards better-rewarded, albeit riskier financial instruments, he said.

“Germans have a very high tendency to save, one that is well above the European average. Yet per capita financial wealth in Germany is only around the European average. This has to do with the fact that a lot of money is put into savings accounts, deposits, and sometimes also life insurance companies that are also restricted from investing the money more aggressively,” he said.

“Another very important policy factor to look into is how savings behavior can be geared towards capital markets - including the capital market-oriented components of the public pension system - towards real assets that also have certain protection against inflation.”