MNI INTERVIEW:Capital Misallocation Holds Germany Back-Advisor

MNI (LONDON) - Germany needs to direct more of its savings towards riskier and high-tech investment if it is to overcome economic stagnation, a leading government adviser told MNI, adding that relaxing the country’s debt brake may only lead to higher social spending.

The country’s predominantly bank-based, collateral-intensive finance system effectively precludes investment in areas such as technology, said Joerg Rocholl, President of Berlin’s European School of Management and Technology and chair of the advisory board to the German Federal Ministry of Finance, with the country now lagging behind not only the U.S. but even European countries in venture capital as a proportion of GDP.

“Germany doesn't have a capital problem, but it does have a capital allocation problem,” Rocholl said in an interview. “Money is going into deposits, bank accounts, life insurance contracts. It's not really channelled towards those sectors that really need additional capital to grow.”

The government’s 49-point growth plan is insufficient to boost growth, he said, pointing to “structural impediments” such as higher energy prices.

 “Germany is a very open economy when it comes to imports and exports, therefore any problem one faces abroad is immediately mirrored by German economic activity, GDP growth and so on.”

DEBT BRAKE

Meanwhile, seeking to boost investment by relaxing the so-called debt-brake, which limits government borrowing as a share of GDP, may exacerbate rather than address existing shortcomings, he said, pointing to the “enormous” increase in social spending over the last 10 years which has depleted funds available for public infrastructure spending.

“This is also a warning signal when it comes to the pension system, which absorbs more than 100 billion euros of government funding per year.  Unless there is significant reform, there can be only one outcome: higher government spending. Even if we did consider giving up the debt brake, I would be concerned that it would not actually lead to more investment, but rather create even more social spending.”

Additionally, the recent failure of the Coalition government to agree a federal Budget for next year makes it more difficult for both global companies and Germany’s vaunted Mittelstand firms to commit to investment, Rocholl said. He also cast doubt on the possibility that he government could use extra-budgetary Sondervermoergen - special funds - to pay for innovation.

“The question is what do you count as innovation and what do you not? One of the reasons the debt brake was introduced was to prevent spending on what was presented as innovation and investment, but was actually consumption.”

German GDP is projected to grow by between -0.1% and +0.1% % in 2024, having contracted 0.3% the previous year, and with 2025 expected to yield only a slight expansion. (See MNI INTERVIEW :German Growth Weak Despite Wages- GCEE's Werding)

But the downturn has not become fully apparent in the labour market, with “massive” numbers of layoffs among some companies offset by a big increase in the number of public sector employees, Rocholl said.

LOWER INFLATION

While welcoming news that CPI inflation is expected to come in just below the ECB’s 2% target at 1.9% in August, he expressed concern that geopolitical tensions and global inflationary pressures, together with difficulties securing key supplies, will put additional pressure on price levels in the months ahead.

“I don't think the race is over yet. It's a good, intermediate result, but it's not something that one should celebrate already and take for granted,” he said.

Nonetheless the slowdown in inflation and Germany’s poor economic outlook will temper wage gains, despite calls such as that by industrial union IG Metall for a 7% increase, Rocholl said.

“On the employee side wage negotiations will be weaker for the simple reason that inflation is not as high anymore. Labour market data indicates there are an increasing number of layoffs by big companies, but also by family-owned businesses. Thus the trades unions will be more careful. The government and the public sector have increased the number of jobs, but this is not sustainable.”