MNI INTERVIEW: No Great German Growth Leap - Gov't Advisor

Policy decisions needed for a “great leap forward” in German growth are unlikely in the current parliament, even if proposed tax changes worth billions of euros are passed in the coming weeks, a leading advisor to Finance Minister Christian Lindner told MNI.

Lars Feld, a personal economic adviser to Free Democrat Party leader Lindner, said in an interview that Germany needs major labour market and environment deregulation, along with a radical improvement of its energy infrastructure, to spur a meaningful boost in output. But he is not optimistic that the steps needed can find agreement under the ruling ‘Traffic Light’ coalition.

The government is currently negotiating the 2025 budget against a July 3 deadline and officials are looking at an FDP proposal to cut taxes and boost certain investment write-offs, but Feld thinks decisions will be difficult to come by despite elements of the government acknowledging the need for compromise.

He points to bureaucracy, labour costs and high energy prices as a drag on private investment. Efforts to reduce red tape and push through a modest tax cut have still left Europe’s largest economy “among the highest-taxing countries in the world regarding profits.” (see MNI INTERVIEW2: Germany Faces Stagnation -Former Experts Chair)

FISCAL LIMITS

Asked whether Germany and the wider European Union should increase borrowing to direct a larger proportion of GDP to defence, Feld said it was important first to establish what precisely those additional needs were, then how to pay for them.

“Talking first about finance is to approach the problem from the wrong direction. The problem is, what are the responsibilities for defence in Europe? Who will provide this kind of public good? Can we have a type of Europeanisation in that area? How about joint army operations? How about joint procurement and production? Then we can work out what the additional costs will be and how to fund them,” he maintained.

Any proposal to increase member states’ annual budgetary leeway by going through the EU budget, building on the NextGeneration EU burden-sharing model, would most likely run aground on the rocks of the German courts, and any move in this direction could require a change in the German constitution.

CHINA REALITY

Feld backed German Chancellor Olaf Scholz’s push for China to provide greater market access for German companies and more of a level playing field, at the same time accepting the need for limits with Berlin following the US lead in restricting the export of certain technologies. But cutting economic ties altogether was “simply not feasible” at this stage, he added.

“The US has not cut its economic relations with China either,” Feld noted. “We have seen some firms, such as BASF, making greater investments in China. At the same time, the federal government should make it clear to those firms that continue investing in China that we will not bail them out.”

The imposition of import tariffs to prevent an influx of cheap Chinese electric vehicles at a time when the EU is attempting to meet ambitious climate goals would also be a mistake, Feld said.

“We need to allow European manufacturers to continue producing combustion engines while at the same time bringing in higher carbon pricing. Simply telling the consumer to buy electric cars is a mistake - let them decide,” he said.

“These changes would also affect the relationship with China, which has until recently been a major beneficiary of EU subsidies. In essence, we bought them market access to Europe, and this is not a good economic policy at all. I would simply abolish all subsidies for electric vehicles,” Feld added.