MNI INTERVIEW: Over-Regulated Germany May Dodge Recession

By Luke Heighton

     FRANKFURT(MNI) - Chances of a recession in Germany are receding, but

over-regulation continues to hinder growth in Europe's largest economy, one of

the country's 'Five Sages' told MNI in an interview, calling for cuts in

corporate taxes and more flexible labour market regulation.

     "Probability models showing the likelihood of a broad recession spiked up

in October-November last year," Volker Wieland, a member of the independent

German Council of Economic Experts (GCEE), said. "Subsequent data, at least some

of it, has been more on the positive side, so the probability of a recession,

that is a broad-based decline in economic activity, has gone down a little bit."

     While Wieland judges Germany's industry, heavily reliant on auto production

and facing challenges from technological change and environmental rules, to be

in recession, he cautioned against any heavy-handed government response, in

particular for the many mid-sized Mittelstand companies.

     The move to a digital economy requires more flexible labour market rules,

governing areas such as work hours and required breaks, he said. Also Germany's

corporate taxation rates are high by international standards, as is the cost of

electricity, which could be lowered using income from a price on CO2 emissions.

     "The key thing to stay successful is to allow them to adjust to the new

challenges," he said, noting how the Mittelstand was making inroads into Asia.

"And that is not done by government directive, or by creating national

champions, but by allowing competition. We need to allow companies to go down

and others to emerge."

     Wieland spoke to MNI on the day it was announced that Germany's creaking

rail network will receive an additional EUR62 billion in funding to modernise

over the next 10 years. The news came as Berlin faces calls from its eurozone

partners to increase fiscal spending.

     --DEBT BRAKE

     But Wieland said that simply allowing a larger budget deficit would not

address Germany's economic needs.

     "This should not be turned into an argument about abolishing the debt

brake, because that's not the limiting factor," Wieland said. "I don't see lack

of spending on infrastructure as a major problem.

     "Rather, the construction sector is faced with over-utilisation of capacity

and bottlenecks. If you want to accelerate infrastructure building, one option

would be to improve the possibilities for foreign companies to compete on

projects in Germany. Also, the process of planning and obtaining permissions is

cumbersome and lengthy."

     Such regulatory moves would also be of greater help to German companies

than easier monetary policy from the European Central Bank.

     "We have an industrial recession, but German industry's problem is not that

the interest rates they are facing are too high. Whether the German government

can borrow even a bit cheaper, is not a key concern for German industry,"

Wieland said.

     Europe's largest economy grew by just 0.6% last year according to

government figures, its weakest performance since 2013, but 0.1 percentage point

higher than projected in the GCEE's Annual Report released last November. The

GCEE said it expected growth of 0.9% in 2020, with much of the sluggishness

attributable to the industrial sector, and in particular auto production.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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