MNI INTERVIEW: Peak Car Means Germany Must Retool: Ex Wise Man

By Luke Heighton

     FRANKFURT(MNI) - German manufacturing needs significant structural changes

if the country is to avoid recession, a former member of the German Council of

Economic Experts has told MNI, calling for a government-led industrial policy to

champion cutting-edge technologies such as hydrogen energy generation.

     Peter Bofinger, professor of economics at the University of Wuerzburg and

from 2004 to February 2019 one of Germany's so-called 'Five Sages', said he was

pessimistic about the outlook for growth, with the decline in manufacturing

expected to spread to both services and labour markets.

     "The industrial sector will have to change a lot," he said. "Global car

consumption reached a peak in around 2017 - partly as a result of efforts to

tackle climate change, but also as a consequence of lifestyle changes, with

companies like Uber making it much easier to get from A to B.

     "You can already see that compared with other euro area countries we are

the weakest performer, together with Italy and Lithuania." The effects of global

and European slowdown are likely to show up more strongly in 2020, Bofinger

said.

     His remarks contrast with those by Council Chair Christoph Schmidt, who

recently said that Germany does not need to reinvent its economic and industrial

policy, but should develop them further.

     Bofinger described Schmidt's analysis as "strange," and highlighted

Germany's failure to match China in the production of car battery cells as

illustrative of the failure of market-based approaches to industrial policy

versus government-led initiatives.

     Instead, Germany should become a global front-runner in developing hydrogen

energy technology, he said, advocating giving companies "very generous

allowances for depreciation - I would do what Trump did: 100% depreciation if

they do this transformation. With zero interest rates it doesn't cost the

government anything."

     --LITTLE PROSPECT OF GERMAN FISCAL BOOST

     But the impetus for such change seems unlikely to come from any increase in

government spending. Despite pointed calls for increased fiscal stimulus from

the European Central Bank, Berlin would in Bofinger's view only be likely to

loosen its purse strings if the Green party were to join the governing

coalition, or the centrist vice chancellor and finance minister Olaf Scholz

fails in his leadership bid for the centre-left Social Democrats.

     Bofinger called for the European Commission to allow higher debt-to-GDP

ratios, so long as such deficits are used to finance infrastructure projects as

part of a European Green New Deal. These could be financed within the framework

of the Stability and Growth Pact via issuing joint-liability eurozone bonds, he

said.

     Allowing fiscal deficits of 90-100% of output, rather than the 60%

currently permitted, would not only give more spending room to relative fiscal

scrooges like the Netherlands and Germany, but also permit countries like France

to do more, according to Bofinger.

     The ECB "cannot do much" to pressure governments into fiscal expansion,

Bofinger said.

     The central bank's upcoming monetary policy review should produce a

"comprehensive" overhaul of its strategy, resulting in an explicit inflation

target range and a new focus on levels of debt in the economy, he said, noting

that the failure to monitor credit was behind the global financial crisis.

     Bofinger is a critic of the anti-ECB rhetoric common in Germany, which

portrays the central bank as depriving savers and pensioners of fair returns by

setting interest rates at low levels.

     "It would be terrible for Germany if there were a major increase in

interest rates. It would damage our construction sector, which we rely on as a

stabilising element for our economy," he said, adding that he hoped that the

appointment of his former 'Five Sages' colleague Isabel Schnabel to the ECB's

executive board might help improve relations with the German public.

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

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