MNI INTERVIEW2: Debt Limit A Brake On German Economy-Bofinger

Germany’s “debt brake” rule constraining public borrowing is a barrier to the concerted public support for industry required to stop the country slowly losing its position as a top-rank manufacturing nation, a former government advisor told MNI, noting that a court ruling which has blown a hole in the ruling coalition’s spending plans makes things still worse.

This week’s Constitutional Court ruling that EUR60 billion of Covid crisis funds cannot be used to fund green energy and climate transition makes it more difficult for Germany “to tackle the challenges of climate change, improvement of its infrastructure and transforming its business model,” Peter Bofinger said, adding that traditional growth drivers are ailing.

“I fear that we are at the beginning of a kind of disruptive process, where Germany as a place for manufacturing cars and everything that is associated with this is now really losing its position,” Bofinger, a former member of the German Council of Economic Experts, said in an interview.

“You have to differentiate between German car manufacturers and Germany as a production site for cars,” he continued. “Take Volkswagen, which produces cars in Germany and supplies the lower end of the market; they are already struggling quite a lot. Mercedes and BMW produce in China and the U.S., while Volkswagen goes to Canada, because they get subsidies to do so.”

DEBT BRAKE THE ROOT PROBLEM

Germany needs to match the support for industry provided by the U.S. Inflation Reduction Act, he said, adding: “Of course the root problem is the debt brake.”

Retiring baby-boomers and a shortage of skilled labour have been constant themes in recent considerations of Germany’s economic future, but Bofinger suggested the source of its stagnation over the last four years may lie in a failure to keep up with global manufacturing trends.

“Maybe the issue is not a lack of skilled workers, but rather the tide is turning and it's a problem of demand,” he said. “What we can offer is no longer in demand. Volkswagen needs a Chinese partner to get the digital supplies for its cars. That shows that something has gone wrong. The smart stuff comes from China, the dull stuff comes from Germany. So technologically I see a lot of problems for Germany, not just a shortage of workers.”

Bofinger spoke shortly after the five-member GCEE delivered its annual report to chancellor Olaf Scholz, predicting that real income growth will contribute to increased private consumption through 2024. Bofinger, however, was sceptical.

“Consumption was never a major growth driver in Germany. Exports were a driver. Construction was a driver. But private consumption was always relatively weak, and the share of private consumption for GDP has been declining over the last decades. (See MNI INTERVIEW: Robust German Pay Growth Set To Continue - Union)

CAPITAL MARKETS UNION

Nor was Bofinger swayed by the GCEE’s claim that capital market reforms would significantly support the green and digital transformation.

“They don't ask the question: Is it something that’s going to go away, or is it actually a chronic problem that requires major changes and a lot of investment that must be financed privately, but also requires a lot of public funds? I’m not sure whether a European capital markets union is the panacea that is going to solve these problems, either.”

Bofinger welcomed the government’s announcement earlier this month of a five-year package of subsidies aimed at lowering costs for energy-intensive industries, but said uncertainty remains over the longer term.

“The best we can do is build a bridge until we have cheaper energy from renewables. I’m not sure there'll be an other side of the river,” he said. “The ambition should be that the energy prices for our companies are not higher than those in France and other European countries. For me that would be the benchmark to say we have an internal energy market in Europe.”