MNI INTERVIEW2: Germany Must Balance Green Drive-Ex 'Wise Man'

Germany should consider a more “pragmatic” balancing of its green ambitions with the urgent need for growth, and while not facing deep recession will struggle to match its previous economic performance without major reforms, former German Council of Economic Experts Chair Volker Wieland told MNI (see MNI INTERVIEW: Pricey Energy Means Tough Decade For Germany).

A high priority is a rethink of Germany’s energy markets, in which the government now subsidises industry after the “not very smart” move to shut down the country’s last nuclear power stations earlier this year, said Wieland, now Chair of Monetary Economics at the Institute for Monetary and Financial Stability, Frankfurt, and co-chair of the Hesse state government’s new Economic Future Council.

The government should promote spending on building new hydrogen and electricity networks, increasing electricity storage capacity and boosting digital infrastructure, as well as moving away from subsidies which push up inflation. Wieland said.

“Industrial subsidies and a subsidised electricity price for energy intensive industry are not the solution. We will probably never get rid of it once it is implemented. That money will be missing where we need it - for infrastructure such as hydrogen networks, better electricity networks, electricity storage, more digitalisation,” he said in an interview.

“We just have to be more pragmatic. If you want to protect the climate, you have to have hydrogen produced from renewable energy sources and produce it yourself. And an infrastructure for distributing it is needed, otherwise you have to reduce the size of the economy, and that means everybody will get a lot poorer. There are some trade-offs between environmental policies and actually dealing with climate change which have to be accepted.”

REGULATION REFORM

Germany is also seriously over-regulated, Wieland said, pointing in particular to environmental and planning regulation which he said slows public infrastructure investment in areas such as bridges, railways and roads.

“The previous government knew that, and the current government knows that too. Hopefully, now, they also recognise that the need has become more urgent to break through this impasse."

Still, Germany’s current economic slowdown is unlikely to become a deep recession, while a shrinking labour market will keep employment at relatively high levels, he said. Rising gas demand in the winter could push prices higher again, he said, though perhaps not to last year’s levels.

“The German economy is stagnating, and that's been the case now for a while. Economic activity is not really getting above the pre-Corona crisis level of 2019,” Wieland said, dismissing any suggestion that ‘debt brake’ limits on borrowing were an economic constraint.