MNI INTERVIEW: Germany Needs More Than Just Tax Cuts -Wambach
MNI (LONDON) - Tax cuts could deliver a boost to Germany’s ailing economy following this weekend’s elections, a prominent economist told MNI, but more public investment and major reform of the country’s energy market will be needed if growth is to rebound.
Germany’s elevated corporate tax rate, plus “very high” unemployment insurance, health insurance and pension contributions are a brake on innovation and growth, said Achim Wambach, president of the Leibniz Centre for European Economic Research (ZEW), in an interview.
Front-runner Friedrich Merz’s centre-right Christian Democratic Union party promises to cut most tax rates - including for higher earners and firms. Chancellor Olaf Scholz’s centre-left Social Democratic Party also wants to lower income tax for the majority of Germans, while hiking them for the super-rich and offering tax incentives for private investment.
“I would not underestimate the effect of tax competition. If Germany were to succeed in lowering corporate and social taxes it would be a good thing,” Wambach said.
Getting and keeping skilled foreign workers has proved hard, he said, with the mood among businesses worse than during the Covid 19 pandemic, and countries such as France attracting more foreign direct investment.
ENERGY MARKET
While the next government is likely to build gas-fired power stations to sit alongside existing renewable energy programmes, high energy prices will continue to pressure many firms - a situation that is unlikely to change without EU intervention, said Wambach, an adviser to the Federal Ministry for Economic Affairs and a former Monopolies Commission chair.
“Germany’s energy market is not working at all well, and that makes it difficult for firms to invest. As long as there is just one pricing zone rather than nodal energy pricing, which would result in regional energy prices, investment will be lower as firms are uncertain about future prices,” he said.
“My sense is that the government will not change it, but the European Commission might do. If they do not, then it will need to be changed in the next decade in any case. At present we don’t have an energy network that can transport all the energy generated from renewables. We need to strengthen our energy connections with France and other countries.”
Lower energy prices, as well as higher growth rates and younger populations are likely to continue to tempt German companies to reallocate resources to other countries, while tariffs on EU goods will create incentives to increase investment in the U.S., Wambach said.
Germany’s car makers continue to spend big on research and development, with the chemicals industry also doing reasonably well when judged by patents filed, but its biotech and tech sectors lag behind. The development of new products has been effectively “regulated away” through EU reporting rules, data protection and artificial intelligence laws, and poor levels of digitalisation at home, according to Wambach.
DEBT BRAKE
Large-scale reform of Germany’s “debt-brake,” which imposes strict limits on how much the government can borrow, is unlikely after the election, he said. However, minor changes, and a special investment fund for infrastructure and investment, as proposed by the centre-left, might be on the cards. (See MNI INTERVIEW: Debt Brake Deal Possible After German Election)
Increased European spending on defence and security could also be a boon.
“The ‘good’ news might be that if it is true that you can only really change course if there is a crisis, that sense of crisis is certainly there, both at the national level and the European level. The pressure that Trump is putting on Europe creates opportunities,” he said.
“The U.S. spends around 15% of its military budget on research and development, whereas in Europe the figure is around 4.5%, so there is huge potential in that field - for engineering, chemicals, those sectors in which Germany is already strong. And because of the crisis there is potential to change regulations in a way that would be additionally supportive.”