To reverse its decline, Germany must rethink its spending

By love-europe
7 months Ago

Collapsing bridges, trains running at a snail’s pace: Germany needs to invest in infrastructure and, above all, in courageous decisions.

Illustration Simon Tanner / NZZ

One of the phenomena that pilots fear most is a stall. In such a scenario, an aircraft may plummet to the ground and crash unless the pilot takes the correct countermeasures. The German economy is currently suffering from such a stall. After an incredibly long climb, it has suddenly found that the lift under its wings is gone.

Individual sectors, including the chemical and automotive industries, are struggling. Overall, the economy has been stagnating since before the pandemic. Throughout 2023 and 2024, the country remained mired in recession.

Germany is in a downward spiral. This bodes ill for Switzerland as well. The former country is suffering from many ailments, but two developments are particularly striking.

Even under former Chancellor Angela Merkel, the amount of subsidies offered by the state had begun to increase. Under the current government, the so-called traffic light coalition – a reference to the colors associated with its political parties, the Social Democrats, the Greens and the pro-business Free Democrats – they have run completely out of control. According to the Kiel Institute for the World Economy, the government is spending €127 billion this year on such subsidies: for the production of computer chips in the country’s east, for pleasure boats on the coast, for the 49 euro monthly train ticket and for commuter allowances, for example.

Social expenditures have also grown steadily. These now amount to an annual total of about 212 billion euros, or 35% of the federal budget. This category includes the so-called Bürgergeld, Germany’s basic welfare benefit for people in need, as well as subsidies to the pension fund.

Infrastructure spending gaps

The Kiel researchers’ verdict is devastating, and deserves to be quoted at length: «The federal government’s subsidy policy instruments are very complex, opaque, uncoordinated, heterogeneous in terms of objectives and effects, and often contradictory. Thus, it is impossible to describe this as a rational subsidy policy. Policymakers are using one set of financial aid measures to combat the damage and undesirable side effects they have caused with another.»

This is one of the relevant developments. It is a story of excess and of politicians who, in a fit of megalomania, believe they are smarter than the swarm intelligence of the market. The other development relates to the collapse of the Carola Bridge in Dresden, crumbling highway bridges and the Cologne-Berlin railroad line. The train journey between these two cities now takes about an hour longer than it did 20 years ago. This is because the ICE trains, which are designed for speeds of 250 kilometers per hour, today stutter through the Weser Uplands region at a mere 80 kilometers per hour.

This in turn is a story of investment shortfalls and of politicians who have never had enough money for infrastructure because they were always concerned with more important and prestigious projects: the road toll that failed because it contravened EU law, or the dream of a German Silicon Valley.

According to EU calculations, only Ireland will spend less than Germany on renewing its public infrastructure next year. This is hardly surprising, as only 2.7% of the German federal government’s budget – 0.4% in relation to gross domestic product – is currently earmarked for infrastructure.

Germany is falling into disrepair. To observe this development, one needs only to buy a train ticket or take a stroll through Cologne’s city center, which has become increasingly rundown over the last 30 years. Just a few minutes’ walk from the soaring Gothic cathedral and the chic, trendy quarters of the old Rhine harbor, a visitor is swallowed up by unkempt, dingy alleyways. Here one finds the dreariness of a city that is falling into poverty in the midst of abundance. Meanwhile, Berlin is proud to be the favela of the federal republic.

There are many reasons for this current economic stall, but one of the most important is certainly the enormous sums of money that are flowing into social spending and industrial policy, but which are lacking elsewhere due to the constraints of the so-called debt brake, the policy that limits how much new debt the state can take on. The resources of a 500 billion euro budget are being used inefficiently in a way that borders on wastefulness. Just like Merkel before them, the parties of the traffic light coalition seem to be heedless of future chaos – another case of «Après moi le déluge.»

However, this is not an argument against the debt brake. This policy works flawlessly in Switzerland, where it was invented. Here, politicians and voters ensure that spending is balanced within the policy’s given financial scope – although even in Switzerland, the tendency toward irresponsible social policy is increasing, and parliament is struggling to reconcile additional defense spending with the brake.

The debt brake could also work in Germany if governments did not engage in lopsided spending on prestige projects and social welfare. This would leave enough money for infrastructure, which is in urgent need of repair.

But how likely is that? An addict would be more likely to quit heroin than German politicians would be to give up their cornucopia of subsidies.

At the same time, the debt brake is not an end in itself. It is intended to guarantee future viability by preventing the state from becoming weighed down by excessive debt, thus rendering it unable to act effectively. Yet if this future viability is at risk in other ways, it may make sense to modify the debt brake.

Among the major Western nations, Germany has the lowest debt-to GDP ratio, at 64%. That is well under the comparable figures in the United Kingdom (97%), France (110%), the United States (125%) or Italy (141%). The German government therefore has a certain amount of leeway in dealing with its current needs. Moreover, Germany has long been manipulating its own national accounts through the use of shadow budgets, the supposedly off-budget funds. In this regard, more transparency and clear rules would be advantageous.

The third rail of German politics

At least at first, the Social Democrats would likely welcome the idea of modifying the debt brake. Germany’s institutionalized thriftiness has long been a thorn in their side. In looking toward the next federal election, they have even had the temerity to describe the reckless increase of state debt as an «economic program.» This is why any relaxation of the debt brake must come with strict guard rails.

Any funds derived through such a policy change should be used only in productive areas, such as infrastructure, research or education. Investments must also be made in the security sector, as external threats have radically changed, and Germany’s migration policy has created additional internal risks.

The country’s military spending is currently meeting NATO’s target of 2% of GDP. However, pension benefits for soldiers, which are more rightly part of social policy, are also included in this category. If these funds are deducted, Germany does not spend significantly more on defense than it did at the peak of the peace dividend after the fall of the Berlin Wall.

The struggling pilots of the traffic light coalition are no longer able to bring about the necessary paradigm shift. In just over a year’s time, they will probably be replaced by a government coalition made up of the Christian Democrats (along with its Bavarian counterpart, the Christian Social Union) and the Social Democrats, possibly with the addition of a third partner. At best, this new coalition will find the strength to make the long-overdue changes. Today, the persistent inability to compromise and a tendency toward dogmatism are still the main problems. But Germany will only regain momentum if it is prepared to question established ways of thinking. Former Chancellor Gerhard Schröder’s Agenda 2010 provides a model for this.

The conservative Christian Democrats should bite the bullet and relax the debt brake for a limited period of time. In return, the Social Democrats would need to agree to reform the state’s social spending, including the botched Bürgergeld program. And finally, the government would have to reduce the subsidies that have skyrocketed in recent years. This would affect all the parties, because they have all doled out financial gifts to their bases.

Reaching a point of genuine sustainability would require a combination of all three of these steps. Each of the coalition partners would have to give up something, and no policies should be considered sacred. Kill your darlings! That is the only path to success.

Even if the next government musters the necessary courage, dangers lurk everywhere along the way. The automotive industry will lobby for subsidies for electric car purchases. The Federation of German Industries is campaigning for a «special transformation fund.» This too is a symptom of Germany’s ongoing decay. Even the ground troops of the market economy today prefer to ask for handouts from the state.

What a paradox: Softening the debt brake will require mastering the art of saying no. But what if this is all just a pipe dream? Then Germany will remain trapped in its current downward spiral. For the rest of Europe, that would be a very bleak outcome.

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