Merkel Seen Readier to Spend on Elections Than Investment

  • Head of DIW economics institute sees risk of election giveaway
  • Germany needs to redouble investment, infrastructure outlays

Europe’s largest economy is in dire need of ramped-up public investment in infrastructure -- but instead may be about to pledge its budget surplus on election giveaways.

That’s according to the economist charged by the German government with drawing up a strategy for boosting investment across the economy. In an interview, Marcel Fratzscher, head of the Berlin-based German Institute of Economic Research, expressed concern that calls for tax cuts of as much as 30 billion euros ($33 billion) could take precedence over upgrading aging roads, railways and public buildings.

With a forecast surplus of as much as 1 percent of output this year, Chancellor Angela Merkel’s government would have the scope to heed calls from the International Monetary Fund or the U.S. to drive long-term demand at a time of slow growth and falling interest rates, without tipping its budget balance in the red. But surging electoral support for populist policies may influence the choice between spending on infrastructure or the voter.

“The ‘Black Zero’ is an obsession, a holy thing, so we don’t need to touch it,” Fratzscher said, referring to the commitment to balance the books. Germany should “spend the surplus, and spend it wisely, not on gifts for the electorate,” he said.

Germany’s next election is due in the autumn of 2017, and Merkel hasn’t declared whether she’s standing for a fourth term in office. Support for her Christian Democratic Union declined one percentage point to 33 percent, according to an FG Wahlen poll published Friday. That still put the CDU 10 points ahead of the Social Democrats, Germany’s second-biggest party.

Investment Gap

For Fratzscher, spending wisely means reversing the long-term trend of public under-spending that has led to an “investment gap” of around 4 percent of German output, or 120 billion euros. The former European Central Bank staff member completed a 10-point plan last year for the government on strengthening the conditions for investment in the country.

Fratzscher’s narrative contrasts strongly with that of the finance ministry led by Wolfgang Schaeuble, which stressed in its latest publication on the topic that German public investment since 2009 has outpaced the general growth of public spending, and that since the financial crisis Germany as a whole has invested more relative to output than the U.S.

“We have a huge backlog in public investment in roads, there are thousands of bridges that should have been maintained and repaired years ago which hasn’t been done,” he said. While Germany prides itself on its per-capita income, “if you want to stay ahead, you can’t make do with average or below-average infrastructure,” he said.

Chronic Neglect

That Germany is suffering from chronic neglect to the fabric of its economy can seem surprising to outsiders, especially in view of prestige infrastructure projects such as a new Munich-to-Berlin railway line that’s opening this year. But Fratzscher claims there’s also something of a national character trait holding the country back, now that it has emerged from Europe’s sovereign debt crisis as the undisputed economic leader of the region.

“We see ourselves as the economic superstar,” he said. “We have these wonderful success stories -- an employment miracle, cutting unemployment in half over the last ten years, the export boom, a current account surplus of 9 percent, a surplus in the fiscal budget,” but “we forget that Germany was the sick man of Europe ten years ago, and so what we are seeing now is not a miracle, it’s no more than a catching up.”

His charge of complacency echoes that made by his counterpart at another of Germany’s influential economic think-tanks, ZEW. Achim Wambach, head of the Mannheim-based institute said in an interview this month that the election is likely to freeze reform of the economy. In fact, the idea that under Merkel Germany has reaped the benefits of earlier reforms without making fresh preparation for the future has been persistent even since the last election in 2013. The chancellor herself has publicly credited her predecessor, Gerhard Schroeder, with helping set the stage for the country’s economic revival.

Populist Movement

Yet now, in an era when Merkel’s governing coalition of the two biggest parties is being challenged by the populist and anti-euro Alternative for Germany party, Fratzscher sees the risk that political survival instincts will trump forward-looking policy. That’s true of the recent decision to lower the pension age for some Germans, even when the evidence of an aging society suggests going in the opposite direction, he said, and true of the impulse to cut taxes.

Finance Ministry spokesman Juerg Weissgerber said in August that there’s “certain leeway” for lower taxes after the vote, and a business lobby within the Christian Democrat-led parliamentary group has said that relief should amount to 30 billion euros. That would be more than the budget surplus forecast by Fratzscher’s institute for the German government this year, and double that for 2017. Merkel is floating a post-election tax cut of 15 billion euros.

“It’s election time, and there’s a feeling, ‘let’s buy the votes,’ in particular with the AfD becoming more powerful,” Fratzscher said. “We’re going in exactly the wrong direction.”

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE