The German Miracle, Riding on Bad RoadsSudha David-Wilp
Oct. 28 (Bloomberg) -- Chancellor Angela Merkel won re-election in Germany with an impressive share of the vote, but talks to form a coalition remain jammed over whether to establish a minimum wage. This focus is myopic.
The next government -- probably a grand coalition between Merkel’s Christian Democratic Union and the Social Democratic Party -- will need to concentrate on fundamental issues affecting the next generation that have been neglected under Merkel as she concentrated on balancing the budget.
Germany may be the export success story that other countries want to emulate, but that powerful narrative hides weaknesses -- aging highways and rail networks, subpar technology investment, poor demographics -- which need to be addressed now, if the country is to avoid stumbling later on. After all, it was only in the 1990s that Germany was being called “the sick man of Europe,” and it can happen again.
Almost 25 years after East and West Germany reunified, the country remains divided when it comes to infrastructure, though not in the way you’d think. Cities in the former communist East Germany boast sparkling new train stations and smooth highways, while the transport systems in many other German regions have been neglected. The government in North Rhine-Westphalia, the most populous state and home to blue-chip companies such as the appliance maker Miele AG and pharmaceuticals company Bayer AG, says 300 bridges have to be repaired in the short term and 700 more later.
To maintain its competitive edge, Germany’s government needs to spend an extra 6.5 billion euros ($9 billion) a year maintaining its roads and railways, according to a study by the German Institute for Economic Research, or DIW, in Berlin. The Pro-Rail Alliance, a lobby, calculated in a survey that Germany spends less per capita on its famously punctual rail system than any of the seven other countries examined except Spain. Germany’s location and its export sector, which is worth 52 percent of gross domestic product, make it one of the largest European markets for logistics, with about 200 billion euros in annual turnover.
The situation of Germany’s energy supply is more acute. The next government must plan quickly for the ambitious transition from nuclear to green energy that was forced after the 2011 Fukushima disaster in Japan, when Merkel suddenly reversed her commitment to keep the country’s nuclear plants running. Any coalition Merkel forms would continue with this policy, removing 18 percent of Germany’s current power generation.
The energy industry might already be raising the alarm if it weren’t able to pass the costs onto consumers: Germans, who already have some of the most expensive electricity in Europe, will see their annual power bills rise about 60 euros for a family of four by the end of next year. The next government will have to amend the country’s renewable energies law to keep such price shocks in check, if the promotion of alternative technologies isn’t to become drag on the economy. The next government should heed the Federation of German Industries’ call for a stakeholder conference within 100 days of taking office, and consider creating a superministry dedicated to energy.
German engineering and the strength of its small and medium enterprises are praised around the world, but the country has not produced heavyweights in the global technology sector, with the exception of software producer SAP AG. German politicians are quick to press for data privacy on behalf of their constituents, but should also contemplate creating a better environment for technology entrepreneurship and innovation to keep the economy humming into the future. Germany can’t afford to wait, for example, on a strategy to build out a fiber-optic broadband network to replace its often snail-like offering on copper phone lines. This won’t appear like manna from heaven and will require substantial public investment.
Along with broadband and policies such as tax relief for investors, Germany can boost the startups that create growth and jobs. Early-stage entrepreneurial activity in Germany hovers just above 5 percent according to the Global Entrepreneurship Monitor, compared with 13 percent for the U.S.
A grand coalition of conservatives and social democrats would be best positioned to carry out the investments needed to secure Germany’s long-term prosperity, and the money can be found. The International Monetary Fund has suggested Germany has the flexibility to eliminate special reductions to the country’s 19 percent sales tax (hotels, for example, have paid a 7 percent rate since 2010). And analysts project that returning growth will produce a 2.5 percent increase in tax revenue by the end of the year.
Finally, though Germany may be the big kid on the block in Europe, with a population of about 80 million, its Federal Statistical Office predicts a loss of 5 million people by 2030. The under-20 age group will shrink the most, while over-65s will increase by 33 percent, straining budgets to pay for ballooning pensions out of a shrinking income tax-stream. The government has to address this by making the workplace more attractive for women -- the pay gap between men and women is among the highest in Europe at 22 percent. Instead of funneling money into child-care subsidies for stay-at-home mothers, the new German government should create more child-care centers and simplify the visa application process for potential skilled immigrants.
Behind closed doors the political parties don’t have much choice but to compromise on issues such as the minimum wage as they haggle over cabinet seats. Yet once in office they need to take the long view. The world needs this Wirtschaftswunder, Germany’s economic miracle, to continue.
(Sudha David-Wilp is a senior transatlantic fellow in the Berlin office of the German Marshall Fund of the United States.)
To contact the writer of this article: Sudha David-Wilp at SDavidwilp@gmfus.org.
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