May 04, 2018
On the madness of Germany's investment cuts
André Kühnlenz und Philipp Stachelsky have a terrific analysis on what lies behind the decision by Olaf Scholz to cut the budgetary appropriations for investment. As one would expect, the headline figures do not tell the entire story - one has to deep-dive into the numbers to make out an underlying trend. There are lots of adjustments in both directions. But, after having done the numbers, their conclusion is that Scholz is now unofficially shifting the fiscal target from Wolfgang Schäuble's "Schwarze Null" to a "Schwarze Eins" - from a fiscal surplus of a little over 0% of GDP, to more than 1%. The idea is that Scholz wants to go down in history as the Red Hawk, as they call him, the biggest deficit hawk in modern German history. We would like to add to this observation that the SPD supported the austerity policies chancellor Heinrich Brüning in the early 1930s. The SPD embraced Keynesian policies in the 1940s and until the 1970s, but has now returned to its pre-Keynesian roots.
The authors quote a figure from the Federal Statistics Office, which puts the investment gap in the public sector infrastructure at a gross €83bn, and a net €27bn. The authors criticise the German Council of Economic Advisers for questioning those official data. This is probably tactical because the council does not wish to endanger the fiscal target, still considered to be single most important policy goal in Germany. The authors say that German infrastructure is decaying, and that the post-unification investments have now essentially depreciated with no replacement. The only way to restore investment would be through a fixed re-investment quota of, say, 0.3% of GDP. According to the authors' calculations, supported by data from the European Commission, net investments are now closer to 0.1% of GDP. A mandated investment quota would be consistent with the German constitutional debt brake, or balanced-budget rule. But the authors believe that the SPD should begin a fundamental debate about the wisdom of the debt brake itself, which constitutes a serious problem for long-term economic prosperity.
Their biggest fear - and ours - is that a cyclical economic downturn or rising interest rates would lead to further cuts in investments.