As officials tittled over how to kick-start progress in a nation also weighed down by high interest rates and rising energy prices, the European state cut its economic estimates for this year.
“The situation is extremely challenging”, said Robert Habeck, business secretary, as he said the country’s gross domestic product may grow by only 0.2 per share year, down from a previous estimates of 1.3 per cent.
He warned that Germany’s economy had suffered from a decline in global trade, higher inflation that had suppressed buyer demand, and elevated attention rates that had put a damper on funding activity, especially in construction.
Germany needed to put reforms in position to improve the country’s profitability “in a entirely changed world atmosphere”, he said.
However, Social Democrats, Greens, and liberals, the partners in German Chancellor Olaf Scholz’s coalition, have almost diametrical views on economic policy, which creates a general misunderstanding about where Germany is headed.
According to Moritz Schularick, head of the Kiel Institute for the World Economy, “You can’t complain when companies and households feel insecure, don’t invest, and have lost their faith in the future if you have no plan for what the German economy should look like in five to ten years.”
The Social Democrats and Greens would like to reform the “debt brake”, Germany’s constitutional curb on new borrowing, which was suspended during the Covid- 19 pandemic and at the start of the Ukraine war, to allow for more public investment.
A large debt-financed investment fund, which Habeck, a Green, would also be able to use to grant tax credits and other incentives to businesses that are committed to combating climate change, has also been suggested.
However, Christian Lindner, the leader of Scholz’s coalition’s fiscally hawkish Free Democrats ( FDP ), the finance minister, rejects any changes to the debt cap and prefers to see massive tax cuts and a broad-ranging reform of corporate taxation, proposals that the SPD and Greens view with suspicion.
The “solidarity surcharge,” which is added to income tax bills to aid in the restructuring of eastern Germany and is now largely applied to businesses rather than individuals, has been a demand in recent days from the FDP. But doing so would create a €10bn- €12bn hole in the budget, necessitating massive savings elsewhere.
Clemens Fuest, the head of the Ifo Institute, a leading think-tank, claimed that the coalition parties’ economic policy disagreements were raising political insecurity to levels comparable to those in the UK during Brexit.
“You just don’t know how the government will respond to the situation because their ideas are so different”, he added. “And that just compounds the uncertainty”.
A shocking ruling from Germany’s constitutional court in November that downplayed ministers’ use of off-budget funds severely limited the government’s scope for maneuver. This left a troubling hole in the nation’s public finances.
The opposition CDU in the upper house of the German parliament has also blocked a €7 billion package of tax relief for businesses that would introduce a tax allowance for investments and incentives for research and development. It may survive, but in sharply reduced form.
Lindner said the government should address Germany’s chronic skills shortage, which he described as a “brake on growth”, reduce the bureaucratic burden on businesses, currently “at an all- time high”, he maintained, and “make the tax system more competitive”.
He disputed Habeck’s suggestion of a large investment fund in discussions with MPs, saying it needed a two-thirds majority to be established, which the CDU would not support.
“We should concentrate on other tools”, he said, citing reform of the labour market, a reduction in red tape, tax reform and moves to mobilise private capital for investment. These are supply-side measures that, according to him, would increase our competitiveness in a long-term.
Habeck acknowledged that conflict within the government had heightened political uncertainty.
“People’s trust]in the authorities ] depends on them making decisions in a predictable way, and that was clearly not always the case in the past two years”, he said, adding that the coalition had made “a lot of noise” — a reference to its frequent internal arguments over policy.
Schularick said this was an understatement. “The coalition partners simply end up blocking each other because they have such divergent ideas about what should happen. It doesn’t look like they’ll be able to show any real political leadership before the next election.”