The German government slashed its economic forecast for this year as ministers squabbled over how to kick-start growth in a country still weighed down by high interest rates and increased energy prices.
“The situation is extremely challenging,” said Robert Habeck, economy minister, as he said the country’s gross domestic product would expand by just 0.2 per cent year, down from a previous forecast of 1.3 per cent.
He warned that Germany’s economy had suffered from a downturn in global trade, high inflation that had suppressed consumer demand, and elevated interest rates that had put a damper on investment activity, especially in construction.
Germany needed to put reforms in place to strengthen the country’s competitiveness “in a completely changed global environment”, he said.
But the partners in German Chancellor Olaf Scholz’s coalition — Social Democrats, Greens and liberals — have views on economic policy that are almost diametrically opposed, leading to widespread confusion as to where Germany is heading.
“If you have no plan for what the German economy should look like in 5-10 years, you can’t complain when companies and households feel insecure and don’t invest and have lost their faith in the future,” said Moritz Schularick, head of the Kiel Institute for the World Economy.
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.
Habeck, a Green, has also proposed a big debt-financed investment fund that could be used to provide tax credits and other incentives to companies investing in fighting climate change.
But Christian Lindner, finance minister and leader of the smallest party in Scholz’s coalition, the fiscally hawkish Free Democrats (FDP), rejects any changes to the debt brake and instead wants to see big tax cuts and a wide-ranging reform of corporate taxation — proposals that are viewed sceptically by the SPD and Greens.
In recent days, the FDP has demanded the abolition of the “solidarity surcharge”, which is added to income tax bills to help finance the restructuring of eastern Germany and, after a series of cuts, now applies largely to companies rather than individuals. But doing so would create a €10bn-€12bn hole in the budget, necessitating massive savings elsewhere.
Clemens Fuest, head of the Ifo Institute, a leading think-tank, said the coalition parties’ disagreements over economic policy were increasing political insecurity to levels comparable to 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.”
The government’s room for manoeuvre was sharply curtailed by a bombshell ruling from Germany’s constitutional court in November that struck down ministers’ use of off-budget funds, creating a massive hole in the country’s public finances.
In addition, a €7bn package of tax relief for companies, which would introduce a tax allowance for investments and incentives for research and development, has been blocked by the opposition CDU in the upper house of the German parliament. 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”.
But speaking to MPs he rejected Habeck’s idea of a big investment fund, saying it would require a two-thirds majority in the Bundestag to establish — an impossibility given that the CDU would vote against.
“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 would improve our competitiveness in a sustainable way,” he said.
Habeck acknowledged that squabbling in the government had contributed to 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 have such different ideas about what should happen that they just end up blocking each other,” he said. “It doesn’t look like they’ll be able to show any real political leadership before the next election.”
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