The urgency of greater public investment

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“WI WORK to the limit, ”explains Apostolos Tsalastras, treasurer of Oberhausen, a town in the Ruhr valley. Like many places in this region, Oberhausen sits on a vast pile of debt, mostly accumulated when mines closed and steel jobs disappeared. The unemployment rate stands at 10.6%, almost double the national rate. Last year, Olaf Scholz, the SPD Minister of Finance (and his candidate chancellor), sought to relieve municipalities like Oberhausen of their old obligations, but was thwarted by his CDU coalition partner. “It’s time to make a fresh start,” argues Mr. Tsalastras. His city is locked in a vicious circle of declining investment, declining tax revenue and shrinking population.

A federal bailout helped most municipalities avoid disaster last year. But by 2023, many will face a budget crisis, says Jens Südekum, professor of economics at the University of Düsseldorf. Trade taxes which are their main independent source of income are volatile and covid-19 creates new demands. National laws limit their ability to cut current spending, one of Mr. Tsalastras’ scarecrows. This puts capital investment in the crosshairs.

The country’s 11,000 or so municipalities are responsible for a large part of public investment. The KFW, a state-backed development bank, puts the municipal investment backlog at 149 billion euros ($ 172 billion), a figure that has risen even as tax revenue has poured in. School buildings represent almost a third of the deficit; roads just under a quarter. Endlessly delayed mega-projects like Berlin Airport may have made the country a laughing stock, but it’s the rusty bridges, shaky phone signals and decrepit school toilets that form the basis of everyday conversation.

Ask anyone in local government what the problem is, and the answer is always people. A report by the Friedrich Ebert Foundation, which is linked to the SPD, notes a huge decrease in municipal staff over 30 years. Immigration has helped, but a quarter of the positions remain vacant, says Henrik Scheller, one of the authors. Planning and engineering are particularly affected, and local governments find it difficult to compete with private companies. Two-thirds of municipalities expect it to be even more difficult to find planners. Surveys show that construction companies are working at full capacity. With such supply constraints, spending more without proper planning may simply fuel inflation.

Bureaucracy and Nimbyism play a role. Businesses are grappling with a patchwork of planning and construction rules. Opponents are delaying public infrastructure projects with endless litigation. The number of projects blocked by citizens’ initiatives has doubled since 2000. This poses a problem for roads, railways and bridges. But it is a “real obstacle” to climate transformation, says Scheller. The recently revised climate law mandates a 65% reduction in carbon emissions from 1990 levels by 2030, and their net elimination 15 years later. The share of renewables in electricity production must also reach 65%. And global demand for electricity for batteries to power electric cars, for heat pumps in buildings and for “green” hydrogen to help decarbonize industry could increase by a quarter.

Agora Energiewende, a think tank, estimates that Germany will need to install 5GW of onshore wind power each year until 2030, and 7GW a year after that. In 2020, he only managed 1.4GW. A visit to Schleswig-Holstein shows how difficult it will be. By the early 1990s, wind power in this northern state began to revitalize what had been some of the poorest communities in western Germany. Today, turbines dot the landscape. Schleswig-Holstein a 8.5GW of installed wind capacity and produces 160% of the electricity it consumes from renewable energies. It can export the surplus via new power lines, including to Scandinavia.

In December, the state government released new rules for building wind farms, after a five-year moratorium imposed amid mounting local tensions. The new rules reserve 2% of the land for wind power, but that may not be enough to meet wind energy targets. Add in the long waiting times for permits and other restrictions and those goals seem unattainable, says Marcus Hrach of the Kiel branch of the German Wind Energy Association. Industry insiders despair of any hurdles they face. “Not many people here are against wind power, but those with strong voices,” says Anton Rahlf, a frustrated wind farm owner on Fehmarn, an island in Schleswig-Holstein.

Other states are even more restrictive. The rules to protect endangered species vary from state to state. A few years ago, litigation, regulation and complex tendering slowed the construction of wind farms at a breakneck pace, although 2021 offered faltering signs of a revival. The mismatch between the federal government’s ambitions and the reality of local regulation, according to Mr. Hrach, will prevent Germany from meeting its commitments under the Paris climate agreement.

Another challenge, says Alexander Reitzenstein of think tank Das Progressive Zentrum, is building the power lines needed to transport electricity from the windy north to industrial states in the south like Baden-Württemberg and Bavaria. Local communities can get a financial stake in wind farms, but this is more difficult for power lines that simply carry electricity. And in the German federal system, states cannot be controlled by the Berlin government. “Many politicians who agree on the climate in Berlin act differently when a line arrives at their local community,” said Tim Meyerjürgens, chief operating officer of TenneT, an electricity transmission operator, adding that the “salami tactics” of regular legislative changes undermine confidence.

There is a near consensus that the next government must do more to meet the vast needs for public investment. The debate is about how. For some, tackling the country’s austerity bias is a priority. The debt brake now enshrined in the constitution limits the possibilities of deficit spending. Critics of German austerity are legion. The European Central Bank has long urged countries with “fiscal space” to exploit it. But all of these suggestions have tended to run up against an austere wall of fiscal orthodoxy.

Excess austerity

Since 2013, the annual public investment budget has increased from around 93 billion euros to 137 billion euros. This, argues Jens Weidmann, head of the Bundesbank, suggests that the debt brake is “a bit of a straw man”. Better to tackle bureaucracy, capacity constraints and unstable municipal revenues by changing the federal structure. But Sebastian Dullien at IMK, a research group linked to a trade union in Düsseldorf, retorts that a guaranteed, long-term income stream of the same type as the debt brake could give city authorities, construction companies and engineers the certainty of planning they need to reduce bottlenecks and increase staff.

Last year, the government invoked a debt brake loophole to fund business support, holidays and other schemes during the pandemic, recording a 4.2% deficit from GDP. It will be bigger this year. The CDU / CSU wants to re-impose the debt brake once circumstances permit, probably in 2023. Mr. Scholz too, who presents himself as a safe pair of hands (much in his SPD wants a broader approach). The most interesting proposals come from the Greens, who want to add a “golden rule” allowing a ten-year debt-financed investment program of 500 billion euros, focused on climate and digital infrastructure.

Yet the two-thirds parliamentary majority required to change the constitution is a formidable obstacle. A more likely prospect is the creation of public investment companies, mainly ad hoc off-budget vehicles (SPVs), devoted to capital expenditure, for example, the provision of broadband services in schools or the modernization of railways. SPVIt is legally complicated and democratically uncertain, worries Mr. Südekum. They would incur borrowing costs at a time when investors are paying to lend to the federal government. But by not increasing the stock of public debt, they offer a way around the debt brake. The CDU / CSU the chancellor-candidate, Armin Laschet, flirted with what he calls Deutschlandfonds.

More radical ideas are looming, including a proposal from Dezernat Zukunft, a think tank led by Philippa Sigl-Glöckner, a former finance ministry official who calls SPVs “a declaration of defeat to stupid fiscal rules”. Dezernat Zukunft wants to shift the tax debate from arbitrary debt limits to the goal of full employment. The low overall unemployment rate, the group notes, masks the low participation rates of women and part-time workers looking for more hours.

Although the debt brake limits deficits to 0.35% of the GDP, the calculations are based on a complex estimate of “potential” output. In the short term, Dezernat Zukunft estimates that adjustments that require legal but unconstitutional tampering could allow more deficit spending worth € 50-60 billion per year. In the long term, Mrs Sigl-Glöckner hopes to remove the debt brake permanently. The fact that such ideas are now being taken seriously suggests that the tax debate has finally started to change.

Full content of this special report
Germany: after Merkel
The public sector: the urgent need for greater public investment*
Automotive industry: a difficult road awaits us
The demographic challenge: parts of the country are in desperate need of more people
The European dilemma: Angela Merkel will be sadly missed by the European Union
Merkelkinder: attitudes of young people
Foreign and security policy: the world needs a more active Germany
The future: Germany needs a reforming government

This article first appeared in the Special Feature section of the print edition under the title “Un trou d’Infrastructure”


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