EUROPE
German politicians ‘afraid’ to come clean on economic decline

BERLIN – As German politicians hit the campaign trail ahead of a 23 February national election, they are ignoring the elephant in the room – the head of the country’s leading economic institute said.

Politicians look to be “afraid of the voter,” Clemens Fuest, president of the Munich-based Ifo Institute for Economic Research, told reporters in Berlin on Thursday. “It is not the challenges that are discussed, but the handing out of gifts,” he said, referring to the country’s generous welfare state.

Europe’s largest economy has officially been in recession for two years, with the National Statistics Office confirming an economic contraction of 0.2% in 2024 on Wednesday. Germany’s weakness is major concern for the rest of Europe – especially for countries in Central and Eastern Europe that depend on German industry for jobs and investment.

Though the economy ranks among German voters’ top concerns ahead of February’s elections, the main parties have offered few meaningful solutions, Fuest said.

When presenting their manifesto for the February snap election, the Social Democrats of Chancellor Olaf Scholz called for a reduction in value-added tax (VAT) on food from 7% to 5%, while the conservative opposition CDU/CSU called for tax incentives for paid overtime.

Either measure would be little more than a sticking plaster over the structural factors driving Germany’s decline, Fuest said. While the former would be a “waste of taxpayers’ money”, the latter “won’t help the labour market.”

“The real problems are not being addressed enough,” he added, citing labour market issues, weak investment, and focusing innovation efforts on the wrong sectors.

In many cases, it “is not worth working in Germany because of the welfare state,” Fuest said, taking the example of a family in Munich with a total gross income of €3,000 per month. If the family were to increase its gross income to €5,000, for instance, through working more hours, its net income would only increase by €32.

This was not only due to higher taxes and social contributions, but also because of transfer payments, such as housing allowances, being reduced as income rises.

“You can improve things a bit by improving the interplay between social benefits, but in the end, you have to reduce social benefits if you want to increase employment,” Fuest said.

Not attractive to invest in Germany

Private investment, meanwhile, languishes 10% below the level of 2019. Companies “don’t find it attractive to invest in Germany,” Fuest said.

The CDU/CSU’s proposed remedy is to reduce the corporate tax rate to 25% – down from 30% – while the SPD and Greens call for a tax bonus specifically for investments in Germany. On this issue, the differences between the party manifestos are “smaller than it seems,” Fuest said.

Even worse, however, investments too often focus on less innovative sectors. Europe is stuck in a “middle technology trap,” Fuest said, meaning that much of its research and development (R&D) takes place in sectors like the automotive industry, machinery, and the chemical industry.

But most of these industries, which form the heart of the German industrial base, “are not growing much,” he said, “because there is little breakthrough innovation”. In high-tech sectors, meanwhile, Europe is losing out to the US.

“Take a mediocre start-up from the USA,” he said, such as software developer Palantir. “The market value of Palantir is higher than the market value of the entire German automotive industry,” he said. “That shows you the dimension in relation to Germany.”

[Edited by Owen Morgan/Matthew Karnitschnig]

Source: Euractiv.com

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