Not all of the consequences of the current budget crisis are yet clear. One thing is certain: some government investments are likely to be put on hold. Observers fear fatal signals for the economy.
According to the OECD, the industrialized nations club, the budget crisis in Germany threatens to put a strain on the European economy. “If there is less investment and spending in Germany in the next few years because there is less money available, then that will inevitably have an impact on the EU economy,” said the head of the Germany desk of the Organization for Economic Cooperation and Development ( OECD), Robert Grundke, the Reuters news agency. Europe’s largest economy will then import fewer intermediate goods and fewer final goods and services from the EU.
Last week, the Federal Constitutional Court decided, with reference to the debt brake anchored in the Basic Law, that the 60 billion euros originally approved as a Corona loan in the 2021 budget may not be subsequently reallocated for investments in climate protection and the modernization of the economy. The OECD is in favor of reforming the debt brake.
“The current budget crisis can also be a great opportunity to tackle structural reforms that have been waiting to be addressed for a long time,” said Grundke. Germany is facing major challenges – from the aging of society to digitalization to restructuring the economy to make it more climate-friendly.
Investments as economic engine
Government investments are seen as economic drivers. According to a 2020 study by the German Institute for Economic Research, public investments have a direct effect on private investments. Every euro of public investment leads to an average of 1.50 euros of private investment.
The share of government investment in the overall economy is comparatively small. Last year, twelve percent of all construction activity was in public hands. When it comes to equipment investments, the state share was even lower at nine percent. Investment in equipment refers to the purchase of, among other things, machines, devices or vehicles.
If you take the share of a country’s total investments as a basis, then Germany’s public investments are well below the OECD average and are only in the middle of the field across the EU. This is not enough for the OECD. It is said that even before the pandemic, Germany had invested too little in its transport and digital infrastructure. In addition to structural reforms such as faster approval procedures, “high public investments and fiscal incentives for private investments are also necessary, which must be financed.”
Concerns for companies
In Germany, companies are extremely unsettled. The steel industry is already warning of the failure of billion-dollar projects to convert to “green” production. Politicians must now quickly find answers as to how the transformation of the industry can be reliably financed, demands the President of the Steel Association, Bernhard Osburg: “Time is of the essence.” The industry must now make decisions about investments – either for a green transformation or not.
Even though many public projects are currently under discussion, public investments are accepted by the population. According to a survey by the trade union-affiliated Hans Böckler Foundation from August 2022, a good two thirds of all Germans are calling for higher government investments. It is said that satisfaction is lowest in the areas of education, health and environmental protection.
Economically speaking, the traffic lights are currently “red”. “The signs of a recession in the euro area are increasing,” warns Christoph Weil, an economist at Commerzbank. Threatened cuts in public investments did not make the situation any better.