analysis
Zero percent economic growth in the second quarter, plus 6.2 percent inflation in June and a decline in manufacturing: the important economic data that describe the economic situation in Germany are pointing downwards. And while economic growth is predicted for other industrialized nations in the current year, the International Monetary Fund (IMF) assumes that the German economy will shrink in 2023.
This has prompted calls for a government stimulus package to boost the economy. The chairmen of the CDU and CSU, Friedrich Merz and Markus Söder, for example, recently spoke out in favor of this, together with Hesse’s Prime Minister Boris Rhein.
Economists, however, don’t think that’s a good idea. If you look at the current situation, that would be exactly the wrong way, says Benjamin Born, Associate Professor of Macroeconomics at the Frankfurt School of Finance & Management, in an interview with tagesschau.de: “There is currently no argument that speaks for a classic economic stimulus package to strengthen the German economy.”
If you have money, you can spend it
According to Born, from an economic point of view, a classic economic stimulus package includes measures “that serve to stimulate the economy again in the short term”. Such a measure was the reduction in VAT during the pandemic – or the scrapping premium, which was launched during the global financial and economic crisis in 2009 and promoted the purchase of a new car. “Such measures are primarily decided with the aim of increasing demand,” explains Born. And for a limited time, i.e. with a foreseeable end date.
The focus of such stimulus packages is usually on private households, they are financially supported – for example through tax cuts or direct grants. The idea here: If you have more money at your disposal, you also spend it. This consumer spending is important for the economy; almost half of all spending on goods and services comes from private households.
According to Born, on the other hand, subsidies for the purchase of a heat pump or an electric car, which consumers can currently apply for, are not economic aid in the classic sense. With these subsidies, the reasons why they were issued were not to support the economy: “Although such subsidies inevitably always have an economic effect. But they were primarily intended to restructure the economy.” Whether a state subsidy is to be classified as economic aid or not also depends on the purpose.
Basic problems of the location
In addition to supporting private households, economic stimulus packages often contain measures intended to strengthen companies. An example of this is the state-subsidized industrial electricity price demanded by business associations, which Federal Minister of Economics Robert Habeck also supports. The industrial electricity price is intended to reduce the costs per kilowatt hour of electricity for certain companies that can demonstrate a particularly high level of energy and competition intensity for 80 percent of their electricity consumption to six cents by 2030.
However, economists like Benjamin Born take a critical view of this: “Such a subsidy would reduce the costs of companies, but would not solve the structural problem.” Because the reasons for the current weakness of the German economy are manifold. In addition to a weakening global economy, there are more fundamental problems that are burdening Germany as a business location. “We need a package of measures that will restructure the German economy in the medium and long term.”
Subsidies can fuel inflation
According to Born, this includes a rapid expansion of renewable energies, a reduction in bureaucracy and an expansion of the infrastructure. Marcel Fratzscher, President of the German Institute for Economic Research (DIW), made a similar statement. In the newspapers of the Funke media group, he spoke out against an economic stimulus program with subsidies and tax cuts and instead called for “a long-term transformation program with an investment offensive, broad-based debureaucratization and a strengthening of the social systems”.
Subsidies to companies also risk fueling further inflation, as Born did tagesschau.de said “With an economic stimulus package, you want to increase demand. If you can do that, prices will also go up, which will drive up inflation.” But in doing so, the federal government would achieve exactly the opposite of what the European Central Bank (ECB) is currently trying to achieve with its interest rate hike.
The ECB has raised interest rates several times to bring inflation back towards two percent. But it is still a long way from that – most recently inflation in Germany was 6.2 percent. If the federal government were to pump money into the economy with a package of measures, it would be working against the central bank. Economic expert Veronika Grimm also spoke out against a state-financed economic stimulus program. That would currently mean “that the ECB is making life unnecessarily difficult when fighting inflation. We shouldn’t do that,” Grimm told the television station Phoenix.
Skepticism also with chip promotion
Above all, economists advocate making Germany more attractive as a business location in the long term – so that companies don’t invest in this country only or primarily because of state subsidies. Hubertus Bardt from the Institute of German Economics in the im Deutschlandfunk. These investments are only due to the high subsidies.
The economic expert Born sees it similarly: “Companies can currently play the countries off against each other by announcing plants where they receive the highest subsidies.” Instead of giving the money to individual companies, the subsidies should flow into research and development and “better financial resources for the universities,” said Reint E. Gropp, President of the Leibniz Institute for Economic Research in Halle, in an interview tagesschau24. In this way, Germany’s innovative power can be strengthened in the long term.
