German Protests: The country needs a new growth agenda and its people need hope 

German Chancellor Olaf Scholz.

Germany’s leaders are suffering the worst crisis of confidence in decades. The right response is both obvious and daunting to achieve: Give people a future to believe in.

In recent weeks, a wave of farmer protests, nominally over diesel subsidies, has turned into an outlet for widespread frustration with the three-party coalition led by Chancellor Olaf Scholz. Train-driver strikes snarled transportation nationwide. According to one recent poll, more than four-fifths of Germans are dissatisfied with their government, and Scholz’s approval rating is the lowest for any chancellor since the survey’s inception in 1997. Meanwhile, the far-right Alternative for Germany party is polling
at about 20 percent for next year’s federal election, up from 15 percent a year ago.

The sources of public frustration are no mystery. Once the envy of Europe, Germany is falling behind. The end of cheap Russian energy and the rise of Chinese competition have slammed a manufacturing sector that used to drive growth. The country’s storied infrastructure is faltering: Even before the strikes, less than 60 percent of Deutsche Bahn long-distance trains were arriving on time. The economy contracted 0.3 percent in 2023 and is expected to be among Europe’s slowest-growing for years to come.

The solution, advocated by local and international economic institutions
alike: Pursue a new growth agenda. To succeed, this will need to be comprehensive and multifaceted. Correcting the country’s overreliance on manufacturing demands greater dynamism in other parts of the economy. This requires, among other things, deregulation of professional services and other activities, faster adoption of digital technologies, and a more flexible capital market to direct investment to new and productive uses.

In advancing this agenda, growth-enhancing public investment will be crucial. Over the past two decades, investment in infrastructure and other public capital has fallen far short of what’s needed. The government has made no cumulative net contribution to its capital stock, leaving it about €250 billion short of the already meagre European Union average and setting back everything from road maintenance to education.

Germany has long prioritised fiscal restraint: At about 66 percent of gross domestic product, its sovereign debt burden is among the lowest in the EU. This provides an opportunity many other governments lack — the fiscal space for well-chosen investments. In combination with judicious deregulation and other reforms, these would increase the economy’s productive potential and conceivably even strengthen the government’s
fiscal position. By one estimate, a €460 billion program, spread over 10 years and financed with debt, would increase potential output enough to leave the debt-to-GDP ratio unaffected — or actually reduce it.

So why not act? Unfortunately, any large-scale public spending plan would require adjusting Germany’s constitutional debt brake, which places a strict limit on net new borrowing with only emergency exceptions and no consideration for fiscally positive investments. When Scholz tried to circumvent the rule using extrabudgetary funds, a legal challenge from the center-right Christian Democratic Union scuttled the effort, precipitating an unplanned round of spending cuts late last year.

Reforming the debt brake to allow additional public investment is essential — but won’t be easy. It would entail winning over Finance Minister Christian Lindner (a member of the libertarian Free Democrats), gaining support in parliament from the opposition CDU, and convincing a frugally minded German populace that genuine investment can be fiscally responsible. A looming federal election in 2025 doesn’t help.

With unrest growing and the far right rising, mainstream politicians must gain a new sense of urgency and unite behind something more inspiring than stagnation. If they fail, the consequences could be severe — for Germany, Europe and the world

Bloomberg Editors: Views do not represent the stand of this publication.

Credit: Bloomberg