Germany’s investment gap widens to EUR 410bn, 12% of GDP, threatening to harm competitiveness
Strict fiscal discipline since the financial crisis in 2008 has helped to keep Germany (AAA/Stable)'s debt level on a downward trajectory. However, the pandemic has highlighted Germany’s investment gap in several key areas caused by the persistent public sector under-investment in recent decades. Scope estimates the resulting investment gap at around EUR 410bn, or 12% of Germany’s 2019 GDP.
“If targeted appropriately, public sector investment can be highly effective at boosting private sector investment,” says Eiko Sievert, director at Scope. “This can help maintain Germany’s competitiveness through improvements in productivity to help counteract the decline in the working-age population.”
Three principal areas where Germany risks lagging behind other highly rated economies are education, digitalisation, and the transition to a carbon neutral economy. The size of the investment gap is significant, but it does not represent an unbridgeable amount even if it will be challenging to meet through budget re-allocations given rising spending pressures in view of the country’s demographic profile.
All Germany’s major political parties have recognised the importance of increasing public investments in their manifestos ahead of the federal elections in September. While there appears to be some agreement on many of the main investment priorities, the scale and funding of the investment initiatives differ significantly between parties. The Greens have the most ambitious investment plan: they want to spend an additional EUR 50bn a year for the next 10 years.
“Proposals to increase investments can support Germany’s growth potential. However, in practice, politically motivated spending pledges only make sense if there are also appropriate investment opportunities where public investments can enhance long-term productivity,” says Sievert.
Germany’s debt brake has helped to place general government debt ratios on a downward trajectory since the financial crisis. Federal and state debt brake laws, introduced in 2009 for the Bund and binding for state governments since 2020, limit structural deficits to 0.35% of GDP a year, and to 0% for state governments. The Bund activated the general escape clause of its debt brake last year in response to the pandemic, which is expected to apply again from 2023. The next German government will therefore decide on the timing and specificities of the reinstatement of Germany’s debt brake rule, which will also have important implications at the European level.
“While increased investments are needed, Germany’s debt brake will ensure long-term fiscal discipline. Different options of funding such an increase in public investment, which need to remain focused on raising the country’s growth potential, will need to be explored further,” says Julian Zimmermann, analyst at Scope.