After Fiscal Prudence, A Reckoning

In Germany, trains no longer run on time. This is a big issue for a country that derives its national identity from punctuality, order, and ‘Gründlichkeit’ – a thoroughness usually applied in a ruthless fashion. The neighbouring Swiss now refuse to grant late-running German trains access to their network for fear of upsetting passengers who expect nothing less than clockwork precision from the railways.

Underfunded and overstretched, the fate of Deutsche Bundesbahn (DB) epitomises the decay of Germany’s physical infrastructure and, in the eyes of many, the loss of trust in the state’s ability to manage the affairs of the nation. In fact, 69 percent of Germans think the present government lacks the ability to properly run their country.

In order to restore the predictability of its timetable, DB needs about €45 billion to update and upgrade the 33,200-kilometer-long national rail network. After three days of intense deliberations, the Bundestag (the federal parliament) in May agreed to partially redirect the proceeds of a new toll for heavy goods vehicles plying German roads and highways towards the modernisation of the long-neglected rail infrastructure. However, this will provide only half the cash needed.

Foreign affairs minister Annalena Baerbock also met the downside of frugality when, in mid-August, the government aeroplane she was travelling on left her stranded in Abu Dhabi during a refuelling stop. Shortly after take-off, the wing flaps of the Airbus 340-300 seconded for the diplomatic mission got stuck, forcing the pilot to dump 80 tons of fuel over the Persian Gulf before returning to Abu Dhabi.

Ms Baerbock had to cancel her official visit to Australia, New Zealand, and Fiji and return home on a commercial flight.

A Lemon

The same aircraft, a lemon of 1990s vintage, also made an emergency lading during a flight to Buenos Aires, Argentina, where Chancellor Angela Merkel was to attend a G20 summit. On that occasion, in 2018, the aeroplane’s avionics had suddenly quit. Two years before that embarrassing incident, it abandoned then-defence minister Ursula von der Leyen, the current president of the European Commission, in Mali after a computer glitch.

The German government has now decommissioned the accident-prone aircraft and ordered three Airbus A350-900s for their replacement in an overhaul of the Luftwaffe’s ‘White Fleet’.

Whilst such incidents are merely anecdotal, they point to years of neglect. In 2009, the Bundestag curtailed federal (over)spending by imposing a hard ceiling for budget deficits and national debt. The ‘Schuldenbremse’ (debt brake) limits the debt-to-GDP ratio to 60 percent and the budget deficit to a maximum of 0.35 percent. Though the twin locks ensured fiscal stability and sustainability, it has also forced the government to slash outlays on the upkeep of the country’s infrastructure.

Since 2006, Germany has tumbled from third to eleventh place in the Global Competitiveness Report, published annually by the World Economic Forum (WEF), for the overall quality of its transport infrastructure. A good example is the bridge over the Rhine that connects Leverkusen – founded in 1930 by chemical giant Bayer to house its workers and now a city of 160,000 – to Cologne on the opposite bank of the river. Since 2012, the 1,061-metre-long Rheinbrücke Leverkusen has been closed to trucks after large cracks appeared in its support structure.

A Bridge Too Old

Despite emergency work, the cable-stayed bridge opened in 1965, proved beyond repair. A new ten-lane bridge is under construction and scheduled to open next year. Until then, the crawl of heavy goods vehicles towards the severely congested bridges further upstream remains a daily ritual for some 20,000 truck drivers.

A national inspection report released last year concluded that more than 4,000 Autobahn bridges need replacement before 2030 of which 1,001 are so deteriorated that weight and speed restrictions have been imposed. The annual €1 billion earmarked by the federal government for bridge maintenance and replacement is far from sufficient considering the sheer scale of the work required.

Moreover, infrastructure spending runs up against NIMBY (not-in-my-backyard) feelings and time-consuming bureaucratic procedures including many rounds of consultation with stakeholders. Even the International Monetary Fund (IMF) got in on the act, urging Germany to remove administrative and regulatory constraints to make way for infrastructure improvements.

Germany’s much-touted ‘Energiewende’ – the shift to renewable energy – is also suffering delays because Autobahn GmbH, the state-owned company managing the famed highways, struggles with a backlog of over 20,000 applications for oversized cargo transports.

According to the German Wind Energy Association (BWE), over 150 permits are needed to move big wind turbine parts such as rotor blades and tower elements over public roadways. The pace of wind-farm development must triple if the country is to meet its own sustainability goal: 80 percent of energy derived from renewables by 2030. However, from planning to inauguration, the commissioning of a wind farm currently takes about ten years.

Venting his frustration in an open letter, BWE-head Wolfram Axthelm likened German bureaucrats to the inhabitants of ‘The Place That Sends You Mad’ featured in the 1976 cartoon film The Twelve Tasks of Asterix and in which the undersized Gaul had to secure a government permit.

The insistence of Germany’s upstanding burghers on fiscal prudence, and their aversion to grand infrastructure projects, only grew stronger in the wake of the Berlin Brandenburg Airport debacle. Designed and built to replace three smaller and older airports in the Berlin metropolitan area (Schönefeld, Tempelhof, and Tegel), the Flughaven Berlin Brandenburg was delivered fourteen years late and four times over budget. Including the planning phase, completion of the facility took almost thirty years and soon turned into an opera buffa.

Sputtering Model

This year, Germany is forecast to be the only G7 member with a shrinking economy. Its export-led model suffers from exposure to China where a crisis of major proportions is brewing. Meanwhile, German industry is battling high energy prices after its access to cheap and plentiful Siberian natural gas was cut off.

The government has, however, ruled out additional subsidies and overruled economy minister Robert Habeck who had proposed a flat rate of €0.06/kWh for big industrial users until 2030 in a bid to preserve the competitiveness of the country. The spot market price for net-day electricity currently hovers around the €0.09/kWh mark. Minister Habeck’s plan carried an expected cost of about €30 billion. Instead, the cabinet of Chancellor Scholz approved a €7 billion corporate tax relief package to shore up the economy.

Chancellor Scholz presides over a fractious three-party coalition of social-democrats, greens, and liberals. Ideological divisions have largely paralysed his government. This became abundantly (and painfully) clear with Germany requiring almost a year to overcome its reluctance in offering support to Ukraine – apart from the now famous 5,000 helmets initially dispatched. In fairness, after Chancellor Scholz did make up his mind, German support has been unwavering and strong with €5.5 billion in annual military aid pledged to 2027 – and an estimated €30 billion already disbursed in military, economic, and humanitarian support.

Only weeks after Russia started its invasion, Chancellor Scholz promised to free up €100 billion to re-equip the Bundeswehr so starved of funds that its soldiers were at times issued broomsticks instead of rifles for training exercises, shouting ‘pang pang’ whilst assaulting each other’s positions. In a sanguine mood, the Bundestag even agreed to lift the debt brake for the extra defence outlays.

All Cash, No Carry

The problem in Germany is not cash but a governance model that has become stuck. Lofty national goals such as the commitment to attain a net-zero society by 2045 clash with both geopolitical and demographic realities. Over the next decade, it is estimated that more than two million baby boomers will retire from the workforce. The average age of German blue-collar workers stand at 45 versus 39 for the US.

Though recent changes made immigration laws a bit more welcoming to foreign (non-EU) workers, CEOs are not convinced that it is enough. In fact, German bosses are quite depressed. Business confidence reached a new low in May after machinery manufacturers reported a twenty percent drop in orders (year-on-year). Higher energy costs and record wage increases are putting a squeeze on corporate profits although a rebound in consumer spending may bring solace.

Last month, a spate of good news failed to lift spirits. German factory orders defied expectations by increasing seven percent from May to June – the biggest monthly jump in three years. However, economists dismissed the news as an anomaly attributed to a momentary surge in orders at Airbus which operates a large factory in Hamburg.

A poll conducted earlier this year by the Federation of German Industry (BDI) found that fully one third of the members queried are ‘unhappy’ with the direction Germany has taken and mull expanding operations outside the country, discarding domestic investments. According to ZEW Mannheim, an economic research institute, the country now ranks 18^th out of 21 industrialised nations for the accommodation of family-owned companies. This is considered a direct threat to the vast universe of ‘Mittelstand’ firms that have long formed the backbone of German industry – and prosperity.

These small- and medium-sized businesses are also a crucial component of the country’s decentralised banking system comprised of small regional banks – mostly cooperatives and savings banks – that usually extend fixed-rate loans and have been back-footed by the rise in interest rates. These banks prefer to loan to their well-known and long-standing customers – Mittelstand enterprises – but are less well equipped for riskier undertakings such as the financing of start-ups.

Pulling Up Sticks

Frustration with government torpor and bureaucratic indifference drove BASF, the world’s largest chemical producer, to China where it is building a €10 billion petrochemical complex. However, the country also enjoyed a few victories of its own such as when Tesla, the EV car manufacturer, chose Berlin for its European mega factory, set to become the largest in Germany – and that’s saying something. Intel and TSMC, two chip manufacturers, were also enticed to set up shop, lured by an estimated €15 billion in subsidies and tax breaks.

Chancellor Scholz has the unenviable job to keep his coalition partners happy whilst lifting the nation out of its gloom. The Greens demand priority for the environment and insist that the country mothball its three remaining nuclear power plants in the midst of an energy crisis. The facilities were duly shuttered last April. Meanwhile, the Free Democrats (liberals) are worried about possible deindustrialisation, whilst Chancellor Scholz’s own Social Democratic Party remains wed to fiscal rectitude.

The ‘German Speed’ in business and economic matters promised by the coalition upon the installation of the government in 2021 now seems to have been reduced to a crawl.

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© 2016 Photo by Christian A Schröder