Opinion: Scholz faces tough road to reinvent German economy

Beyond COVID, the government of Chancellor Olaf Scholz must reinvent the German economy.

Labor market and social protection reforms defended by Gerhard Schroder in 2003 triggered the market forces that made it possible Angela Merkel’s growth and prosperity. One is based on superior industrial engineering, excellence in manufacturing, and exports of automobiles, industrial machinery, robots, and other engineering products and services to China and America.

Now climate change, electrification and China’s rise to power are calling all that into question.

Gasoline cars

The south is deep dependent on automotive internal combustion engine. Daimler DAI,
-1.51%,
Volkswagen wish,
-1.43%
and BMW BMW,
-0.92%
have the resources to make big bets to catch Tesla TSLA,
-0.08%.
They carry the weight that electric vehicle startups lack – large networks of assembly factories to respond Scholz’s goal of putting 15 million electric vehicles on the road by 2030 and similar ambitions elsewhere in Europe and America.

However, the pyramid of small suppliers who manufacture pistons, exhaust pipes and other components for internal combustion engines is not so well placed. Electric vehicles contain much less moving parts, the suppliers of these companies often lack expertise in software and microelectronics suitable for electric vehicles, batteries account for around 40% of the cost of electric vehicles, and China controls the lion’s share of cell manufacturing.

China’s Contemporary Amperex Technology, Ltd. 300750,
-1.62%
built a huge German factory to supply European car manufacturers. Bosch, the world’s largest automotive supplier, will not build batteries for electric vehicles but will instead cooperate with CATL. Therefore, large royalties and profits that fund the development of new products will go to a Chinese company and not a German one.

German companies that dig tunnels and help build mass transit systems around the world are losing market share. Today, Chinese companies are digging tunnels for the Stockholm metro and supplying wagons to Portugal. Also buses in Norway, wind turbines in France and electricity grids in Poland.

Budget challenges

With all this, creating enough new, well-paying jobs will be much more difficult for Scholz than for Merkel, yet it is increase the minimum wage from € 9.60 to € 12. At the very least, it will expand the market for industrial robots and artificial intelligence software.

Scholz’s coalition government plans to increase public spending on R&D—the best way to leverage innovation and private entrepreneurs—But the new government aims to get Germany out of coal by 2030 and build 400,000 new houses per year to address shortages and affordability.

After the Fukushima nuclear accident in 2011, Germany abruptly decided to get out of nuclear and the country is already using too much Russian gas—impose national security vulnerabilities and restrict foreign policy.

Scholz’s environmental goals require massive investments in wind and solar power. Here, Scholz’s problems are too similar to those of an American president.

High costs

Investments in green energy may create more externalities for the competitiveness of domestic industries, but Germany already has the the highest electricity prices in Europe. Scholz can’t easily push its utilities to borrow, modernize, and pass costs without industry screaming.

Regulatory bureaucracy costs businesses around € 55 billion annually. This represents around 1.6% of GDP and over Germany spends on national defense.

Michael Mann, an entrepreneur from West Germany, built wind turbines three decades ago about 30 miles from the larger city—Government approval took three months at a cost of € 5,000 at current prices. Most recently, he asked for approval to replace those with new turbines that would generate 40 times the energy – the approval took seven years and nearly € 300,000.

Germany does not have an adequate grid to transfer wind energy from the industrial north to the south, but the construction of power lines were blocked by legal challenges from protesters not in my backyard.

Scholz and his coalition partners want to cut regulatory approval times, and Greens co-leader Robert Habeck has been appointed Minister of the Economy, Climate and Energy. He cut his teeth campaigning for cycle paths, writing children’s books and as Environment Minister for Schleswig-Holstein. It will be interesting to see him try to dismantle the quagmire of obstacles and confront bureaucracies and legal barriers.

Germany’s national debt is lower than that of other major European states, so it can afford to borrow to invest in a better future.

However, the necessary support of the conservative Liberal Democratic Party for the Scholz coalition was obtained by ceding control of the Ministry of Finance. The FDP has succeeded in securing a pledge of continued fiscal discipline – no excessive borrowing and no new taxes, except those aimed at reducing CO2 emissions.

Scholz’s platform is perfectly balanced to accomplish a tripartite coalition, but political and fiscal constraints may require a magician more than a statesman to accomplish the economic transformation that Germany and Europe need.

Peter Morici is an economist and professor emeritus of commerce at the University of Maryland, and a national columnist.

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