September 28, 2017
An Economic Roadmap for Germany
By Daniel Andrich
It is not yet clear what the government will look like. Martin Schulz, chairman of the Social Democrats (SPD), rejected a continuation of the coalition partnership with German Chancellor Angela Merkel’s CDU. Conversely, the CDU does not completely exclude continuing the “grand coalition” with the SPD. Over the next few weeks, Merkel’s conservative party will also hold coalition negotiations with the liberal Free Democratic Party (FDP) and the Green Party. Economic and business issues figure prominently amongst the important topics that the politicians and experts of the parties will discuss.
Whatever the outcome of the coalition negotiations, the Federation of German Industries and the Association of German Chambers of Industry and Commerce have clear expectations of the newly elected parliament. For the German business community, it is important that the negotiations are focused on forming a viable new government that can tackle the economic challenges ahead.
Digitalization was a crucial topic in the economic platforms of most parties. Although Germany’s economy is growing steadily today, future economic growth will come from managing the digital transformation of business and society. Germany has some catching up to do, especially regarding digital infrastructure. Particularly in the countryside, villages lack access to high-speed, broadband Internet. Less than one-third of the companies in German villages enjoy 50 megabit per second connections, which is why broadband expansion is indispensable if Germany wants to make “Economy 4.0” happen. Now, Germany must demonstrate its willingness to follow through on its broadband expansion plans.
Furthermore, Germany should take an active role in shaping the European Union’s digital policy. To establish the EU as a leading player in the digital world, we need a digital single market. With more than 500 million inhabitants, Europe has a market size competitive with the other big international players. Therefore, a consistent, EU-wide legal framework instead of fragmented solo efforts on the national level is important for regulatory certainty.
Innovation is the driving force to remain competitive in the global market. Germany must increase expenditures in research and development to strengthen innovation. The government should, furthermore, incentivize innovation investment through tax write-offs for companies investing in crucial areas.
Germany is considered a pioneer in the field of renewable energy. However, German companies are burdened by the high costs of the energy transition through the so-called German Renewable Energy Source Act (EEG). As a result, 96 percent of industrial companies pay in full a mandatory surcharge on electricity that covers the costs of the energy transition, whereas competitors in other countries do not face similar high energy costs. This annual surcharge is an overall burden of €24 billion for German industry. The next government should reform this system to improve the competitiveness of German companies in the global market.
Investments are long-term decisions that require a predictable regulatory framework and an investment-friendly climate. Germany needs to not only invest more in physical infrastructure such as roads and bridges, but also in digital infrastructure, in education, as well as innovation. Additionally, the federal tax policy needs structural reform to relieve the burden especially on small and medium-sized enterprises (SMEs), which are the backbone of the German economy.
German companies have a wide international presence with supply chains that span the globe. Since the German economy is tightly bound in these global value chains, we should continue to focus on negotiating free trade agreements. The EU has concluded free trade agreements with more than fifty partners already, while negotiations with other countries are still in progress. With their flexibility and bespoke nature, free trade agreements can complement the multilateral World Trade Organization (WTO) while progress there remains challenging. Global rules for global trade and investment flows remain the aim in an interconnected global economy.
The transatlantic relationship remains crucial for Germany. The United States is the most important export market for Germany with $114 billion (€107 billion) in total exports for 2016. This partnership is also strengthened through job creation and direct investment. German companies employ over 670,000 people in the United States, almost half of which are in the manufacturing sector. According to the US Department of Commerce, investment by German businesses in the US market reached nearly $292 billion as of year-end 2016. This demonstrates that our economic interdependence is strong and that free trade and open markets are vital for the success of the export-oriented German economy. Therefore, the German government should keep the transatlantic relationship high on its agenda. The Representative of German Industry and Trade (RGIT) in Washington, DC, will continue to support these efforts on behalf its principals.
The German elections changed the political landscape. A more fragmented Bundestag will complicate parliamentary work. Building a coalition will not be easy, but Germany must prove that it is able to act responsibly and constructively. German business expects the government to tackle the challenges facing it and enable successful transitions in both energy and digitalization, along with encouraging an investment-friendly climate. If those reforms can be accomplished, the German economy will remain strong.
Daniel Andrich is president and chief executive officer, Representative of German Industry and Trade.