Economists critique Lindner's one-sided approach.

Economists critique Lindner's narrow approach.

Germany's public infrastructures are in need of significant investments. Two leading economic research institutes estimate the required amount to be around several hundred billion euros. Their directors are advocating for credit-funded investments, in contrast to the current stance of the Federal Minister of Finance.

The Federal Republic of Germany has a hefty investment requirement: the German Economic Institute (IW) and the Institute for Macroeconomics and Economic Research (IMK) estimate the investment needs for the next decade to amount to 600 billion euros. This sum equates to 1.4% of Germany's annual gross domestic product (GDP), which isn't an overly astronomical figure, according to IW Director Michael Hüther and IMK Director Sebastian Dullien at the presentation of their joint study in Berlin.

"However, a reform of the debt brake is crucial to allow for credit financing of this scale," said Dullien. "We both believe it's time to remove the ideological barriers and acknowledge not just the need for this public investment, but also talk seriously about its implementation and financing." Hüther points out that their investment estimates are conservative.

Stumbling Block for Lindner

Hüther and Dullien suggest either a Germany Fund like the one for the German military or the implementation of a golden debt rule. The latter necessitates a reform of the existing debt brake, thereby allowing for investment. A reform of this type would require a two-thirds majority in Parliament, as would the establishment of a new special fund. The SPD and Greens have long advocated for a debt brake reform, while the FDP is staunchly against it. The CDU/CSU presumably won't help the traffic light coalition, but is discussing potential changes post-federal elections. The debt brake stipulates that the federal and state governments must prepare budgets without any new borrowing and, if necessary, only on a small scale.

Hüther and Dullien's intervention is noteworthy. Both are highly influential economists in Germany, and while the IMK, led by Dullien, is associated with the trade unions, the IW, led by Hüther, is seen as business-friendly. Yet, Hüther has been in favor of allowing the government to take on more debt for some time, provided the funds go towards real investments. This contrasts him sharply with FDP Chairman and Finance Minister Christian Lindner and his in-house economist Lars Feld.

The identified investment needs pertain exclusively to public infrastructures and exclude other requirements, such as those required to maintain certain industries in Germany or the additional funding for the Bundeswehr. Cities and municipalities alone have a collective investment requirement of 177 billion euros, plus 13 billion euros to adapt to climate change consequences.

A third of the total investment requirement, around 200 billion euros, is dedicated to climate protection-related public investments. These include energy-efficient building refurbishment as the largest single investment category, along with expanding and maintaining grids for electricity, hydrogen, and heat supply.

Investments in transportation routes and local public transport total 127 billion euros. This encompasses 60 billion euros for the modernization and expansion of the rail network, 28 billion euros for the expansion of local public transport, and 39 billion euros for maintaining major roads, including bridges.

According to Hüther and Dullien, 42 billion euros are needed for the expansion of all-day schools, 35 billion euros for university renovations, and 37 billion euros for social housing.

Justifying Boosted Budgets: A Pipe Dream?

The two economists believe it's "unrealistic" that these requirements can be met simply through budget reorganization and cost-cutting. They express concerns about the social ramifications of intensified distribution battles. The coalition government is grappling with a challenge as it prepares a budget for the upcoming year with a shortage of 25 billion euros, resulting from strict adherence to the debt brake and escalating expenditures, particularly in the Bundeswehr.

Creating space for investment is essential, argued Dullien. "Infrastructure isn't just a foundation for the economy but also a social one. It bolsters democracy and ensures Germany remains an attractive destination in the future." Hüther also debunks Lindner's claim that the traffic light coalition is already investing within the constraints of the debt brake. "Sizeable sums are budgeted, but these figures don't actualize significant investment or we already know/anticipate that the funds won't be dispersed." In a nutshell: the traffic light coalition leans on accounting tricks and gives the impression of more investment than is actually occurring.

Hüther does not believe that more spending can be financed without borrowing through increased economic growth. The FDP's suggestions for relieving employees and businesses to jumpstart the economy pose a huge risk for federal and state budgets in the short term.

Hüther and Dullien disagree with Lindner's claim that the debt brake was the reason for Germany's low and decreasing debt ratio. They have estimated the impact of the 600 billion euros on GDP at a current interest rate of 2.5% on ten-year government bonds. As a result, they discovered that the growth impact on GDP is large enough to make the debt ratio even lower over a 15-year period, even with an annual interest cost of 15 billion euros.

Regarding the proposed federal fund, Hüther and Dullien suggest possible solutions, either by altering the investment rules in the debt limit or by establishing such a fund. Hüther proposes that the expenditure should be monitored by a joint federal-state commission. However, he acknowledges that the traffic light party damaged the concept of the special fund by not investing a significant part of the 100 billion euros.

No immediate solutions in sight

Hüther criticizes the FDP and CDU/CSU, without explicitly naming them, for not wanting to discuss potential solutions despite their apparent need. "This denial is not acceptable," he said. He also questioned Lindner's concerns that any loosening of the debt limit would result in unnecessary spending. "Mistrusting all the players in parliament is not a good precedent," stated Hüther. "We can't say we're ruling out future tasks due to our inability to manage funds." If this mentality continues, there will be no basis for any financial policy plan.

Neither Hüther nor Dullien anticipate a quick response to their proposal. They don't believe an agreement will be reached in the current legislative period. In response to the study, Federal Chancellor Olaf Scholtz rejected Lindner's plan for exceptions to the debt brake. "We shouldn't make this too easy for ourselves. Now is the time to work hard." Hüther and Dullien believe that a decision should be made following the Bundestag elections at the earliest. Hüther added, "We need to take action now and cannot negotiate for five years."