Germany must bid farewell to the holy grail of “being in the black” and invest more in areas such as infrastructure, renewable energies, housing and innovation. That is the advice to the Merkel government from economist Claus Michelsen of the Berlin-based German Institute for Economic Research (DIW). He advocates a public investment fund with an annual capital expenditure of 30 billion euros or 1% of the gross domestic product (GDP).

Michelsen does not have much hope that such a fund will be set up. There is currently a lack of urgency for this in Berlin, even though the economy is heading full steam ahead into recession. The conservative industrial employer’s federation BDI is therefore also in favour of letting go of the “in the black” stipulation – the legal obligation that Germany has imposed on itself which means that it should never spend more than it earns. Deviations from this are only permitted in exceptional circumstances.

The FDI now believes that the time has come. “As important as balancing the budget may be in times of economic prosperity, now is the time to change fiscal policy,” says BDI leader Joachim Lang.

Public investment frequently pays twice as many dividends

The DIW has long been regarded as an advocate for higher government spending. Michelsen has calculated that in the current economic situation, every additional euro in the German infrastructure pays twice as many dividends and that would impact everyone. In the DIW model, every extra euro spent by the federal government generates additional business investment of 1.1 euros over a period of five years. For €50 billion, that amounts to €55 billion. And with 100 billion euros it would be 110 billion euros.

Macro economist Claus Michelsen from DIW Berlin. Photo: BDI

It is what is known as a “multiplier effect” in the economy.

The Dogma of the Balanced Budget

Van Michelsen’s fund might have to be much larger than the 50 billion euros currently circulating in the federal government in the event that Germany actually does go into recession.

“Even if we do not end up in a real recession with several consecutive quarters of negative economic growth, the time is ripe for a change in economic policy. We believe that the Berlin government should make good use of its financial leeway and set an agenda for modernizing Germany. This would not only improve growth prospects, but business confidence as well.”

Michelsen advocates that public investment be increased not for one or two years, but for the next ten to fifteen years. Their target is one percent of the GDP, which is equivalent to 30 billion euros per year.

The only problem is that the constitution will have to be amended. We believe that this dogmatic thinking about balancing the budget needs to be thrown overboard. Politicians must seek broad support so that long-term plans will not be tampered with every time there is a new government”.

This is the third part of a series about a potential recession in Germany and the consequences for innovation and R&D spending.

Part 1 appeared on Tuesday 20 August

Part 2 on Friday 23 August