“A ray of hope for German industry”, the German business newspaper Handelsblatt wrote last Tuesday when the German office for statistics announced that more orders had been placed than had been lost as of June 0.1%. However, this is by no means sufficient reason for celebration, says Professor Timo Wollmershäuser of the Munich-based Ifo economic institute in an interview with Innovation Origins. The fact is that German industry is in an abominable state, with turnover and the number of orders in its portfolio already in decline since last year.

Wollmershäuser: “Many people wonder whether Germany is in recession, but if you only look at the industry, we are already in the middle of it.”

According to Wollmershäuser, this is a small catastrophe for Germany’s innovative capability, because industry is at the heart of the economy, much more so than in other countries. International comparisons also show this. In 2018, for example, more than 23% of Germany’s gross national product (GNP) was generated by industry, while in the Netherlands and Great Britain it was only around 18%.

Professor Timo Wollmershäuser of the Ifo Institute in Munich

Bottom of the till not yet in sight

In the end, less turnover in the industry means less money for new machines, intelligent robots and other modernization such as electric cars and automated factories. “We have had one stroke of luck, and that is that companies have been thrifty in recent years and therefore have relatively deep pockets. So the loss of sales can be compensated for a while by temporary measures such as a reduction in working hours. Yet the longer the recession lasts, the greater the need for cuts in all costs. This also means that the R&D budget will undoubtedly suffer as a result.

According to Wollmershäuser, this is already evident in the downturn in investments. “There are no specific figures on which types of investments are in decline as yet. But it is certain that investments will drop. We assume that, for the time being, these are mainly postponed investments to replace, for example, old machines. Nevertheless, there will come a time when actual R&D expenditure will be involved too, and that is obviously bad for our innovative capabilities.

Will the German car industry still have enough money left to develop the car of the future?

Government spending versus lowering taxes

It is therefore high time that the government did something to boost investment and the economy in the view of Wollmershäuser. There are basically two possibilities for this. In one case, the government itself spends more on, for example, roads, building redevelopment, etc., and in so doing tries to boost the economic engine. And in the second case, by lowering taxes, the government will instead leave it up to the business community to invest more.

Wollmerhäuser clearly prefers the latter. According to him, this is the most efficient and effective way to get the industry out of the doldrums and raise the level of investment. And it could easily be done, because Germany currently has a relatively high tax burden on corporate profits at around 30%, compared to a mere 25% in France, for instance.

Berlin is slow on the uptake

Some of the plans have already been laid out on the table. The annoying thing is that Berlin requires an endless amount of time to put them into practice. A good example is the abolition of the so-called solidarity tax, a surcharge that every citizen and company must pay on top of ordinary taxes and which last year brought in €18.9 billion for the state.

The German Government wants to abolish this additional tax – which was once invented to help the new federal states of East Germany – by 2021. But why wait so long? Next year is also an option, Wollmershäuser states.

Wollmershäuser considers it a bad move because it is at the expense of investment in small and medium-sized enterprises. “Unfortunately, this affects a lot of small-scale entrepreneurs, even though it is precisely these entrepreneurs who would be helped in their investment decisions if the soli-tax were to be abolished.”

 

Fewer taxes or preferably more money for modernizing rundown roads and buildings?

More investment in infrastructure? Don’t do it

Many analysts are advising Berlin to spend more on infrastructure. However, Wollmershäuser does not agree. He concurs with the criticism that maintenance of German infrastructure is definitely overdue, but what many people forget to mention is that the government budget for this has already been drastically increased over the past few years. Subsequently, a lot of work is already being done in order to resolve the construction backlog.

Secondly, additional infrastructure investments would come at the wrong time. “The construction sector is one of the few German sectors that is still operating at full capacity. That is why they really do not need any extra work from the government and will only take it on at very high prices.”

In conclusion, infrastructural investments cannot be raised overnight. Building decisions take time to be made, worked out and implemented. “As an anti-recession measure, it is therefore pointless to raise infrastructure investments,” says Wollmershäuser. He does, however, argue in favor of setting infrastructure expenditure at a reasonable level for a longer period of time. This will prevent a repeat of the 2008-2010 situation when the construction industry collapsed as a result of the credit crisis.

 

This is the second part of a series concerning a potential recession in Germany and the consequences this will have for innovation and R&D expenditure.